Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
(Mark One)
 
x☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period
    ended SeptemberJune 30, 20172019
or
o☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition
period from   to
 
Commission File Number: 1-6887
 
BANK OF HAWAII CORPORATIONCORP
(Exact name of registrant as specified in its charter)
Delaware99-0148992
(State of incorporation)(I.R.S. Employer Identification No.)
   
130 Merchant Street Honolulu, HawaiiHonoluluHawaii96813
(Address of principal executive offices)(City)(State)(Zip Code)
1-888-643-38881-888-643-3888
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock$.01 Par ValueBOHNew York Stock Exchange
 
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.
Yesx☒ 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).
Yesx☒  No o☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerx
☒
Accelerated filero☐
Non-accelerated filero (Do not check if a smaller reporting company)
☐
Smaller reporting companyo☐
 
Emerging growth companyo☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o☐  No x☒
 
As of October 17, 2017,July 16, 2019, there were 42,478,64340,626,462 shares of common stock outstanding.

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

Three and ninesix months ended SeptemberJune 30, 20172019 and 20162018
2
   
 
Consolidated Statements of Comprehensive Income –

Three and ninesix months ended SeptemberJune 30, 20172019 and 20162018
3
   
 
Consolidated Statements of Condition –
September
June 30, 20172019 and December 31, 20162018
4
   
 
Consolidated Statements of Shareholders’ Equity –
Nine
Six months ended SeptemberJune 30, 20172019 and 20162018
5
   
 
Consolidated Statements of Cash Flows –
Nine
Six months ended SeptemberJune 30, 20172019 and 20162018
6
   
 
Notes to Consolidated Financial Statements (Unaudited)
7
   
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
5055
   
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
8187
   
Item 4.
Controls and Procedures
8187
   
Part II - Other Information
 
   
Item 1A.
Risk Factors
8288
   
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
8288
   
Item 6.
Exhibits
8288
   
Signatures
 
8389

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months EndedThree Months Ended Six Months Ended
September 30, September 30,June 30, June 30,
(dollars in thousands, except per share amounts)2017
 2016
 2017
 2016
2019
 2018
 2019
 2018
Interest Income 
  
  
  
 
  
  
  
Interest and Fees on Loans and Leases$94,621
 $83,489
 $273,467
 $246,707
$110,401
 $101,311
 $218,912
 $198,945
Income on Investment Securities              
Available-for-Sale11,987
 10,313
 34,906
 31,648
15,072
 12,380
 28,504
 24,521
Held-to-Maturity20,334
 19,315
 59,958
 59,874
22,149
 20,711
 44,070
 42,007
Deposits5
 1
 12
 7
9
 (4) 24
 14
Funds Sold1,579
 695
 3,165
 2,066
730
 846
 2,174
 1,603
Other235
 166
 673
 531
210
 341
 529
 641
Total Interest Income128,761
 113,979
 372,181
 340,833
148,571
 135,585
 294,213
 267,731
Interest Expense 
  
  
  
 
  
  
  
Deposits6,663
 3,232
 15,352
 9,199
18,628
 9,459
 33,912
 17,040
Securities Sold Under Agreements to Repurchase4,664
 5,713
 14,928
 18,000
4,623
 4,617
 9,194
 9,181
Funds Purchased—
 3
 42
 9
512
 83
 669
 136
Short-Term Borrowings—
 —
 64
 —
1
 13
 37
 29
Other Debt1,117
 1,119
 3,327
 3,139
710
 917
 1,467
 1,893
Total Interest Expense12,444
 10,067
 33,713
 30,347
24,474
 15,089
 45,279
 28,279
Net Interest Income116,317
 103,912
 338,468
 310,486
124,097
 120,496
 248,934
 239,452
Provision for Credit Losses4,000
 2,500
 12,650
 1,500
4,000
 3,500
 7,000
 7,625
Net Interest Income After Provision for Credit Losses112,317
 101,412
 325,818
 308,986
120,097
 116,996
 241,934
 231,827
Noninterest Income 
  
  
  
 
  
  
  
Trust and Asset Management11,050
 11,008
 34,325
 34,971
11,385
 11,356
 22,146
 22,537
Mortgage Banking3,237
 6,362
 10,356
 13,639
3,336
 2,179
 5,623
 4,324
Service Charges on Deposit Accounts8,188
 8,524
 24,522
 25,117
7,283
 6,865
 14,647
 13,994
Fees, Exchange, and Other Service Charges13,764
 14,023
 41,061
 41,445
14,252
 14,400
 28,460
 28,733
Investment Securities Gains (Losses), Net(566) (328) 11,047
 10,540
(776) (1,702) (1,611) (2,368)
Annuity and Insurance1,429
 1,653
 5,585
 5,560
1,806
 1,847
 4,384
 3,053
Bank-Owned Life Insurance1,861
 1,911
 4,908
 5,010
1,779
 1,796
 3,489
 3,638
Other3,447
 4,961
 11,758
 14,558
6,385
 4,557
 11,991
 11,422
Total Noninterest Income42,410
 48,114
 143,562
 150,840
45,450
 41,298
 89,129
 85,333
Noninterest Expense 
  
  
  
 
  
  
  
Salaries and Benefits51,626
 49,725
 153,341
 150,528
53,511
 52,148
 110,097
 106,570
Net Occupancy7,727
 8,510
 24,026
 22,671
8,579
 8,588
 16,173
 17,122
Net Equipment5,417
 4,913
 16,624
 15,387
6,895
 5,845
 13,728
 11,372
Data Processing3,882
 3,620
 11,173
 11,543
4,727
 4,563
 9,253
 8,454
Professional Fees3,044
 2,396
 8,415
 7,082
2,177
 2,546
 4,630
 5,319
FDIC Insurance2,107
 2,104
 6,413
 6,600
1,290
 2,182
 2,559
 4,339
Other14,795
 16,264
 45,363
 47,178
15,546
 14,919
 29,342
 31,999
Total Noninterest Expense88,598
 87,532
 265,355
 260,989
92,725
 90,791
 185,782
 185,175
Income Before Provision for Income Taxes66,129
 61,994
 204,025
 198,837
72,822
 67,503
 145,281
 131,985
Provision for Income Taxes20,248
 18,501
 62,306
 60,889
15,903
 12,785
 29,563
 23,227
Net Income$45,881
 $43,493
 $141,719
 $137,948
$56,919
 $54,718
 $115,718
 $108,758
Basic Earnings Per Share$1.09
 $1.02
 $3.35
 $3.23
$1.40
 $1.31
 $2.84
 $2.59
Diluted Earnings Per Share$1.08
 $1.02
 $3.32
 $3.21
$1.40
 $1.30
 $2.82
 $2.57
Dividends Declared Per Share$0.52
 $0.48
 $1.52
 $1.41
$0.65
 $0.60
 $1.27
 $1.12
Basic Weighted Average Shares42,251,541
 42,543,122
 42,336,441
 42,730,571
40,541,594
 41,884,221
 40,738,772
 41,960,743
Diluted Weighted Average Shares42,565,364
 42,778,346
 42,662,163
 42,947,059
40,769,767
 42,152,200
 40,988,001
 42,252,900
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
 Three Months Ended Nine Months EndedThree Months Ended Six Months Ended
 September 30, September 30,June 30, June 30,
(dollars in thousands) 2017
 2016
 2017
 2016
2019
 2018
 2019
 2018
Net Income $45,881
 $43,493
 $141,719
 $137,948
$56,919
 $54,718
 $115,718
 $108,758
Other Comprehensive Income (Loss), Net of Tax:  
  
  
  
 
  
  
  
Net Unrealized Gains (Losses) on Investment Securities 444
 (5,528) 8,444
 8,323
16,209
 (2,974) 23,128
 (12,095)
Defined Benefit Plans 146
 140
 439
 422
245
 216
 491
 432
Total Other Comprehensive Income (Loss) 590
 (5,388) 8,883
 8,745
16,454
 (2,758) 23,619
 (11,663)
Comprehensive Income $46,471
 $38,105
 $150,602
 $146,693
$73,373
 $51,960
 $139,337
 $97,095
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Condition (Unaudited)
(dollars in thousands)September 30,
2017
 December 31,
2016
June 30,
2019
 December 31,
2018
Assets 
  
 
  
Interest-Bearing Deposits in Other Banks$3,161
 $3,187
$3,859
 $3,028
Funds Sold512,868
 707,343
204,340
 198,860
Investment Securities 
  
 
  
Available-for-Sale2,322,668
 2,186,041
2,649,949
 2,007,942
Held-to-Maturity (Fair Value of $3,960,956 and $3,827,527)3,960,598
 3,832,997
Held-to-Maturity (Fair Value of $2,973,229 and $3,413,994)2,959,611
 3,482,092
Loans Held for Sale9,752
 62,499
22,706
 10,987
Loans and Leases9,573,956
 8,949,785
10,759,129
 10,448,774
Allowance for Loan and Lease Losses(106,881) (104,273)(107,672) (106,693)
Net Loans and Leases9,467,075
 8,845,512
10,651,457
 10,342,081
Total Earning Assets16,276,122
 15,637,579
16,491,922
 16,044,990
Cash and Due From Banks245,487
 169,077
282,164
 324,081
Premises and Equipment, Net125,162
 113,505
169,671
 151,837
Operating Lease Right-of-Use Assets103,336
 —
Accrued Interest Receivable51,526
 46,444
49,726
 51,230
Foreclosed Real Estate1,393
 1,686
2,737
 1,356
Mortgage Servicing Rights24,436
 23,663
24,233
 24,310
Goodwill31,517
 31,517
31,517
 31,517
Bank-Owned Life Insurance278,425
 274,188
285,295
 283,771
Other Assets234,234
 194,708
248,244
 230,882
Total Assets$17,268,302
 $16,492,367
$17,688,845
 $17,143,974
      
Liabilities 
  
 
  
Deposits 
  
 
  
Noninterest-Bearing Demand$4,825,643
 $4,772,727
$4,528,251
 $4,739,596
Interest-Bearing Demand2,896,559
 2,934,107
3,033,066
 3,002,925
Savings5,363,866
 5,395,699
6,004,528
 5,539,199
Time1,962,092
 1,217,707
1,922,976
 1,745,522
Total Deposits15,048,160
 14,320,240
15,488,821
 15,027,242
Funds Purchased—
 9,616
Short-Term Borrowings—
 199
Securities Sold Under Agreements to Repurchase505,293
 523,378
504,299
 504,296
Other Debt267,887
 267,938
110,605
 135,643
Operating Lease Liabilities110,483
 —
Retirement Benefits Payable38,308
 48,451
40,047
 40,494
Accrued Interest Payable6,717
 5,334
9,454
 8,253
Taxes Payable and Deferred Taxes31,360
 21,674
21,337
 19,736
Other Liabilities142,684
 134,199
117,851
 139,911
Total Liabilities16,040,409
 15,330,830
16,402,897
 15,875,774
Shareholders’ Equity 
  
 
  
Common Stock ($.01 par value; authorized 500,000,000 shares;
issued / outstanding: September 30, 2017 - 57,958,200 / 42,513,348
and December 31, 2016 - 57,856,672 / 42,635,978)		576
 576
Common Stock ($.01 par value; authorized 500,000,000 shares;
issued / outstanding: June 30, 2019 - 58,175,367 / 40,687,719
and December 31, 2018 - 58,063,689 / 41,499,898)		579
 577
Capital Surplus558,530
 551,628
577,346
 571,704
Accumulated Other Comprehensive Loss(25,023) (33,906)(27,424) (51,043)
Retained Earnings1,491,830
 1,415,440
1,704,993
 1,641,314
Treasury Stock, at Cost (Shares: September 30, 2017 - 15,444,852
and December 31, 2016 - 15,220,694)		(798,020) (772,201)
Treasury Stock, at Cost (Shares: June 30, 2019 - 17,487,648
and December 31, 2018 - 16,563,791)		(969,546) (894,352)
Total Shareholders’ Equity1,227,893
 1,161,537
1,285,948
 1,268,200
Total Liabilities and Shareholders’ Equity$17,268,302
 $16,492,367
$17,688,845
 $17,143,974
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).

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

 
Accum.
Other
Compre-
hensive
Income
(Loss)

 Retained Earnings
 Treasury Stock
 Total
Common
Shares Outstanding
 Common Stock
 
Capital
Surplus

 
Accum.
Other
Compre-
hensive
Income
(Loss)

 Retained Earnings
 Treasury Stock
 Total
Balance as of December 31, 201642,635,978
 $576
 $551,628
 $(33,906) $1,415,440
 $(772,201) $1,161,537
Balance as of December 31, 201841,499,898
 $577
 $571,704
 $(51,043) $1,641,314
 $(894,352) $1,268,200
Net Income—
 —
 —
 —
 141,719
 —
 141,719
—
 —
 —
 —
 58,799
 —
 58,799
Other Comprehensive Income—
 —
 —
 8,883
 —
 —
 8,883
—
 —
 —
 7,165
 —
 —
 7,165
Share-Based Compensation—
 —
 5,332
 —
 —
 —
 5,332
—
 —
 2,274
 —
 —
 —
 2,274
Common Stock Issued under Purchase and Equity
Compensation Plans and Related Tax Benefits		319,377
 —
 1,570
 —
 (383) 10,552
 11,739
Common Stock Issued under Purchase and Equity
Compensation Plans		131,529
 1
 616
 —
 (203) 1,673
 2,087
Common Stock Repurchased(442,007) —
 —
 —
 —
 (36,371) (36,371)(552,739) —
 —
 —
 —
 (43,189) (43,189)
Cash Dividends Declared ($1.52 per share)—
 —
 —
 —
 (64,946) —
 (64,946)
Balance as of September 30, 201742,513,348
 $576
 $558,530
 $(25,023) $1,491,830
 $(798,020) $1,227,893
Cash Dividends Declared ($0.62 per share)—
 —
 —
 —
 (25,646) —
 (25,646)
Balance as of March 31, 201941,078,688
 $578
 $574,594
 $(43,878) $1,674,264
 $(935,868) $1,269,690
                          
Balance as of December 31, 201543,282,153
 $575
 $542,041
 $(23,557) $1,316,260
 $(719,059) $1,116,260
Net Income—
 —
 —
 —
 137,948
 —
 137,948
—
 —
 —
 —
 56,919
 —
 56,919
Other Comprehensive Income—
 —
 —
 8,745
 —
 —
 8,745
—
 —
 —
 16,454
 —
 —
 16,454
Share-Based Compensation—
 —
 5,020
 —
 —
 —
 5,020
—
 —
 2,164
 —
 —
 —
 2,164
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 Issued under Purchase and Equity
Compensation Plans		43,180
 1
 588
 —
 365
 1,308
 2,262
Common Stock Repurchased(772,658) —
 —
 —
 —
 (51,365) (51,365)(434,149) —
 —
 —
 —
 (34,986) (34,986)
Cash Dividends Declared ($1.41 per share)—
 —
 —
 —
 (60,663) —
 (60,663)
Balance as of September 30, 201642,733,513
 $576
 $549,064
 $(14,812) $1,393,231
 $(764,200) $1,163,859
Cash Dividends Declared ($0.65 per share)—
 —
 —
 —
 (26,555) —
 (26,555)
Balance as of June 30, 201940,687,719
 $579
 $577,346
 $(27,424) $1,704,993
 $(969,546) $1,285,948
             
Balance as of December 31, 201742,401,443
 $576
 $561,161
 $(34,715) $1,512,218
 $(807,372) $1,231,868
Net Income—
 —
 —
 —
 54,040
 —
 54,040
Other Comprehensive Loss—
 —
 —
 (8,905) —
 —
 (8,905)
Reclassification of the Income Tax Effects of the
Tax Cuts and Jobs Act from AOCI		—
 —
 —
 (7,477) 7,477
 —
 —
Share-Based Compensation—
 —
 1,867
 —
 —
 —
 1,867
Common Stock Issued under Purchase and Equity
Compensation Plans		121,299
 1
 570
 —
 252
 1,128
 1,951
Common Stock Repurchased(208,328) —
 —
 —
 —
 (17,541) (17,541)
Cash Dividends Declared ($0.52 per share)—
 —
 —
 —
 (22,087) —
 (22,087)
Balance as of March 31, 201842,314,414
 $577
 $563,598
 $(51,097) $1,551,900
 $(823,785) $1,241,193
             
Net Income—
 —
 —
 —
 54,718
 —
 54,718
Other Comprehensive Loss—
 —
 —
 (2,758) —
 —
 (2,758)
Reclassification of the Income Tax Effects of the
Tax Cuts and Jobs Act from AOCI		—
 —
 —
 —
 —
 —
 —
Share-Based Compensation—
 —
 2,188
 —
 —
 —
 2,188
Common Stock Issued under Purchase and Equity
Compensation Plans		58,345
 —
 650
 —
 (86) 1,864
 2,428
Common Stock Repurchased(288,693) —
 —
 —
 —
 (24,688) (24,688)
Cash Dividends Declared ($0.60 per share)—
 —
 —
 —
 (25,364) —
 (25,364)
Balance as of June 30, 201842,084,066
 $577
 $566,436
 $(53,855) $1,581,168
 $(846,609) $1,247,717
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).

Bank of Hawaii Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months EndedSix Months Ended
September 30,June 30,
(dollars in thousands)2017
 2016
2019
 2018
Operating Activities 
  
 
  
Net Income$141,719
 $137,948
$115,718
 $108,758
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: 
  
 
  
Provision for Credit Losses12,650
 1,500
7,000
 7,625
Depreciation and Amortization9,832
 9,734
8,232
 6,788
Amortization of Deferred Loan and Lease Fees(744) (1,089)(487) (292)
Amortization and Accretion of Premiums/Discounts on Investment Securities, Net29,685
 33,234
9,951
 17,632
Amortization of Operating Lease Right-of-Use Assets6,359
 —
Share-Based Compensation5,332
 5,020
4,438
 4,055
Benefit Plan Contributions(11,098) (929)(887) (798)
Deferred Income Taxes3,871
 6,465
(2,711) (2,496)
Gains on Sale of Premises and Equipment(558) —
Net Gains on Sales of Loans and Leases(5,615) (8,061)(2,166) (1,070)
Net Gains on Sales of Investment Securities(11,047) (10,540)
Net Losses (Gains) on Sales of Investment Securities1,611
 2,368
Proceeds from Sales of Loans Held for Sale238,137
 152,185
162,426
 152,004
Originations of Loans Held for Sale(231,464) (187,117)(173,117) (148,513)
Net Tax Benefits from Share-Based Compensation2,515
 —
637
 949
Excess Tax Benefits from Share-Based Compensation—
 (916)
Net Change in Other Assets and Other Liabilities(37,405) (14,297)(36,486) (18,529)
Net Cash Provided by Operating Activities146,368
 123,137
99,960
 128,481
      
Investing Activities 
  
 
  
Investment Securities Available-for-Sale: 
  
 
  
Proceeds from Prepayments and Maturities278,719
 288,928
Proceeds from Sales11,052
 10,766
Proceeds from Sales, Prepayments and Maturities1,423,672
 209,572
Purchases(417,899) (248,839)(1,029,942) (99,254)
Investment Securities Held-to-Maturity: 
  
 
  
Proceeds from Prepayments and Maturities654,484
 545,133
367,211
 425,043
Purchases(795,272) (394,547)(864,955) (99,415)
Net Change in Loans and Leases(722,352) (954,616)(316,228) (264,304)
Proceeds from Sales of Loans137,717
 118,089
Premises and Equipment, Net(21,489) (8,823)
Net Cash Used in Investing Activities(875,040) (643,909)
Purchases of Premises and Equipment(26,146) (18,652)
Proceeds from Sale of Premises and Equipment639
 —
Net Cash Provided by (Used in) Investing Activities(445,749) 152,990
      
Financing Activities 
  
 
  
Net Change in Deposits727,920
 557,262
461,579
 59,390
Net Change in Short-Term Borrowings(27,701) (74,891)(196) (770)
Proceeds from Long-Term Debt—
 75,000
Repayments of Long-Term Debt—
 (50,000)(25,038) (25,000)
Excess Tax Benefits from Share-Based Compensation—
 916
Proceeds from Issuance of Common Stock11,679
 6,903
4,214
 4,498
Repurchase of Common Stock(36,371) (51,365)(78,175) (42,229)
Cash Dividends Paid(64,946) (60,663)(52,201) (47,451)
Net Cash Provided by Financing Activities610,581
 403,162
Net Cash Provided by (Used in) Financing Activities310,183
 (51,562)
      
Net Change in Cash and Cash Equivalents(118,091) (117,610)(35,606) 229,909
Cash and Cash Equivalents at Beginning of Period879,607
 755,721
525,969
 447,851
Cash and Cash Equivalents at End of Period$761,516
 $638,111
$490,363
 $677,760
Supplemental Information 
  
 
  
Cash Paid for Interest$32,331
 $28,952
$44,077
 $27,830
Cash Paid for Income Taxes49,957
 51,257
29,868
 24,487
Non-Cash Investing Activities: 
  
Non-Cash Investing and Financing Activities: 
  
Initial Recognition of Operating Lease Right-of-Use Assets106,514
 —
Initial Recognition of Operating Lease Liabilities113,394
 —
Transfer from Investment Securities Held-To-Maturity to Investment Securities Available-For-Sale1,014,859
 —
Transfer from Loans to Foreclosed Real Estate2,559
 1,058
1,869
 2,307
Transfers from Loans to Loans Held for Sale86,625
 140,439
The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).

Bank of Hawaii Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)


Note 1.  Summary of Significant Accounting Policies


Basis of Presentation


Bank of Hawaii Corporation (the “Parent”) is a Delaware corporation and a bank holding company headquartered in Honolulu, Hawaii.  Bank of Hawaii Corporation and its subsidiaries (collectively, the “Company”) provide a broad range of financial products and services to customers in Hawaii, Guam, and other Pacific Islands.  The accompanying consolidated financial statements include the accounts of the Parent and its subsidiaries. The Parent’s principal operating subsidiary is Bank of Hawaii (the “Bank”). 


The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the interim periods. All such adjustments are of a normal recurring nature. Intercompany accounts and transactions have been eliminated in consolidation. Certain prior period information has been reclassified to conform to the current period presentation. Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the full fiscal year or for any future period.


The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.  Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements and should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018. 


Use of Estimates in the Preparation of Financial Statements


The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes.  Actual results may differ from those estimates and such differences could be material to the financial statements.


Variable Interest Entities


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


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


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


Unfunded commitments to fund these low-income housing partnerships were $26.5$12.8 million and $16.2$15.2 million as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively. These unfunded commitments are unconditional and legally binding

and are recorded in other liabilities in the consolidated statements of condition. See Note 5 6 Affordable Housing Projects Tax Credit Partnerships for more information.


The Company also has limited partnership interests in solar energy tax credit partnership investments. These partnerships develop, build, own and operate solar renewable energy projects. Over the course of these investments, the Company expects to receive federal and state tax credits, tax-related benefits, and excess cash available for distribution, if any. The Company may be called to sell its interest in the limited partnerships through a call option once all investment tax credits have been recognized. Tax benefits associated with these investments are generally recognized over six6 years.
TheseAlthough these entities meet the definition of a VIE; however,VIE, 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 $83.3$78.9 million and $78.9$85.9 million as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively, and is included in other assets in the consolidated statements of condition.

Correction of an Immaterial Error to the Financial Statements

The Company determined during the fourth quarter of 2016 the proceeds from the sale of residential mortgage loans transferred from portfolio to held for sale were incorrectly reported on the consolidated statements of cash flows. The consolidated statement of cash flows for the nine months ended September 30, 2016 was adjusted to decrease the originations of loans held for sale by $136.7 million, decrease the proceeds from sales of loans held for sale by $116.6 million, and decrease the net change in other assets and other liabilities by $0.1 million. The net result was a $20.1 million increase to the net cash provided by operating activities. In addition, the net change in loans and leases was increased by $138.2 million, and a new line item, proceeds from sales of loans, was inserted for $118.1 million, resulting in a $20.1 million increase to net cash used in investing activities. Lastly, listed in the Supplemental Information section as a non-cash investing activity, transfers from loans to loans held for sale was decreased by $3.5 million. These corrections did not impact the consolidated statements of income or the consolidated statements of condition. The Company evaluated the effect of the incorrect presentation of the consolidated statements of cash flows, both qualitatively and quantitatively, and concluded it did not materially misstate the Company’s previously issued financial statements.


Accounting Standards Adopted in 20172019


In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. Some of the key provisions of this new ASU include: (1) companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement, and APIC pools will be eliminated. The guidance also eliminates the requirement that excess tax benefits be realized before companies can recognize them. In addition, the guidance requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity; (2) increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. The new guidance will also require an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows (current guidance did not specify how these cash flows should be classified); and (3) permit companies to make an accounting policy election for the impact of forfeitures on the recognition of expense for share-based payment awards. Forfeitures can be estimated, as required today, or recognized when they occur. ASU No. 2016-09 is effective for interim and annual reporting periods beginning after December 15, 2016. The Company adopted ASU No. 2016-09 on January 1, 2017 and elected to recognize forfeitures as they occur. As allowed by the ASU, the Company’s adoption was prospective; therefore, prior periods have not been adjusted. The adoption of ASU No. 2016-09 could result in increased volatility to reported income tax expense related to excess tax benefits and tax deficiencies for employee share-based transactions. However, the actual amounts recognized in income tax expense will be dependent on the amount of employee share-based transactions and the stock price at the time of vesting or exercise. For the first nine months of 2017, the adoption of ASU No. 2016-09 resulted in a decrease to the provision for income taxes primarily due to the tax benefit from the exercise of stock options and the vesting of restricted stock.

In May 2017, the FASB issued ASU No. 2017-09, “Stock Compensation, Scope of Modification Accounting.” This ASU clarifies when changes to the terms of conditions of a share-based payment award must be accounted for as modifications. Companies will apply the modification accounting guidance if the value, vesting conditions or classification of the award changes. The new guidance should reduce diversity in practice and result in fewer changes to the terms of an award being accounted for as modifications, as the guidance will allow companies to make certain non-substantive changes to awards without accounting for them as modifications. It does not change the accounting for modifications. ASU No. 2017-09 is effective for interim and annual reporting periods beginning after December 15, 2017; early adoption is permitted. The Company elected to early adopt ASU No. 2017-09 in 2017. ASU No. 2017-09 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 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., to interim and annual reporting periods beginning after December 15, 2017). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. In addition, the FASB has begun to issue targeted updates to clarify specific implementation issues of ASU 2014-09. These updates include ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” ASU No. 2016-12, “Narrow-Scope Improvements and Practical Expedients,” and ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the Company does not expect the new guidance to have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company is substantially complete with its overall assessment of revenue streams and reviewing of related contracts potentially affected by the ASU, including trust and asset management fees, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. The Company’s assessment suggests that adoption of this ASU should not materially change the method in which we currently recognize revenue for these revenue streams. The Company is also substantially complete with its evaluation of certain costs related to these revenue streams to determine whether such costs should be presented as expenses or contra-revenue (i.e., gross vs. net). In addition, the Company is evaluating the ASU’s expanded disclosure requirements. The Company plans to adopt ASU No. 2014-09 on January 1, 2018 utilizing the modified retrospective approach with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be material.

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. Although the Company has not finalized its evaluation of the impact of adopting ASU No. 2016-01, adoption is not expected to have a material impact on the Company’s Consolidated Financial Statements.

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.2018. All entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. They haveAs the Company elected the transition option provided in ASU No. 2018-11 (see below), the modified retrospective approach was applied on January 1, 2019 (as opposed to January 1, 2017). The Company also elected certain relief options offered in ASU 2016-02 including the package of practical expedients, the option not to separate lease and non-lease components and instead to account for them as a single lease component, and the option not to recognize right-of-use assets and lease liabilities that arise from short-term leases (i.e., leases with terms of twelve months or less). The Company did not elect the hindsight practical expedient, which allows entities to use certain relief; full retrospective application is prohibited.hindsight when determining lease term and impairment of right-of-use assets. The Company has several lease agreements, such as branch locations, which are currently considered operating leases, and therefore, were not previously recognized on the Company’s consolidated statements of condition. The Company expects the new guidance will requirerequires these lease agreements to now be recognized on the consolidated statements of condition as a right-of-use asset and a corresponding lease liability. Therefore,The new guidance did not have a material impact on the Company’s preliminary evaluation indicatesconsolidated statements of income or the provisionsconsolidated statements of cash flows. See Note 16 Leases for more information.

In August 2017, the FASB issued ASU No. 2016-022017-12, “Targeted Improvements to Accounting for Hedging Activities.” This ASU’s objectives are expected to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities; and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018. The Company currently does not designate any derivative financial instruments as formal hedging relationships, and therefore, does not currently utilize hedge accounting. As such, ASU No. 2017-12 did not impact the Company’s consolidated statementsConsolidated Financial Statements.


In July 2018, the FASB issued ASU No. 2018-11, “Leases - Targeted Improvements” to provide entities with relief from the costs of condition, along with our regulatory capital ratios. However, the Company continues to evaluate the extentimplementing certain aspects of potential impact the new guidance willleasing standard, ASU No. 2016-02. Specifically, under the amendments in ASU 2018-11: (1) entities may elect not to recast the comparative periods presented when transitioning to the new leasing standard, and (2) lessors may elect not to separate lease and non-lease components when certain conditions are met. The amendments have the same effective date as ASU 2016-02 (January 1, 2019 for the Company). The Company adopted ASU 2018-11 on its required effective date of January 1, 2019 and elected both transition options mentioned above. ASU 2018-11 did not have a material impact on the Company’s Consolidated Financial Statements.

In addition,December 2018, the FASB issued ASU No. 2018-20, “Narrow-Scope Improvements for Lessors.” This ASU (1) allows lessors to make an accounting policy election of presenting sales taxes and other similar taxes collected from lessees on a net basis, (2) requires a lessor to exclude lessor costs paid directly by a lessee to third parties on the lessor’s behalf and include lessor costs that are paid by the lessor and reimbursed by the lessee in the measurement of variable lease revenue and the associated expense, and (3) clarifies that when lessors allocate variable payments to lease and non-lease components they are required to follow the recognition guidance in the new leases standard for the lease component and other applicable guidance, such as the new revenue standard, for the non-lease component. The Company adopted ASU 2018-20 on its required effective date of January 1, 2019 and elected to present sales taxes and other similar taxes collected from lessees on a net basis as described in (1) above. ASU 2018-20 did not have a material impact on the Company’s Consolidated Financial Statements.

In March 2019, the FASB issued ASU No. 2019-01, “Leases: Codification Improvements.” This ASU (1) states that for lessors that are not manufacturers or dealers, the fair value of the underlying asset is its cost, less any volume or trade discounts, as long as there isn’t a significant amount of time between acquisition of the asset and lease commencement; (2) clarifies that lessors in the scope of ASC 942 (such as the Company) must classify principal payments received from sales-type and direct financing leases in investing activities in the statement of cash flows; and (3) clarifies the transition guidance related to certain interim disclosures provided in the year of adoption. To coincide with the adoption of ASU No. 2016-02, the Company is considering obtaining new softwareelected to aidearly adopt ASU 2019-01 on January 1, 2019. The adoption of this ASU did not have a material impact on the Company’s Consolidated Financial Statements.

In April 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments.” With respect to Topic 815, Derivatives and Hedging, ASU 2019-04 clarifies that the reclassification of a debt security from held-to-maturity (“HTM”) to available-for-sale (“AFS”) under the transition guidance in ASU 2017-12 would not (1) call into question the classification of other HTM securities, (2) be required to actually designate any reclassified security in a last-of-layer hedge, or (3) be restricted from selling any reclassified security. As part of the transition of ASU 2019-04, entities may reclassify securities that would qualify for designation as the hedged item in a last-of-layer hedging relationship from HTM to AFS; however, entities that already made such a reclassification upon their adoption of ASU 2017-12 are precluded from reclassifying additional securities. The Company did not reclassify any securities from HTM to AFS upon adoption of ASU 2017-12. The Company elected to early adopt the amendments to Topic 815 in June 2019. See Note 3 Investment Securities for more information regarding the impact of the transfer of certain HTM debt securities to AFS. The amendments and pending adoption to Topics 326 and 825 are described in the transition to the new leasing guidance.section below.


Accounting Standards Pending Adoption

In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments.” This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that aren’tare not 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 toapproach known as the current expected credit loss (“CECL”) model,, which will apply to: (1) financial assets subject to credit losses and measured at amortized cost, and (2) certain off-balance sheet credit exposures. This includes, but is not limited to, loans, leases, held-to-maturity securities, loan commitments, and financial guarantees. The CECL model doesapproach will not apply to available-for-sale (“AFS”)AFS debt securities. For AFS debt securities with unrealized losses, entities will measure credit losses in a manner similar to what they do today, except that the credit losses will be recognized as allowances rather than reductions in the amortized cost of the securities. As a result, entities will recognize improvements to estimated credit losses immediately in earnings rather than as interest income over time, as they do today. The ASU also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 also expands the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating the allowance for loan and lease losses. In addition, entities will need to disclose the amortized cost balance for each class of financial asset by credit quality indicator, disaggregated by the year of origination. ASU No. 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019; early adoption2019 and the Company is permitted for interim and annual reporting periods beginning after December 15, 2018.planning to adopt the standard in the first quarter of 2020. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of

the first reporting period in which the guidance is effective (i.e., modified retrospective approach). The Company is continuing its implementation efforts through its Company-wide implementation team. This team has assigned roles and responsibilities, key tasks to complete, and a general timeline to be followed. The implementation team meets periodically to discuss the latest developments and ensure progress is being made. The team also keeps current on evolving interpretationshas been working with an advisory consultant and industry practices related to ASU 2016-13 via webcasts, publications, conferences,has finalized and peer bank meetings. Currentlydocumented the methodologies that will be utilized. The team is currently developing controls, processes, policies and disclosures in the process of gathering and reviewing historical data and evaluating different loss methodologies.preparation for performing a full end to end parallel run. The Company’s preliminary evaluation indicates the provisions of ASU No. 2016-13 are expected to impact the Company’s Consolidated Financial Statements, in particular the level of the reserve for credit losses.  However, theThe Company continuesis continuing to evaluate the extent of the potential impact.impact and expects that portfolio composition and economic conditions at the time of adoption will be a factor.


In August 2016,2018, the FASB issued ASU No. 2016-15, 2018-13, “Classification of Certain Cash Receipts and Cash Payments.” Current GAAP is unclear or does not include specific guidance on howDisclosure Framework - Changes to classify certain transactions in the statement of cash flows. Disclosure Requirements for Fair Value Measurement.” This ASU is intendedeliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes, entities will no longer be required to reduce diversity in practice in how eight particular transactions are classified indisclose the statementamount of cash flows.and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU No. 2016-152018-13 is effective for interim and annual reporting periods beginning after December 15, 2017. Early2019; early adoption is permitted, provided that allpermitted. As ASU No. 2018-13 only revises disclosure requirements, it will not have a material impact on the Company’s Consolidated Financial Statements.

As mentioned in the previous section the FASB issued ASU No. 2019-04 in April 2019. With respect to Topic 326, Financial Instruments - Credit Losses, ASU 2019-04 clarifies the scope of the credit losses standard and addresses issues related to accrued interest receivable balances, recoveries, variable interest rates and prepayments, among other things. With respect to Topic 825, Financial Instruments, on recognizing and measuring financial instruments, ASU 2019-04 addresses the scope of the guidance, the requirement for remeasurement under ASC 820 when using the measurement alternative, certain disclosure requirements and which equity securities have to be remeasured at historical exchange rates. The amendments are adopted into Topic 326 have the same period. Entities will be requiredeffective dates as ASU 2016-13 (i.e., the first quarter of 2020). The Company is currently evaluating the potential impact of Topic 326 amendments on the Company’s Consolidated Financial Statements. The amendments to apply the guidance retrospectively. If it is impracticable to apply the guidance retrospectivelyTopic 825 are effective 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 isinterim and annual reporting periods beginning after December 15, 2019 and are not expected to have a material impact on the Company’s Consolidated Financial Statements.


In January 2017,May 2019, the FASB issued ASU No. 2017-04, 2019-05, “Simplifying the Test for Goodwill Impairment.Financial Instruments - Credit Losses (Topic 326); Targeted Transition Relief.” The guidance removes Step 2 This ASU allows entities to irrevocably elect, upon adoption of ASU 2016-13, the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value option on financial instruments that (1) were previously recorded at amortized cost and (2) are within the scope of ASC 326-20 if the instruments are eligible for the fair value option under ASC 825-10. The fair value option election does not apply to exceedheld-to-maturity debt securities. Entities are required to make this election on an instrument-by-instrument basis. ASU 2019-05 has the carrying amountsame effective date as ASU 2016-13 (i.e., the first quarter of goodwill. All other goodwill impairment guidance will remain largely unchanged. ASU No. 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2019, applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017.2020). The Company expectsdoes not expect to early adopt uponelect the next goodwill impairment test in 2017.fair value option, and therefore, ASU No. 2017-042019-05 is not expected to have a material impact on the Company’s Consolidated Financial Statements.


In March 2017,Note 2.  Cash and Cash Equivalents

The following table provides a reconciliation of cash and cash equivalents reported within the FASB issued ASU No. 2017-07, “Improvingconsolidated statements of condition that sum to the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” Under the new guidance, employers will present the service cost componenttotal of the net periodic benefit costsame such amounts shown in the same income statement line item (e.g., Salaries and Benefits) as other employee compensation costs arising from services rendered during the period. In addition, only the service cost component will be eligible for capitalization in assets. Employers will present the other components separately (e.g., Other Noninterest Expense) from the line item that includes the service cost. ASU No. 2017-07 is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted: however, the Company has decided not to early adopt. Employers will apply the guidance on the presentationconsolidated statements of the components of net periodic benefit cost in the income statement retrospectively. The guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component will be applied prospectively. The Company expects to utilize the ASU’s practical expedient allowing entities to estimate amounts for comparative periods using the information previously disclosed in their pension and other postretirement benefit plan footnote. ASU No. 2017-07 is not expected to have a material impact on the Company’s Consolidated Financial Statements.cash flows:
(dollars in thousands)June 30,
2019
 December 31,
2018
Interest-Bearing Deposits in Other Banks$3,859
 $3,028
Funds Sold204,340
 198,860
Cash and Due From Banks282,164
 324,081
Total Cash and Cash Equivalents$490,363
 $525,969
    



In March 2017, the FASB issued ASU No. 2017-08, “Premium Amortization on Purchased Callable Debt Securities.” This ASU shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. Today, entities generally amortize the premium over the contractual life of the security. The new guidance does not change the accounting for purchased callable debt securities held at a discount; the discount continues to be amortized to maturity. ASU No. 2017-08 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The guidance calls for a modified retrospective transition approach under which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is currently evaluating the provisions of ASU No. 2017-08 to determine the potential impact the new standard will have on the Company’s Consolidated Financial Statements.

In August 2017, the FASB issued ASU No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities.” This ASU’s objectives are to (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities; and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. ASU No. 2017-12 is effective for interim and annual reporting periods beginning after December 15, 2018; early adoption is permitted. The Company currently does not designate any derivative financial instruments as formal hedging relationships, and therefore, does not utilize hedge accounting. However, the Company is currently evaluating this ASU to determine whether its provisions will enhance the Company’s ability to employ risk management strategies, while improving the transparency and understanding of those strategies for financial statement users.

Note 2.3.  Investment Securities


The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities as of SeptemberJune 30, 20172019 and December 31, 20162018 were as follows:

(dollars in thousands)Amortized Cost
 Gross
Unrealized Gains
 Gross
Unrealized Losses
 Fair Value
June 30, 2019 
  
  
  
Available-for-Sale: 
  
  
  
Debt Securities Issued by the U.S. Treasury and Government Agencies$336,474
 $496
 $(1,438) $335,532
Debt Securities Issued by States and Political Subdivisions61,228
 993
 (2) 62,219
Debt Securities Issued by U.S. Government-Sponsored Enterprises192

4

—
 196
Debt Securities Issued by Corporations349,653
 911
 (752) 349,812
Mortgage-Backed Securities: 
  
  
  
    Residential - Government Agencies1,219,120
 12,519
 (3,709) 1,227,930
    Residential - U.S. Government-Sponsored Enterprises500,664
 4,663
 (2,270) 503,057
    Commercial - Government Agencies170,567
 2,960
 (2,324) 171,203
Total Mortgage-Backed Securities1,890,351
 20,142
 (8,303) 1,902,190
Total$2,637,898
 $22,546
 $(10,495) $2,649,949
Held-to-Maturity: 
  
  
  
Debt Securities Issued by the U.S. Treasury and Government Agencies$353,721
 $1,752
 $(262) $355,211
Debt Securities Issued by States and Political Subdivisions65,421
 1,405
 —
 66,826
Debt Securities Issued by Corporations16,429
 —
 (234) 16,195
Mortgage-Backed Securities:       
    Residential - Government Agencies1,219,447
 13,744
 (8,002) 1,225,189
    Residential - U.S. Government-Sponsored Enterprises1,218,431
 10,095
 (3,232) 1,225,294
    Commercial - Government Agencies86,162
 215
 (1,863) 84,514
Total Mortgage-Backed Securities2,524,040
 24,054

(13,097)
2,534,997
Total$2,959,611
 $27,211
 $(13,593) $2,973,229
        
December 31, 2018 
  
  
  
Available-for-Sale: 
  
  
  
Debt Securities Issued by the U.S. Treasury and Government Agencies$394,485
 $493
 $(2,577) $392,401
Debt Securities Issued by States and Political Subdivisions559,800
 5,227
 (1,031) 563,996
Debt Securities Issued by U.S. Government-Sponsored Enterprises56
 —
 —
 56
Debt Securities Issued by Corporations224,997
 —
 (1,857) 223,140
Mortgage-Backed Securities:       
    Residential - Government Agencies189,645
 1,726
 (929) 190,442
    Residential - U.S. Government-Sponsored Enterprises589,311
 1,779
 (12,563) 578,527
    Commercial - Government Agencies63,864
 —
 (4,484) 59,380
Total Mortgage-Backed Securities842,820
 3,505
 (17,976) 828,349
Total$2,022,158
 $9,225
 $(23,441) $2,007,942
Held-to-Maturity: 
  
  
  
Debt Securities Issued by the U.S. Treasury and Government Agencies$353,122
 $186
 $(1,093) $352,215
Debt Securities Issued by States and Political Subdivisions234,602
 6,150
 —
 240,752
Debt Securities Issued by Corporations97,266
 —
 (1,755) 95,511
Mortgage-Backed Securities:       
    Residential - Government Agencies1,861,874
 3,886
 (51,773) 1,813,987
    Residential - U.S. Government-Sponsored Enterprises758,835
 1,590
 (20,259) 740,166
    Commercial - Government Agencies176,393
 147
 (5,177) 171,363
Total Mortgage-Backed Securities2,797,102
 5,623
 (77,209) 2,725,516
Total$3,482,092
 $11,959
 $(80,057) $3,413,994


As mentioned in Note 1 the FASB issued ASU No. 2019-04 in April 2019. In June 2019, the Company elected to early adopt the amendments to Topic 815, Derivatives and Hedging, which allowed the Company a one-time reclassification of certain prepayable debt securities from held-to-maturity to available-for-sale. On June 10, 2019, prepayable debt securities with a carrying value of $1.0 billion and a net unrealized gain of $3.1 million were transferred from held-to-maturity to available-for-sale. The reclassified securities consisted of mortgage-backed securities issued by U.S. government agencies and government-sponsored enterprises, municipal debt securities, and corporate debt securities.
(dollars in thousands)Amortized Cost
 Gross
Unrealized Gains
 Gross
Unrealized Losses
 Fair Value
September 30, 2017 
  
  
  
Available-for-Sale: 
  
  
  
Debt Securities Issued by the U.S. Treasury and Government Agencies$446,205
 $3,952
 $(953) $449,204
Debt Securities Issued by States and Political Subdivisions624,203
 17,783
 (23) 641,963
Debt Securities Issued by Corporations268,013
 138
 (2,305) 265,846
Mortgage-Backed Securities: 
  
  
  
    Residential - Government Agencies247,418
 3,605
 (1,047) 249,976
    Residential - U.S. Government-Sponsored Enterprises646,013
 1,056
 (4,956) 642,113
    Commercial - Government Agencies76,260
 —
 (2,694) 73,566
Total Mortgage-Backed Securities969,691
 4,661
 (8,697) 965,655
Total$2,308,112
 $26,534
 $(11,978) $2,322,668
Held-to-Maturity: 
  
  
  
Debt Securities Issued by the U.S. Treasury and Government Agencies$425,086
 $380
 $(735) $424,731
Debt Securities Issued by States and Political Subdivisions239,462
 14,283
 —
 253,745
Debt Securities Issued by Corporations123,660
 478
 (1,156) 122,982
Mortgage-Backed Securities:       
    Residential - Government Agencies2,168,568
 14,781
 (21,313) 2,162,036
    Residential - U.S. Government-Sponsored Enterprises795,992
 1,637
 (6,918) 790,711
    Commercial - Government Agencies207,830
 1,972
 (3,051) 206,751
Total Mortgage-Backed Securities3,172,390
 18,390

(31,282)
3,159,498
Total$3,960,598
 $33,531
 $(33,173) $3,960,956
        
December 31, 2016 
  
  
  
Available-for-Sale: 
  
  
  
Debt Securities Issued by the U.S. Treasury and Government Agencies$407,478
 $2,531
 $(1,294) $408,715
Debt Securities Issued by States and Political Subdivisions662,231
 11,455
 (1,887) 671,799
Debt Securities Issued by Corporations273,044
 5
 (3,870) 269,179
Mortgage-Backed Securities:       
    Residential - Government Agencies240,412
 4,577
 (1,145) 243,844
    Residential - U.S. Government-Sponsored Enterprises511,234
 971
 (5,218) 506,987
    Commercial - Government Agencies89,544
 —
 (4,027) 85,517
Total Mortgage-Backed Securities841,190
 5,548
 (10,390) 836,348
Total$2,183,943
 $19,539
 $(17,441) $2,186,041
Held-to-Maturity: 
  
  
  
Debt Securities Issued by the U.S. Treasury and Government Agencies$530,149
 $1,562
 $(771) $530,940
Debt Securities Issued by States and Political Subdivisions242,295
 9,991
 —
 252,286
Debt Securities Issued by Corporations135,620
 416
 (1,528) 134,508
Mortgage-Backed Securities:       
    Residential - Government Agencies1,940,076
 20,567
 (23,861) 1,936,782
    Residential - U.S. Government-Sponsored Enterprises752,768
 798
 (10,919) 742,647
    Commercial - Government Agencies232,089
 940
 (2,665) 230,364
Total Mortgage-Backed Securities2,924,933
 22,305
 (37,445) 2,909,793
Total$3,832,997
 $34,274
 $(39,744) $3,827,527


The table below presents an analysis of the contractual maturities of the Company’s investment securities as of SeptemberJune 30, 2017.2019.  Debt securities issued by government agencies (Small Business Administration securities) and mortgage-backed securities are disclosed separately in the table below as these investment securities may prepay prior to their scheduled contractual maturity dates.
(dollars in thousands)Amortized Cost
 Fair Value
Available-for-Sale: 
  
Due in One Year or Less$169,659
 $169,782
Due After One Year Through Five Years107,258
 107,298
Due After Five Years Through Ten Years135,099
 136,099
Due After Ten Years52
 52
 412,068
 413,231
    
Debt Securities Issued by Government Agencies335,479
 334,528
Mortgage-Backed Securities: 
  
    Residential - Government Agencies1,219,120
 1,227,930
    Residential - U.S. Government-Sponsored Enterprises500,664
 503,057
    Commercial - Government Agencies170,567
 171,203
Total Mortgage-Backed Securities1,890,351
 1,902,190
Total$2,637,898
 $2,649,949
    
Held-to-Maturity: 
  
Due in One Year or Less$219,851
 $220,115
Due After One Year Through Five Years199,291
 201,922
Due After Five Years Through Ten Years16,429
 16,195
Due After Ten Years—
 —
 435,571
 438,232
Mortgage-Backed Securities: 
  
    Residential - Government Agencies1,219,447
 1,225,189
    Residential - U.S. Government-Sponsored Enterprises1,218,431
 1,225,294
    Commercial - Government Agencies86,162
 84,514
Total Mortgage-Backed Securities2,524,040
 2,534,997
Total$2,959,611
 $2,973,229

(dollars in thousands)Amortized Cost
 Fair Value
Available-for-Sale: 
  
Due in One Year or Less$79,756
 $80,005
Due After One Year Through Five Years622,846
 628,796
Due After Five Years Through Ten Years164,664
 172,362
Due After Ten Years25,501
 27,186
 892,767
 908,349
    
Debt Securities Issued by Government Agencies445,654
 448,664
Mortgage-Backed Securities: 
  
    Residential - Government Agencies247,418
 249,976
    Residential - U.S. Government-Sponsored Enterprises646,013
 642,113
    Commercial - Government Agencies76,260
 73,566
Total Mortgage-Backed Securities969,691
 965,655
Total$2,308,112
 $2,322,668
    
Held-to-Maturity: 
  
Due in One Year or Less$240,105
 $239,988
Due After One Year Through Five Years255,274
 257,753
Due After Five Years Through Ten Years254,585
 262,701
Due After Ten Years38,244
 41,016
 788,208
 801,458
Mortgage-Backed Securities: 
  
    Residential - Government Agencies2,168,568
 2,162,036
    Residential - U.S. Government-Sponsored Enterprises795,992
 790,711
    Commercial - Government Agencies207,830
 206,751
Total Mortgage-Backed Securities3,172,390
 3,159,498
Total$3,960,598
 $3,960,956


Investment securities with carrying values of $2.7$2.5 billion and $2.4$2.3 billion as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively, were pledged to secure deposits of governmental entities and securities sold under agreements to repurchase.


The table below presents the gains and losses from the sales of investment securities for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016.2018.
 Three Months Ended
June 30,		 Six Months Ended
June 30,
(dollars in thousands)2019
 2018
 2019
 2018
Gross Gains on Sales of Investment Securities$5,633
 $—
 $7,663
 $—
Gross Losses on Sales of Investment Securities(6,409) (1,702) (9,274) (2,368)
Net Gains (Losses) on Sales of Investment Securities$(776) $(1,702) $(1,611) $(2,368)

 Three Months Ended
September 30,		 Nine Months Ended
September 30,
(dollars in thousands)2017
 2016
 2017
 2016
Gross Gains on Sales of Investment Securities$—
 $—
 $12,467
 $11,180
Gross Losses on Sales of Investment Securities(566) (328) (1,420) (640)
Net Gains (Losses) on Sales of Investment Securities$(566) $(328) $11,047
 $10,540


The gross gains and losses on sales of investment securities during the three and ninesix months ended SeptemberJune 30, 20172019 included sales of municipal debt securities, mortgage-backed securities, and 2016 were due tocorporate debt securities as part of a portfolio repositioning. In addition, fees paid to the counterparties of our prior Visa Class B share sale transactions.transactions which are expensed as incurred also contributed to the losses during the three and six months ended June 30, 2019 and June 30, 2018. In addition, the second quarter of 2018 included a $1.0 million liability recorded related to a change in the Visa Class B conversion ratio.



The Company’s gross unrealized losses and the related fair value of investment securities, aggregated by investment category and length of time in ana continuous unrealized loss position, segregated by continuous length of loss, were as follows:
 Less Than 12 Months 12 Months or Longer Total
(dollars in thousands)Fair Value
 Gross Unrealized Losses
 Fair Value
 Gross Unrealized Losses
 Fair Value
 Gross Unrealized Losses
June 30, 2019 
  
  
  
  
  
Available-for-Sale:           
Debt Securities Issued by the U.S. Treasury
   and Government Agencies
$6,597
 $(37) $192,407
 $(1,401) $199,004
 $(1,438)
Debt Securities Issued by States
   and Political Subdivisions
—
 —
 626
 (2) 626
 (2)
Debt Securities Issued by Corporations49,952
 (48) 115,856
 (704) 165,808
 (752)
Mortgage-Backed Securities:        

 

    Residential - Government Agencies55,175
 (160) 221,343
 (3,549) 276,518
 (3,709)
    Residential - U.S. Government-Sponsored Enterprises35,262
 (131) 202,939
 (2,139) 238,201
 (2,270)
    Commercial - Government Agencies—
 —
 57,344
 (2,324) 57,344
 (2,324)
Total Mortgage-Backed Securities90,437
 (291) 481,626
 (8,012) 572,063
 (8,303)
Total$146,986
 $(376) $790,515
 $(10,119) $937,501
 $(10,495)
Held-to-Maturity:           
Debt Securities Issued by the U.S. Treasury
   and Government Agencies
$—
 $—
 $39,813
 $(262) $39,813
 $(262)
Debt Securities Issued by Corporations—
 —
 16,195
 (234) 16,195
 (234)
Mortgage-Backed Securities:           
    Residential - Government Agencies341
 —
 512,748
 (8,002) 513,089
 (8,002)
    Residential - U.S. Government-Sponsored Enterprises4,580
 (13) 305,816
 (3,219) 310,396
 (3,232)
    Commercial - Government Agencies—
 —
 63,189
 (1,863) 63,189
 (1,863)
Total Mortgage-Backed Securities4,921
 (13) 881,753
 (13,084) 886,674
 (13,097)
Total$4,921
 $(13) $937,761
 $(13,580) $942,682
 $(13,593)
            
December 31, 2018 
  
  
  
  
  
Available-for-Sale:           
Debt Securities Issued by the U.S. Treasury
     and Government Agencies
$157,058
 $(964) $173,763
 $(1,613) $330,821
 $(2,577)
Debt Securities Issued by States
     and Political Subdivisions
38,138
 (59) 156,772
 (972) 194,910
 (1,031)
Debt Securities Issued by Corporations59,770
 (231) 163,371
 (1,626) 223,141
 (1,857)
Mortgage-Backed Securities:           
     Residential - Government Agencies6,299
 (10) 19,011
 (919) 25,310
 (929)
     Residential - U.S. Government-Sponsored Enterprises—
 —
 473,380
 (12,563) 473,380
 (12,563)
     Commercial - Government Agencies—
 —
 59,380
 (4,484) 59,380
 (4,484)
Total Mortgage-Backed Securities6,299
 (10) 551,771
 (17,966) 558,070
 (17,976)
Total$261,265
 $(1,264) $1,045,677
 $(22,177) $1,306,942
 $(23,441)
Held-to-Maturity:           
Debt Securities Issued by the U.S. Treasury
and Government Agencies		$99,440
 $(237) $134,239
 $(856) $233,679
 $(1,093)
Debt Securities Issued by Corporations—
 —
 95,511
 (1,755) 95,511
 (1,755)
Mortgage-Backed Securities:           
     Residential - Government Agencies12,974
 (45) 1,491,747
 (51,728) 1,504,721
 (51,773)
     Residential - U.S. Government-Sponsored Enterprises—
 —
 617,000
 (20,259) 617,000
 (20,259)
     Commercial - Government Agencies19,217
 (61) 145,715
 (5,116) 164,932
 (5,177)
Total Mortgage-Backed Securities32,191
 (106) 2,254,462
 (77,103) 2,286,653
 (77,209)
Total$131,631
 $(343) $2,484,212
 $(79,714) $2,615,843
 $(80,057)

 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, 2017 
  
  
  
  
  
Available-for-Sale:           
Debt Securities Issued by the U.S. Treasury
   and Government Agencies
$77,995
 $(420) $152,914
 $(533) $230,909
 $(953)
Debt Securities Issued by States
   and Political Subdivisions
11,064
 (20) 746
 (3) 11,810
 (23)
Debt Securities Issued by Corporations22,995
 (8) 202,713
 (2,297) 225,708
 (2,305)
Mortgage-Backed Securities:        

 

    Residential - Government Agencies17,046
 (4) 12,048
 (1,043) 29,094
 (1,047)
    Residential - U.S. Government-Sponsored Enterprises389,869
 (3,512) 55,238
 (1,444) 445,107
 (4,956)
    Commercial - Government Agencies—
 —
 73,566
 (2,694) 73,566
 (2,694)
Total Mortgage-Backed Securities406,915
 (3,516) 140,852
 (5,181) 547,767
 (8,697)
Total$518,969
 $(3,964) $497,225
 $(8,014) $1,016,194
 $(11,978)
Held-to-Maturity:           
Debt Securities Issued by the U.S. Treasury
   and Government Agencies
$159,956
 $(238) $49,804
 $(497) $209,760
 $(735)
Debt Securities Issued by Corporations46,726
 (716) 14,589
 (440) 61,315
 (1,156)
Mortgage-Backed Securities:           
    Residential - Government Agencies897,044
 (6,532) 516,479
 (14,781) 1,413,523
 (21,313)
    Residential - U.S. Government-Sponsored Enterprises508,545
 (4,881) 59,202
 (2,037) 567,747
 (6,918)
    Commercial - Government Agencies32,799
 (573) 55,820
 (2,478) 88,619
 (3,051)
Total Mortgage-Backed Securities1,438,388
 (11,986) 631,501
 (19,296) 2,069,889
 (31,282)
Total$1,645,070
 $(12,940) $695,894
 $(20,233) $2,340,964
 $(33,173)
            
December 31, 2016 
  
  
  
  
  
Available-for-Sale:           
Debt Securities Issued by the U.S. Treasury
     and Government Agencies
$143,715
 $(562) $89,211
 $(732) $232,926
 $(1,294)
Debt Securities Issued by States
     and Political Subdivisions
211,188
 (1,873) 6,725
 (14) 217,913
 (1,887)
Debt Securities Issued by Corporations67,332
 (714) 196,838
 (3,156) 264,170
 (3,870)
Mortgage-Backed Securities:           
     Residential - Government Agencies38,355
 (89) 11,185
 (1,056) 49,540
 (1,145)
     Residential - U.S. Government-Sponsored Enterprises397,385
 (5,218) —
 —
 397,385
 (5,218)
     Commercial - Government Agencies5,097
 (164) 80,420
 (3,863) 85,517
 (4,027)
Total Mortgage-Backed Securities440,837
 (5,471) 91,605
 (4,919) 532,442
 (10,390)
Total$863,072
 $(8,620) $384,379
 $(8,821) $1,247,451
 $(17,441)
Held-to-Maturity:           
Debt Securities Issued by the U.S. Treasury
and Government Agencies		$169,926
 $(771) $—
 $—
 $169,926
 $(771)
Debt Securities Issued by Corporations69,601
 (971) 15,933
 (557) 85,534
 (1,528)
Mortgage-Backed Securities:           
     Residential - Government Agencies835,227
 (15,313) 231,377
 (8,548) 1,066,604
 (23,861)
     Residential - U.S. Government-Sponsored Enterprises693,047
 (10,919) —
 —
 693,047
 (10,919)
     Commercial - Government Agencies87,586
 (2,597) 18,653
 (68) 106,239
 (2,665)
Total Mortgage-Backed Securities1,615,860
 (28,829) 250,030
 (8,616) 1,865,890
 (37,445)
Total$1,855,387
 $(30,571) $265,963
 $(9,173) $2,121,350
 $(39,744)



The Company does not believe that the investment securities that were in an unrealized loss position as of SeptemberJune 30, 2017,2019, which were comprised of 306258 individual securities, represent an other-than-temporary impairment.  Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.  As of SeptemberJune 30, 20172019 and December 31, 2016,2018, the gross unrealized losses reported for mortgage-backed securities were mostly related to investment securities issued by the Government National Mortgage Association. The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.


Interest income from taxable and non-taxable investment securities for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 were as follows:
 Three Months Ended
June 30,		 Six Months Ended
June 30,
(dollars in thousands)2019
 2018
 2019
 2018
Taxable$35,336
 $28,405
 $67,328
 $57,076
Non-Taxable1,885
 4,686
 5,246
 9,452
Total Interest Income from Investment Securities$37,221
 $33,091
 $72,574
 $66,528

 Three Months Ended
September 30,		 Nine Months Ended
September 30,
(dollars in thousands)2017
 2016
 2017
 2016
Taxable$27,441
 $24,558
 $79,949
 $76,112
Non-Taxable4,880
 5,070
 14,915
 15,410
Total Interest Income from Investment Securities$32,321
 $29,628
 $94,864
 $91,522


As of SeptemberJune 30, 2017,2019, included in the Company’s investment securities portfolio were debt securities issued by political subdivisions within the State of Hawaii of $510.3$127.8 million, representing 57%99% of the total fair value of the Company’s municipal debt securities. Of the entire Hawaii municipal bond portfolio, 95%80% were credit-rated Aa2 or better by Moody’s whileMoody’s. Most of the remaining Hawaii municipal bonds were credit-rated A2A1 or better by at least one nationally recognized statistical rating organization. Of the Company’s total Hawaii municipal bond holdings, 78%75% were general obligation issuances. As of September 30, 2017, there were no other holdings of municipal debt securities that were issued by a single state or political subdivision which comprised more than 10% of the total fair value of the Company’s municipal debt securities.


As of SeptemberJune 30, 20172019 and December 31, 2016,2018, the carrying value of the Company’s Federal Home Loan Bank of Des Moines stock and Federal Reserve Bank stock was as follows:
(dollars in thousands)June 30,
2019
 December 31,
2018
Federal Home Loan Bank Stock$14,000
 $15,000
Federal Reserve Bank Stock20,970
 20,858
Total$34,970
 $35,858

(dollars in thousands)September 30,
2017
 December 31,
2016
Federal Home Loan Bank Stock$20,000
 $20,000
Federal Reserve Bank Stock20,645
 20,063
Total$40,645
 $40,063


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


Visa Class B Restricted Shares


In 2008, the Company received Visa Class B restricted shares as part of Visa’s initial public offering. These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares. This conversion will not occur until the settlement of certain litigation which iswill be indemnified by Visa members, including the Company. Visa funded an escrow account from its initial public offering to settle these litigation claims. Should this escrow account be insufficient to cover these litigation claims, Visa is entitled to fund additional amounts to the escrow account by reducing each member bank’s Class B conversion ratio to unrestricted Class A shares. As of SeptemberJune 30, 2017,2019, the conversion ratio was 1.6483.1.6298. See Note 12 Derivative Financial Instruments for more information.


During the first quarter of 2017, theThe Company recorded a $12.5 million gain on the sale of 90,000occasionally sells these Visa Class B shares.shares to other financial institutions. Concurrent with every sale of Visa Class B shares, the Company has enteredenters into an agreement with the buyer that requires payment to the buyer in the event Visa further reduces the conversion ratio. Based on the existing transfer restriction and the uncertainty of the outcome of the Visa litigation mentioned above, the remaining 90,91483,014 Class B shares (149,854(135,296 Class A equivalents) that the Company owns as of SeptemberJune 30, 20172019 are carried at a zero cost basis.



Note 3.4.    Loans and Leases and the Allowance for Loan and Lease Losses


Loans and Leases


The Company’s loan and lease portfolio was comprised of the following as of SeptemberJune 30, 20172019 and December 31, 2016:2018:


(dollars in thousands)September 30,
2017
 December 31,
2016
June 30,
2019
 December 31,
2018
Commercial 
  
 
  
Commercial and Industrial$1,252,238
 $1,249,791
$1,408,729
 $1,331,149
Commercial Mortgage2,050,998
 1,889,551
2,411,289
 2,302,356
Construction232,487
 270,018
119,228
 170,061
Lease Financing204,240
 208,332
163,070
 176,226
Total Commercial3,739,963
 3,617,692
4,102,316
 3,979,792
Consumer 
  
 
  
Residential Mortgage3,366,634
 3,163,073
3,785,006
 3,673,796
Home Equity1,528,353
 1,334,163
1,694,577
 1,681,442
Automobile506,102
 454,333
703,523
 658,133
Other 1
432,904
 380,524
473,707
 455,611
Total Consumer5,833,993
 5,332,093
6,656,813
 6,468,982
Total Loans and Leases$9,573,956
 $8,949,785
$10,759,129
 $10,448,774
1 
Comprised of other revolving credit, installment, and lease financing.
The majority of the Company’s lending activity is with customers located in the State of Hawaii. A substantial portion of the Company’s real estate loans are secured by real estate in Hawaii.


Net gains related to sales of residential mortgage loans, recorded as a component of mortgage banking income were $1.4$1.1 million and $3.6$0.5 million for the three months ended SeptemberJune 30, 20172019 and 2016,2018, respectively, and $4.6$1.6 million and $9.8$0.8 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, respectively.


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


The following presents by portfolio segment, the activity in the Allowance for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016.2018.  The following also presents by portfolio segment, the balance in the Allowance disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans and leases as of SeptemberJune 30, 20172019 and 2016.2018.


(dollars in thousands)Commercial
 Consumer
 Total
Three Months Ended June 30, 2019 
  
  
Allowance for Loan and Lease Losses: 
  
  
Balance at Beginning of Period$67,527
 $38,496
 $106,023
Loans and Leases Charged-Off(206) (4,923) (5,129)
Recoveries on Loans and Leases Previously Charged-Off401
 2,377
 2,778
Net Loans and Leases Recovered (Charged-Off)195
 (2,546) (2,351)
Provision for Credit Losses1,546
 2,454
 4,000
Balance at End of Period$69,268
 $38,404
 $107,672
Six Months Ended June 30, 2019 
  
  
Allowance for Loan and Lease Losses: 
  
  
Balance at Beginning of Period$66,874
 $39,819
 $106,693
Loans and Leases Charged-Off(2,192) (9,765) (11,957)
Recoveries on Loans and Leases Previously Charged-Off902
 5,034
 5,936
Net Loans and Leases Recovered (Charged-Off)(1,290) (4,731) (6,021)
Provision for Credit Losses3,684
 3,316
 7,000
Balance at End of Period$69,268
 $38,404
 $107,672
As of June 30, 2019 
  
  
Allowance for Loan and Lease Losses: 
  
  
Individually Evaluated for Impairment$716
 $3,327
 $4,043
Collectively Evaluated for Impairment68,552
 35,077
 103,629
Total$69,268
 $38,404
 $107,672
Recorded Investment in Loans and Leases: 
  
  
Individually Evaluated for Impairment$20,791
 $41,971
 $62,762
Collectively Evaluated for Impairment4,081,525
 6,614,842
 10,696,367
Total$4,102,316
 $6,656,813
 $10,759,129
      
Three Months Ended June 30, 2018 
  
  
Allowance for Loan and Lease Losses: 
  
  
Balance at Beginning of Period$64,110
 $43,828
 $107,938
Loans and Leases Charged-Off(485) (5,176) (5,661)
Recoveries on Loans and Leases Previously Charged-Off366
 2,045
 2,411
Net Loans and Leases Recovered (Charged-Off)(119) (3,131) (3,250)
Provision for Credit Losses(279) 3,779
 3,500
Balance at End of Period$63,712
 $44,476
 $108,188
Six Months Ended June 30, 2018 
  
  
Allowance for Loan and Lease Losses: 
  
  
Balance at Beginning of Period$65,822
 $41,524
 $107,346
Loans and Leases Charged-Off(691) (10,958) (11,649)
Recoveries on Loans and Leases Previously Charged-Off694
 4,172
 4,866
Net Loans and Leases Recovered (Charged-Off)3
 (6,786) (6,783)
Provision for Credit Losses(2,113) 9,738
 7,625
Balance at End of Period$63,712
 $44,476
 $108,188
As of June 30, 2018 
  
  
Allowance for Loan and Lease Losses: 
  
  
Individually Evaluated for Impairment$100
 $3,827
 $3,927
Collectively Evaluated for Impairment63,612
 40,649
 104,261
Total$63,712
 $44,476
 $108,188
Recorded Investment in Loans and Leases: 
  
  
Individually Evaluated for Impairment$12,184
 $41,981
 $54,165
Collectively Evaluated for Impairment3,804,088
 6,195,070
 9,999,158
Total$3,816,272
 $6,237,051
 $10,053,323
(dollars in thousands)Commercial
 Consumer
 Total
Three Months Ended September 30, 2017 
  
  
Allowance for Loan and Lease Losses: 
  
  
Balance at Beginning of Period$66,182
 $40,171
 $106,353
Loans and Leases Charged-Off(611) (5,607) (6,218)
Recoveries on Loans and Leases Previously Charged-Off598
 2,148
 2,746
Net Loans and Leases Recovered (Charged-Off)(13) (3,459) (3,472)
Provision for Credit Losses295
 3,705
 4,000
Balance at End of Period$66,464
 $40,417
 $106,881
Nine Months Ended September 30, 2017 
  
  
Allowance for Loan and Lease Losses: 
  
  
Balance at Beginning of Period$65,680
 $38,593
 $104,273
Loans and Leases Charged-Off(909) (16,500) (17,409)
Recoveries on Loans and Leases Previously Charged-Off1,200
 6,167
 7,367
Net Loans and Leases Recovered (Charged-Off)291
 (10,333) (10,042)
Provision for Credit Losses493
 12,157
 12,650
Balance at End of Period$66,464
 $40,417
 $106,881
As of September 30, 2017 
  
  
Allowance for Loan and Lease Losses: 
  
  
Individually Evaluated for Impairment$136
 $3,762
 $3,898
Collectively Evaluated for Impairment66,328
 36,655
 102,983
Total$66,464
 $40,417
 $106,881
Recorded Investment in Loans and Leases: 
  
  
Individually Evaluated for Impairment$21,738
 $39,385
 $61,123
Collectively Evaluated for Impairment3,718,225
 5,794,608
 9,512,833
Total$3,739,963
 $5,833,993
 $9,573,956
      
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-Off296
 2,221
 2,517
Net Loans and Leases Recovered (Charged-Off)87
 (2,486) (2,399)
Provision for Credit Losses442
 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-Off7,619
 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 Impairment62,547
 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 Impairment3,467,761
 5,166,093
 8,633,854
Total$3,489,554
 $5,204,543
 $8,694,097


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.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. Management believes that there is a moderate likelihood of some loss related to those loans and leases that are considered special mention.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 passPass 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 passPass 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 classifiedClassified 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 classifiedClassified status. Management believes that there is a distinct possibility that the Company will sustain some loss if the deficiencies related to classifiedClassified loans and leases are not corrected in a timely manner.



The Company’s credit quality indicators are periodically updated on a case-by-case basis.  The following presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of SeptemberJune 30, 20172019 and December 31, 2016.2018.
September 30, 2017June 30, 2019
(dollars in thousands)
Commercial
and Industrial

 
Commercial
Mortgage

 Construction
 
Lease
Financing

 
Total
Commercial

Commercial
and Industrial

 
Commercial
Mortgage

 Construction
 
Lease
Financing

 
Total
Commercial

Pass$1,206,294
 $1,997,523
 $231,033
 $203,806
 $3,638,656
$1,374,994
 $2,341,245
 $117,961
 $162,081
 $3,996,281
Special Mention18,593
 30,744
 13
 —
 49,350
17,730
 50,098
 —
 —
 67,828
Classified27,351
 22,731
 1,441
 434
 51,957
16,005
 19,946
 1,267
 989
 38,207
Total$1,252,238
 $2,050,998
 $232,487
 $204,240
 $3,739,963
$1,408,729
 $2,411,289
 $119,228
 $163,070
 $4,102,316
                  
(dollars in thousands)
Residential
Mortgage

 
Home
Equity

 Automobile
 
Other 1

 
Total
Consumer

Residential
Mortgage

 
Home
Equity

 Automobile
 
Other 1

 
Total
Consumer

Pass$3,357,447
 $1,521,919
 $505,296
 $432,211
 $5,816,873
$3,779,877
 $1,691,560
 $702,916
 $472,744
 $6,647,097
Special Mention—
 1,764
 —
 —
 1,764
Classified9,187
 4,670
 806
 693
 15,356
5,129
 3,017
 607
 963
 9,716
Total$3,366,634
 $1,528,353
 $506,102
 $432,904
 $5,833,993
$3,785,006
 $1,694,577
 $703,523
 $473,707
 $6,656,813
Total Recorded Investment in Loans and LeasesTotal Recorded Investment in Loans and Leases  
  
  
 $9,573,956
Total Recorded Investment in Loans and Leases  
  
  
 $10,759,129
December 31, 2016December 31, 2018
(dollars in thousands)
Commercial
and Industrial

 
Commercial
Mortgage

 Construction
 
Lease
Financing

 
Total
Commercial

Commercial
and Industrial

 
Commercial
Mortgage

 Construction
 
Lease
Financing

 
Total
Commercial

Pass$1,203,025
 $1,792,119
 $264,287
 $207,386
 $3,466,817
$1,302,278
 $2,256,128
 $168,740
 $175,223
 $3,902,369
Special Mention20,253
 66,734
 4,218
 5
 91,210
17,688
 30,468
 —
 5
 48,161
Classified26,513
 30,698
 1,513
 941
 59,665
11,183
 15,760
 1,321
 998
 29,262
Total$1,249,791
 $1,889,551
 $270,018
 $208,332
 $3,617,692
$1,331,149
 $2,302,356
 $170,061
 $176,226
 $3,979,792
                  
(dollars in thousands)
Residential
Mortgage

 
Home
Equity

 Automobile
 
Other 1

 
Total
Consumer

Residential
Mortgage

 
Home
Equity

 Automobile
 
Other 1

 
Total
Consumer

Pass$3,149,294
 $1,327,676
 $453,439
 $379,793
 $5,310,202
$3,668,475
 $1,677,193
 $657,620
 $454,697
 $6,457,985
Special Mention—
 2,964
 —
 —
 2,964
Classified13,779
 3,523
 894
 731
 18,927
5,321
 4,249
 513
 914
 10,997
Total$3,163,073
 $1,334,163
 $454,333
 $380,524
 $5,332,093
$3,673,796
 $1,681,442
 $658,133
 $455,611
 $6,468,982
Total Recorded Investment in Loans and LeasesTotal Recorded Investment in Loans and Leases  
  
  
 $8,949,785
Total Recorded Investment in Loans and Leases  
  
  
 $10,448,774
1 
Comprised of other revolving credit, installment, and lease financing.

Aging Analysis


The following presents by class, an aging analysis of the Company’s loan and lease portfolio as of SeptemberJune 30, 20172019 and December 31, 2016.2018.
(dollars in thousands)
30 - 59
Days
Past Due

 
60 - 89
Days
Past Due

 
Past Due
90 Days
or More

 Non-Accrual
 
Total
Past Due and
Non-Accrual

 Current
 
Total
Loans and
Leases

 
Non-Accrual
Loans and
Leases that
are Current 2

30 - 59
Days
Past Due

 
60 - 89
Days
Past Due

 
Past Due
90 Days
or More

 Non-Accrual
 
Total
Past Due and
Non-Accrual

 Current
 
Total
Loans and
Leases

 
Non-Accrual
Loans and
Leases that
are Current 2

As of September 30, 2017 
  
  
  
  
  
  
  
As of June 30, 2019 
  
  
  
  
  
  
  
Commercial 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Commercial and Industrial$2,063
 $206
 $5
 $901
 $3,175
 $1,249,063
 $1,252,238
 $162
$2,908
 $105
 $—
 $552
 $3,565
 $1,405,164
 $1,408,729
 $355
Commercial Mortgage1,321
 619
 —
 1,425
 3,365
 2,047,633
 2,050,998
 404
749
 202
 —
 11,310
 12,261
 2,399,028
 2,411,289
 11,310
Construction—
 —
 —
 —
 —
 232,487
 232,487
 —
—
 —
 —
 —
 —
 119,228
 119,228
 —
Lease Financing—
 —
 —
 —
 —
 204,240
 204,240
 —
—
 —
 —
 —
 —
 163,070
 163,070
 —
Total Commercial3,384
 825
 5
 2,326
 6,540
 3,733,423
 3,739,963
 566
3,657
 307
 —
 11,862
 15,826
 4,086,490
 4,102,316
 11,665
Consumer 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Residential Mortgage3,838
 1,456
 2,933
 9,188
 17,415
 3,349,219
 3,366,634
 1,517
4,688
 396
 1,859
 4,697
 11,640
 3,773,366
 3,785,006
 338
Home Equity2,588
 1,017
 1,392
 4,128
 9,125
 1,519,228
 1,528,353
 1,300
3,059
 1,751
 2,981
 2,486
 10,277
 1,684,300
 1,694,577
 443
Automobile9,743
 1,623
 806
 —
 12,172
 493,930
 506,102
 —
11,727
 1,663
 607
 —
 13,997
 689,526
 703,523
 —
Other 1
2,772
 1,912
 1,528
 —
 6,212
 426,692
 432,904
 —
2,528
 1,578
 963
 —
 5,069
 468,638
 473,707
 —
Total Consumer18,941
 6,008
 6,659
 13,316
 44,924
 5,789,069
 5,833,993
 2,817
22,002
 5,388
 6,410
 7,183
 40,983
 6,615,830
 6,656,813
 781
Total$22,325
 $6,833
 $6,664
 $15,642
 $51,464
 $9,522,492
 $9,573,956
 $3,383
$25,659
 $5,695
 $6,410
 $19,045
 $56,809
 $10,702,320
 $10,759,129
 $12,446
                              
As of December 31, 2016 
  
  
  
  
  
  
  
As of December 31, 2018 
  
  
  
  
  
  
  
Commercial 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Commercial and Industrial$10,698
 $1,016
 $—
 $151
 $11,865
 $1,237,926
 $1,249,791
 $—
$3,653
 $118
 $10
 $542
 $4,323
 $1,326,826
 $1,331,149
 $515
Commercial Mortgage128
 17
 —
 997
 1,142
 1,888,409
 1,889,551
 416
561
 —
 —
 2,040
 2,601
 2,299,755
 2,302,356
 2,040
Construction—
 —
 —
 —
 —
 270,018
 270,018
 —
—
 —
 —
 —
 —
 170,061
 170,061
 —
Lease Financing—
 —
 —
 —
 —
 208,332
 208,332
 —
—
 —
 —
 —
 —
 176,226
 176,226
 —
Total Commercial10,826

1,033

—
 1,148
 13,007
 3,604,685
 3,617,692
 416
4,214

118

10
 2,582
 6,924
 3,972,868
 3,979,792
 2,555
Consumer 
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
Residential Mortgage6,491
 106
 3,127
 13,780
 23,504
 3,139,569
 3,163,073
 1,628
5,319
 638
 2,446
 5,321
 13,724
 3,660,072
 3,673,796
 1,203
Home Equity3,063
 2,244
 1,457
 3,147
 9,911
 1,324,252
 1,334,163
 1,015
3,323
 1,581
 2,684
 3,671
 11,259
 1,670,183
 1,681,442
 765
Automobile11,692
 2,162
 894
 —
 14,748
 439,585
 454,333
 —
12,372
 2,240
 513
 —
 15,125
 643,008
 658,133
 —
Other 1
3,200
 1,532
 1,592
 —
 6,324
 374,200
 380,524
 —
2,913
 1,245
 914
 —
 5,072
 450,539
 455,611
 —
Total Consumer24,446
 6,044
 7,070
 16,927
 54,487
 5,277,606
 5,332,093
 2,643
23,927
 5,704
 6,557
 8,992
 45,180
 6,423,802
 6,468,982
 1,968
Total$35,272
 $7,077
 $7,070
 $18,075
 $67,494
 $8,882,291
 $8,949,785
 $3,059
$28,141
 $5,822
 $6,567
 $11,574
 $52,104
 $10,396,670
 $10,448,774
 $4,523
1 
Comprised of other revolving credit, installment, and lease financing.
2 
Represents non-accrual loans that are not past due 30 days or more; however, full payment of principal and interest is still not expected.

Impaired Loans


The following presents by class, information related to impaired loans as of SeptemberJune 30, 20172019 and December 31, 2016.2018.


(dollars in thousands)
Recorded
 Investment

 
Unpaid
 Principal
 Balance

 
Related 
Allowance for 
Loan Losses

Recorded
 Investment

 
Unpaid
 Principal
 Balance

 
Related 
Allowance for 
Loan Losses

September 30, 2017 
  
  
June 30, 2019 
  
  
Impaired Loans with No Related Allowance Recorded: 
  
  
 
  
  
Commercial 
  
  
 
  
  
Commercial and Industrial$8,967
 $16,279
 $—
$4,844
 $4,844
 $—
Commercial Mortgage9,450
 12,950
 —
5,721
 10,837
 —
Construction1,441
 1,440
 —
1,267
 1,267
 —
Total Commercial19,858
 30,669
 —
11,832
 16,948
 —
Total Impaired Loans with No Related Allowance Recorded$19,858
 $30,669
 $—
$11,832
 $16,948
 $—
          
Impaired Loans with an Allowance Recorded: 
  
  
 
  
  
Commercial 
  
  
 
  
  
Commercial and Industrial$656
 $656
 $14
$1,682
 $1,913
 $111
Commercial Mortgage1,224
 1,224
 122
7,277
 7,277
 605
Total Commercial1,880
 1,880
 136
8,959
 9,190
 716
Consumer 
  
  
 
  
  
Residential Mortgage21,401
 26,140
 3,117
19,045
 22,926
 2,681
Home Equity1,810
 1,810
 267
3,495
 3,495
 350
Automobile13,612
 13,612
 304
17,626
 17,626
 251
Other 1
2,562
 2,562
 74
1,805
 1,806
 45
Total Consumer39,385
 44,124
 3,762
41,971
 45,853
 3,327
Total Impaired Loans with an Allowance Recorded$41,265
 $46,004
 $3,898
$50,930
 $55,043
 $4,043
          
Impaired Loans:          
Commercial$21,738
 $32,549
 $136
$20,791
 $26,138
 $716
Consumer39,385
 44,124
 3,762
41,971
 45,853
 3,327
Total Impaired Loans$61,123
 $76,673
 $3,898
$62,762
 $71,991
 $4,043
          
December 31, 2016 
  
  
December 31, 2018 
  
  
Impaired Loans with No Related Allowance Recorded: 
  
  
 
  
  
Commercial 
  
  
 
  
  
Commercial and Industrial$9,556
 $16,518
 $—
$4,587
 $4,587
 $—
Commercial Mortgage9,373
 12,873
 —
2,712
 6,212
 —
Construction1,513
 1,513
 —
1,321
 1,321
 —
Total Commercial20,442
 30,904
 —
8,620
 12,120
 —
Total Impaired Loans with No Related Allowance Recorded$20,442
 $30,904
 $—
$8,620
 $12,120
 $—
          
Impaired Loans with an Allowance Recorded: 
  
  
 
  
  
Commercial 
  
  
 
  
  
Commercial and Industrial$765
 $765
 $24
$1,856
 $2,099
 $130
Commercial Mortgage365
 365
 21
1,822
 1,822
 92
Total Commercial1,130
 1,130
 45
3,678
 3,921
 222
Consumer 
  
  
 
  
  
Residential Mortgage25,625
 30,615
 3,224
19,753
 23,635
 3,051
Home Equity1,516
 1,516
 15
3,359
 3,359
 350
Automobile9,660
 9,660
 206
17,117
 17,117
 296
Other 1
2,325
 2,325
 65
2,098
 2,098
 57
Total Consumer39,126
 44,116
 3,510
42,327
 46,209
 3,754
Total Impaired Loans with an Allowance Recorded$40,256
 $45,246
 $3,555
$46,005
 $50,130
 $3,976
          
Impaired Loans: 
  
  
 
  
  
Commercial$21,572
 $32,034
 $45
$12,298
 $16,041
 $222
Consumer39,126
 44,116
 3,510
42,327
 46,209
 3,754
Total Impaired Loans$60,698
 $76,150
 $3,555
$54,625
 $62,250
 $3,976
1 Comprised of other revolving credit and installment financing.

The following presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016.2018.


Three Months Ended
September 30, 2017		 Three Months Ended
September 30, 2016		Three Months Ended
June 30, 2019		 Three Months Ended
June 30, 2018
(dollars in thousands)
Average Recorded
Investment

 
Interest Income
Recognized

 
Average Recorded
Investment

 
Interest Income
Recognized

Average Recorded
Investment

 
Interest Income
Recognized

 
Average Recorded
Investment

 
Interest Income
Recognized

Impaired Loans with No Related Allowance Recorded:Impaired Loans with No Related Allowance Recorded:  
  
  
   
  
  
Commercial 
  
  
  
 
  
  
  
Commercial and Industrial$8,592
 $106
 $9,762
 $115
$5,008
 $78
 $7,540
 $83
Commercial Mortgage9,512
 61
 9,848
 90
5,789
 16
 6,351
 30
Construction1,453
 23
 1,548
 25
1,281
 21
 1,386
 22
Total Commercial19,557
 190
 21,158
 230
12,078
 115
 15,277
 135
Total Impaired Loans with No Related Allowance Recorded$19,557
 $190
 $21,158
 $230
$12,078
 $115
 $15,277
 $135
              
Impaired Loans with an Allowance Recorded: 
  
  
  
 
  
  
  
Commercial 
  
  
  
 
  
  
  
Commercial and Industrial$640
 $11
 $681
 $27
$1,598
 $22
 $1,128
 $10
Commercial Mortgage771
 31
 194
 5
4,535
 2
 236
 3
Total Commercial1,411
 42
 875
 32
6,133
 24
 1,364
 13
Consumer 
  
  
  
 
  
  
  
Residential Mortgage21,674
 209
 27,172
 235
19,179
 199
 20,509
 215
Home Equity1,773
 20
 1,428
 15
3,388
 42
 2,221
 26
Automobile12,895
 217
 7,908
 129
17,705
 298
 15,819
 278
Other 1
2,615
 52
 2,064
 44
1,898
 39
 2,806
 56
Total Consumer38,957
 498
 38,572
 423
42,170
 578
 41,355
 575
Total Impaired Loans with an Allowance Recorded$40,368
 $540
 $39,447
 $455
$48,303
 $602
 $42,719
 $588
              
Impaired Loans: 
  
  
  
 
  
  
  
Commercial$20,968
 $232
 $22,033
 $262
$18,211
 $139
 $16,641
 $148
Consumer38,957
 498
 38,572
 423
42,170
 578
 41,355
 575
Total Impaired Loans$59,925
 $730
 $60,605
 $685
$60,381
 $717
 $57,996
 $723
              
Nine Months Ended
September 30, 2017		 Nine Months Ended
September 30, 2016		Six Months Ended
June 30, 2019		 Six Months Ended
June 30, 2018
(dollars in thousands)
Average Recorded
Investment

 
Interest Income
Recognized

 
Average Recorded
Investment

 
Interest Income
Recognized

Average Recorded
Investment

 
Interest Income
Recognized

 
Average Recorded
Investment

 
Interest Income
Recognized

Impaired Loans with No Related Allowance Recorded:Impaired Loans with No Related Allowance Recorded:  
  
  
   
  
  
Commercial 
  
  
  
 
  
  
  
Commercial and Industrial$8,989
 $248
 $11,061
 $333
$4,867
 $163
 $7,724
 $196
Commercial Mortgage9,390
 223
 10,040
 252
4,763
 32
 7,132
 117
Construction1,477
 71
 1,570
 76
1,294
 42
 1,396
 45
Total Commercial19,856
 542
 22,671
 661
10,924
 237
 16,252
 358
Total Impaired Loans with No Related Allowance Recorded$19,856
 $542
 $22,671
 $661
$10,924
 $237
 $16,252
 $358
              
Impaired Loans with an Allowance Recorded:Impaired Loans with an Allowance Recorded:  
  
  
   
  
  
Commercial 
  
  
  
 
  
  
  
Commercial and Industrial$684
 $31
 $983
 $59
$1,684
 $43
 $1,022
 $20
Commercial Mortgage562
 39
 97
 5
3,630
 4
 557
 6
Total Commercial1,246
 70
 1,080
 64
5,314
 47
 1,579
 26
Consumer 
  
  
  
 
  
  
  
Residential Mortgage23,331
 635
 27,889
 736
19,370
 395
 20,866
 427
Home Equity1,642
 57
 1,365
 50
3,378
 80
 2,135
 51
Automobile11,592
 581
 7,553
 376
17,509
 593
 15,483
 539
Other 1
2,553
 162
 1,922
 126
1,965
 81
 2,752
 108
Total Consumer39,118
 1,435
 38,729
 1,288
42,222
 1,149
 41,236
 1,125
Total Impaired Loans with an Allowance Recorded$40,364
 $1,505
 $39,809
 $1,352
$47,536
 $1,196
 $42,815
 $1,151
              
Impaired Loans: 
  
  
  
 
  
  
  
Commercial$21,102
 $612
 $23,751
 $725
$16,238
 $284
 $17,831
 $384
Consumer39,118
 1,435
 38,729
 1,288
42,222
 1,149
 41,236
 1,125
Total Impaired Loans$60,220
 $2,047
 $62,480
 $2,013
$58,460
 $1,433
 $59,067
 $1,509
1 
Comprised of other revolving credit and installment financing.


For the three and ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, the amounts of interest income recognized by the Company within the periods that the loans were impaired were primarily related to loans modified in a troubled debt restructuring (“TDR”) that remained on accrual status. For the three and ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, the amount of interest income recognized using a cash-basis method of accounting during the periods that the loans were impaired was not material.


Modifications


A modification of a loan constitutes a troubled debt restructuring (“TDR”)TDR when the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider.  Loans modified in a TDR were $59.2$56.7 million and $60.0$54.0 million as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively.  As of September 30, 2017, thereThere were no$0.3 million and $0.2 million commitments to lend additional funds on loans modified in a TDR. AsTDR as of June 30, 2019 and December 31, 2016, there were $0.4 million of commitments to lend additional funds on loans modified in a TDR.2018, respectively.


The Company offers various types of concessions when modifying a loan or lease. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor areis often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a co-borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. Residential mortgage loans modified in a TDR generally include a lower interest rate and the loan being fully amortized for up to 40 years from the modification effective date. In some cases, the Company may forbear a portion of the unpaid principal balance with a balloon payment due upon maturity or pay-off of the loan. Land loans are also included in the class of residential mortgage loans. Land loans are typically structured as interest-only monthly payments with a balloon payment due at maturity. Land loan modifications usually involve extending the interest-only monthly payments up to an additional five years with a balloon payment due at maturity, or re-amortizing the remaining balance over a period up to 360 months. Interest rates are not changed for land loan modifications. Home equity modifications are made infrequently and uniquely designed to meet the specific needs of each borrower. Automobile loans modified in a TDR are primarily comprised of loans where the Company has lowered monthly payments by extending the term.


Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance.  As a result, loans modified in a TDR may have the financial effect of increasing the specific Allowance associated with the loan.  An Allowance for impaired consumercommercial and commercialconsumer loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent.  Management exercises significant judgment in developing these estimates.



The following presents by class, information related to loans modified in a TDR during the three and ninesix months ended SeptemberJune 30, 20172019 and 2016.2018.
Loans Modified as a TDR for the
Three Months Ended September 30, 2017		 Loans Modified as a TDR for the
Three Months Ended September 30, 2016		Loans Modified as a TDR for the
Three Months Ended June 30, 2019		 Loans Modified as a TDR for the
Three Months Ended June 30, 2018
 
 Recorded
 Increase in
  
 Recorded
 Increase in
 
 Recorded
 Increase in
  
 Recorded
 Increase in
Troubled Debt RestructuringsNumber of
 Investment
 Allowance
 Number of
 Investment
 Allowance
Number of
 Investment
 Allowance
 Number of
 Investment
 Allowance
(dollars in thousands)Contracts
(as of period end)1
 (as of period end)  Contracts
(as of period end)1
 (as of period end) Contracts
(as of period end)1
 (as of period end)  Contracts
(as of period end)1
 (as of period end) 
Commercial 
  
  
  
  
  
 
  
  
  
  
  
Commercial and Industrial1
 $198
 $—
 4
 $97
 $1
1
 $99
 $10
 6
 $712
 $48
Commercial Mortgage2
 1,307
 93
 1
 208
 2
Total Commercial3
 1,505
 93
 5
 305
 3
1
 99
 10
 6
 712
 48
Consumer 
  
  
  
  
  
 
  
  
  
  
  
Residential Mortgage—
 —
 —
 3
 547
 258
1
 57
 —
 2
 455
 30
Home Equity2
 203
 1
 —
 —
 —
2
 247
 —
 3
 545
 —
Automobile123
 2,636
 59
 79
 1,678
 38
79
 1,488
 21
 72
 1,521
 31
Other 2
34
 383
 9
 62
 510
 14
29
 179
 5
 63
 468
 14
Total Consumer159
 3,222
 69
 144
 2,735
 310
111
 1,971
 26
 140
 2,989
 75
Total162
 $4,727
 $162
 149
 $3,040
 $313
112
 $2,070
 $36
 146
 $3,701
 $123
                      
Loans Modified as a TDR for the
Nine Months Ended September 30, 2017		 Loans Modified as a TDR for the
Nine Months Ended September 30, 2016		Loans Modified as a TDR for the
Six Months Ended June 30, 2019		 Loans Modified as a TDR for the
Six Months Ended June 30, 2018
 
 Recorded
 Increase in
  
 Recorded
 Increase in
 
 Recorded
 Increase in
  
 Recorded
 Increase in
Troubled Debt RestructuringsNumber of
 Investment
 Allowance
 Number of
 Investment
 Allowance
Number of
 Investment
 Allowance
 Number of
 Investment
 Allowance
(dollars in thousands)Contracts
(as of period end)1
 (as of period end)  Contracts
(as of period end)1
 (as of period end) Contracts
(as of period end)1
 (as of period end)  Contracts
(as of period end)1
 (as of period end) 
Commercial 
  
  
  
  
  
 
  
  
  
  
  
Commercial and Industrial12
 $7,485
 $12
 6
 $3,084
 $1
4
 $205
 $14
 7
 $1,233
 $48
Commercial Mortgage3
 2,007
 93
 1
 208
 2
1
 3,836
 —
 —
 —
 —
Total Commercial15
 9,492
 105
 7
 3,292
 3
5
 4,041
 14
 7
 1,233
 48
Consumer 
  
  
  
  
  
 
  
  
  
  
  
Residential Mortgage—
 —
 —
 8
 3,025
 274
1
 57
 —
 2
 455
 30
Home Equity3
 442
 5
 1
 476
 5
2
 247
 —
 3
 545
 —
Automobile326
 6,657
 149
 184
 3,617
 82
191
 3,596
 51
 170
 3,654
 75
Other 2
136
 1,131
 28
 155
 1,127
 31
66
 385
 10
 138
 967
 28
Total Consumer465
 8,230
 182
 348
 8,245
 392
260
 4,285
 61
 313
 5,621
 133
Total480
 $17,722
 $287
 355
 $11,537
 $395
265
 $8,326
 $75
 320
 $6,854
 $181
1 
The period end balances reflect all paydowns and charge-offs since the modification date.  TDRs fully paid-off, charged-off, or foreclosed upon by period end are not included.
2 
Comprised of other revolving credit and installment financing.

The following presents by class, all loans modified in a TDR that defaulted during the three and ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, and within twelve months of their modification date.  A TDR is considered to be in default once it becomes 60 days or more past due following a modification.
 Three Months Ended
June 30, 2019		 Three Months Ended
June 30, 2018
TDRs that Defaulted During the Period, 
 Recorded
 Recorded 
Within Twelve Months of their Modification DateNumber of
 Investment
 Number of
 Investment
(dollars in thousands)Contracts
 
(as of period end)1

 Contracts
 
(as of period end)1

Commercial       
Commercial and Industrial1
 $58
 —
 $—
Total Commercial1
 58
 —
 —
        
Consumer   
  
  
Automobile9
 186
 14
 289
Other 2
11
 63
 21
 167
Total Consumer20
 249

35
 456
Total21
 $307
 35
 $456
        
 Six Months Ended
June 30, 2019		 Six Months Ended
June 30, 2018
TDRs that Defaulted During the Period, 
 Recorded
 Recorded 
Within Twelve Months of their Modification DateNumber of
 Investment
 Number of
 Investment
(dollars in thousands)Contracts
 
(as of period end)1

 Contracts
 
(as of period end)1

Commercial       
Commercial and Industrial1
 $58
 —
 $—
Total Commercial1
 58
 —
 —
        
Consumer 
  
  
  
Home Equity—
 —
 1
 236
Automobile19
 353
 32
 606
Other 2
20
 109
 41
 295
Total Consumer39
 462
 74
 1,137
Total40
 $520
 74
 $1,137
 Three Months Ended
September 30, 2017		 Three Months Ended
September 30, 2016
TDRs that Defaulted During the Period, 
 Recorded
 Recorded 
Within Twelve Months of their Modification DateNumber of
 Investment
 Number of
 Investment
(dollars in thousands)Contracts
 
(as of period end)1

 Contracts
 
(as of period end)1

Consumer   
  
  
Automobile15
 $373
 1
 $3
Other 2
13
 83
 —
 —
Total Consumer28
 456

1
 3
Total28
 $456
 1
 $3
        
 Nine Months Ended
September 30, 2017		 Nine Months Ended
September 30, 2016
TDRs that Defaulted During the Period, 
 Recorded
 Recorded 
Within Twelve Months of their Modification DateNumber of
 Investment
 Number of
 Investment
(dollars in thousands)Contracts
 
(as of period end)1

 Contracts
 
(as of period end)1

Commercial       
Commercial and Industrial1
 $49
 —
 $—
Total Commercial1
 49
 —
 —
        
Consumer 
  
  
  
Residential Mortgage—
 —
 3
 1,044
Home Equity—
 —
 1
 158
Automobile23
 551
 3
 47
Other 2
33
 184
 18
 110
Total Consumer56
 735
 25
 1,359
Total57
 $784
 25
 $1,359

1 
The period end balances reflect all paydowns and charge-offs since the modification date.  TDRs fully paid-off, charged-off, or foreclosed upon by period end are not included.
2 
Comprised of other revolving credit and installment financing.
Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default.  If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment.  The specific Allowance associated with the loan may be increased, adjustments may be made in the allocation of the Allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.


Foreclosure Proceedings


Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $5.5$2.7 million as of SeptemberJune 30, 2017.2019.


Note 4.5.  Mortgage Servicing Rights


The Company’s portfolio of residential mortgage loans serviced for third parties was $3.0 billion and $2.9 billion as of SeptemberJune 30, 20172019 and $2.7 billion as of December 31, 2016.2018, respectively.  Substantially all of these loans were originated by the Company and sold to third parties on a non-recourse basis with servicing rights retained.  These retained servicing rights are recorded as a servicing asset and are initially recorded at fair value (see Note 13 14 Fair Value of Assets and Liabilities for more information). Changes to the balance of mortgage servicing rights are recorded in mortgage banking income in the Company’s consolidated statements of income.


The Company’s mortgage servicing activities include collecting principal, interest, and escrow payments from borrowers; making tax and insurance payments on behalf of borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to investors.  Servicing income, including late and ancillary fees, was $1.8 million and $1.7 million for the three months ended SeptemberJune 30, 20172019 and 2016, respectively,2018, and $5.3 million and $5.2$3.6 million for the ninesix months ended SeptemberJune 30, 20172019 and 2016, respectively.2018.  Servicing income is recorded in mortgage banking income in the Company’s consolidated statements of income.  The Company’s residential mortgage investor loan servicing portfolio is primarily comprised of fixed rate loans concentrated in Hawaii.


For the three and ninesix months endedSeptember June 30, 20172019 and 2016,2018, the change in the carrying value of the Company’s mortgage servicing rights accounted for under the fair value measurement method was as follows:
 Three Months Ended
June 30,		 Six Months Ended
June 30,
(dollars in thousands)2019
 2018
 2019
 2018
Balance at Beginning of Period$1,268
 $1,404
 $1,290
 $1,454
Change in Fair Value: 
  
  
  
Due to Payoffs(56) (38) (78) (88)
Total Changes in Fair Value of Mortgage Servicing Rights(56) (38) (78) (88)
Balance at End of Period$1,212
 $1,366
 $1,212
 $1,366

 Three Months Ended
September 30,		 Nine Months Ended
September 30,
(dollars in thousands)2017
 2016
 2017
 2016
Balance at Beginning of Period$1,548
 $1,819
 $1,655
 $1,970
Change in Fair Value: 
  
  
  
Due to Payoffs(39) (79) (146) (230)
Total Changes in Fair Value of Mortgage Servicing Rights(39) (79) (146) (230)
Balance at End of Period$1,509
 $1,740
 $1,509
 $1,740


For the three and ninesix months endedSeptemberJune 30, 20172019 and 20162018, the change in the carrying value of the Company’s mortgage servicing rights accounted for under the amortization method net of valuation allowance, was as follows:
 Three Months Ended
June 30,		 Six Months Ended
June 30,
(dollars in thousands)2019
 2018
 2019
 2018
Balance at Beginning of Period$22,881
 $23,089
 $23,020
 $23,168
Servicing Rights that Resulted From Asset Transfers974
 775
 1,524
 1,396
Amortization(824) (647) (1,513) (1,347)
Valuation Allowance Provision(10) —
 (10) —
Balance at End of Period$23,021
 $23,217

$23,021

$23,217
        
Valuation Allowance:       
Balance at Beginning of Period$—
 $—
 $—
 $—
Valuation Allowance Provision(10) —
 (10) —
Balance at End of Period$(10) $—

$(10)
$—
        
Fair Value of Mortgage Servicing Rights Accounted for
 Under the Amortization Method
 
  
  
  
Beginning of Period$26,814
 $28,600
 $29,218
 $26,716
End of Period$24,905
 $29,746
 $24,905
 $29,746

 Three Months Ended
September 30,		 Nine Months Ended
September 30,
(dollars in thousands)2017
 2016
 2017
 2016
Balance at Beginning of Period$22,923
 $17,812
 $22,008
 $21,032
Servicing Rights that Resulted From Asset Transfers900
 1,670
 3,176
 2,441
Amortization(739) (780) (2,047) (2,093)
Valuation Allowance Provision(157) 549
 (210) (2,129)
Balance at End of Period$22,927
 $19,251

$22,927

$19,251
        
Valuation Allowance:       
Balance at Beginning of Period$(53) $(2,699) $—
 $(21)
Valuation Allowance Provision(157) 549
 (210) (2,129)
Balance at End of Period$(210) $(2,150)
$(210)
$(2,150)
        
Fair Value of Mortgage Servicing Rights Accounted for
 Under the Amortization Method
 
  
  
  
Beginning of Period$25,479
 $17,812
 $25,148
 $24,804
End of Period$23,761
 $19,177
 $23,761
 $19,177


The key data and assumptions used in estimating the fair value of the Company’s mortgage servicing rights as of SeptemberJune 30, 20172019 and December 31, 20162018 were as follows:
September 30,
2017
 December 31, 2016
June 30,
2019
 December 31, 2018
Weighted-Average Constant Prepayment Rate 1
9.21% 8.13%10.39% 7.01%
Weighted-Average Life (in years)6.88
 7.43
6.33
 7.89
Weighted-Average Note Rate4.06% 4.10%4.06% 4.06%
Weighted-Average Discount Rate 2
8.89% 9.33%7.49% 9.59%
1 
Represents annualized loan repaymentprepayment rate assumption.
2 
Derived from multiple interest rate scenarios that incorporate a spread to a market yield curve and market volatilities.

A sensitivity analysis of the Company’s fair value of mortgage servicing rights to changes in certain key assumptions as of SeptemberJune 30, 20172019 and December 31, 20162018 is presented in the following table.
(dollars in thousands)June 30,
2019
 December 31,
2018
Constant Prepayment Rate 
  
Decrease in fair value from 25 basis points (“bps”) adverse change$(292) $(361)
Decrease in fair value from 50 bps adverse change(577) (716)
Discount Rate 
  
Decrease in fair value from 25 bps adverse change(253) (325)
Decrease in fair value from 50 bps adverse change(502) (643)

(dollars in thousands)September 30,
2017
 December 31,
2016
Constant Prepayment Rate 
  
Decrease in fair value from 25 basis points (“bps”) adverse change$(284) $(321)
Decrease in fair value from 50 bps adverse change(563) (636)
Discount Rate 
  
Decrease in fair value from 25 bps adverse change(255) (288)
Decrease in fair value from 50 bps adverse change(504) (570)



This analysis generally cannot be extrapolated because the relationship of a change in one key assumption to the change in the fair value of the Company’s mortgage servicing rights usually is not linear.  Also, the effect of changing one key assumption without changing other assumptions is not realistic.


Note 5.6. Affordable Housing Projects Tax Credit Partnerships


The Company makes equity investments in various limited partnerships that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (LIHTC)(“LIHTC”) pursuant to Section 42 of the Internal Revenue Code. The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act. The primary activities of the limited partnerships include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants. Generally, these types of investments are funded through a combination of debt and equity.


The Company is a limited partner in each LIHTC limited partnership. Each limited partnership is managed by an unrelated third party general partner who exercises significant control over the affairs of the limited partnership. The general partner has all the rights, powers and authority granted or permitted to be granted to a general partner of a limited partnership. Duties entrusted to the general partner of each limited partnership include, but are not limited to: investment in operating companies, company expenditures, investment of excess funds, borrowing funds, employment of agents, disposition of fund property, prepayment and refinancing of liabilities, votes and consents, contract authority, disbursement of funds, accounting methods, tax elections, bank accounts, insurance, litigation, cash reserve, and use of working capital reserve funds. Except for limited rights granted to the limited partner(s) relating to the approval of certain transactions, the limited partner(s) may not participate in the operation, management, or control of the limited partnership’s business, transact any business in the limited partnership’s name or have any power to sign documents for or otherwise bind the limited partnership. In addition, the general partner may only be removed by the limited partner(s) in the event the general partner fails to comply with the terms of the agreement or is negligent in performing its duties.


The general partner of each limited partnership has both the power to direct the activities which most significantly affect the performance of each partnership and the obligation to absorb losses or the right to receive benefits that could be significant to the entities. Therefore, the Company has determined that it is not the primary beneficiary of any LIHTC partnership. The Company uses the effective yield method to account for its pre-2015 investments in these entities. Beginning January 1, 2015, any new investments that meet the requirements of the proportional amortization method are recognized using the proportional amortization method. The Company’s net affordable housing tax credit investments and related unfunded commitments were $73.5$68.6 million and $66.6$73.7 million as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively, and are included in other assets in the consolidated statements of condition.


Unfunded Commitments


As of SeptemberJune 30, 2017,2019, the expected payments for unfunded affordable housing commitments were as follows:
(dollars in thousands)Amount
Amount
2017$8,760
201814,164
20192,382
$3,050
202051
8,317
202137
42
202249
202342
Thereafter1,065
1,281
Total Unfunded Commitments$26,459
$12,781



The following table presents tax credits and other tax benefits recognized and amortization expense related to affordable housing for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016.2018.
 Three Months Ended
June 30,		 Six Months Ended
June 30,
(dollars in thousands)2019
 2018
 2019
 2018
Effective Yield Method       
Tax credits and other tax benefits recognized$2,930
 $3,380
 $5,859
 $6,812
Amortization Expense in Provision for Income Taxes1,891
 2,078
 3,783
 4,155
        
Proportional Amortization Method       
Tax credits and other tax benefits recognized$753
 $410
 $1,507
 $820
Amortization Expense in Provision for Income Taxes645
 333
 1,289
 666

 Three Months Ended
September 30,		 Nine Months Ended
September 30,
(dollars in thousands)2017
 2016
 2017
 2016
Effective Yield Method       
Tax credits and other tax benefits recognized$3,414
 $3,352
 $10,282
 $10,384
Amortization Expense in Provision for Income Taxes2,105
 1,319
 6,403
 5,667
        
Proportional Amortization Method       
Tax credits and other tax benefits recognized$440
 $259
 $1,201
 $777
Amortization Expense in Provision for Income Taxes358
 200
 969
 600


There were no impairment losses related to LIHTC investments during the ninesix months ended SeptemberJune 30, 20172019 and 2016.2018. During the first quarter of 2018, the Company recorded a $2.0 million adjustment to increase its LIHTC investments. This

adjustment resulted in a decrease to the provision for income tax.

Note 6.7. Balance Sheet Offsetting


Interest Rate Swap Agreements (“Swap Agreements”)
The Company enters into swap agreements to facilitate the risk management strategies of a small number of commercial banking customers. The Company mitigates the risk of entering into these agreements by entering into equal and offsetting swap agreements with highly-rated third party financial institutions. The swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated statements of condition (asset positions are included in other assets and liability positions are included in other liabilities). The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes. The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral, usually in the form of cash or marketable securities, is posted by the party (i.e., the Company or the financial institution counterparty) with net liability positions in accordance with contract thresholds. The Company had net liability positions with its financial institution counterparties totaling $4.8$5.8 million and $5.5$0.3 million as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively. See Note 11 12 Derivative Financial Instruments for more information.
Parties to a centrally cleared over-the-counter derivative exchange daily payments that reflect the daily change in value of the derivative. Effective 2017, these payments, commonly referred to as variation margin, will beare recorded as settlements of the derivatives’ mark-to-market exposure rather than collateral against the exposures. During the second quarter of 2017, the Company executed its first centrally cleared swap agreements. This rule change effectively results in any centrally cleared derivative having a fair value that approximates zero on a daily basis, and therefore, these swap agreements were not included in the offsetting table at the end of this section. See Note 11 12 Derivative Financial Instruments for more information.

Securities Sold Under Agreements to Repurchase (“Repurchase Agreements”)
The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities.  Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets.  As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as sales and subsequent repurchases of securities.  The obligation to repurchase the securities is reflected as a liability in the Company’s consolidated statements of condition, while the securities underlying the repurchase agreements remain in the respective investment securities asset accounts. As a result, there is no offsetting or netting of the investment securities assets with the repurchase agreement liabilities. In addition, as the Company does not enter into reverse repurchase agreements, there is no such offsetting to be done with the repurchase agreements.


The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase agreement should the Company be in default (e.g., fail to make an interest payment to the counterparty). For private institution repurchase agreements, if the private institution counterparty were to default (e.g., declare bankruptcy), the Company could cancel the repurchase agreement (i.e., cease payment of principal and interest) and attempt collection on the amount of collateral value in excess of the repurchase agreement fair value. The collateral is held by a third party financial institution in the counterparty’s custodial account. The counterparty has the right to sell or repledge the investment securities. For government entity repurchase agreements, the collateral is held by the Company

in a segregated custodial account under a tri-party agreement. The Company is required by the counterparty to maintain adequate collateral levels. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional securities. The Company closely monitors collateral levels to ensure adequate levels are maintained, while mitigating the potential risk of over-collateralization in the event of counterparty default.


The following table presents the remaining contractual maturities of the Company’s repurchase agreements as of SeptemberJune 30, 20172019 and December 31, 2016,2018, disaggregated by the class of collateral pledged.
   Remaining Contractual Maturity of Repurchase Agreements
 (dollars in thousands)  Up to
90 days
  91-365 days
  1-3 Years
  After
3 Years
  Total
June 30, 2019          
 Class of Collateral Pledged:          
 Debt Securities Issued by the U.S. Treasury and Government Agencies $—
 $—
 $311,241
 $—
 $311,241
 Debt Securities Issued by States and Political Subdivisions 1,100
 1,690
 —
 —
 2,790
Debt Securities Issued by Corporations —
 —
 2,467
 —
 2,467
 Mortgage-Backed Securities:          
     Residential - Government Agencies —
 1,509
 90,105
 —
 91,614
     Residential - U.S. Government-Sponsored Enterprises —
 —
 96,187
 —
 96,187
 Total $1,100
 $3,199
 $500,000
 $—
 $504,299
           
December 31, 2018          
 Class of Collateral Pledged:          
 Debt Securities Issued by the U.S. Treasury and Government Agencies $—
 $—
 $198,442
 $117,021
 $315,463
 Debt Securities Issued by States and Political Subdivisions 1,906
 1,590
 —
 —
 3,496
 Mortgage-Backed Securities:          
     Residential - Government Agencies 800
 —
 26,558
 70,341
 97,699
     Residential - U.S. Government-Sponsored Enterprises —
 —
 —
 87,638
 87,638
 Total $2,706
 $1,590
 $225,000
 $275,000
 $504,296

   Remaining Contractual Maturity of Repurchase Agreements
 (dollars in thousands)  Up to
90 days
  91-365 days
  1-3 Years
  After
3 Years
  Total
September 30, 2017          
 Class of Collateral Pledged:          
 Debt Securities Issued by the U.S. Treasury and Government Agencies $—
 $—
 $69,717
 $243,168
 $312,885
 Debt Securities Issued by States and Political Subdivisions 1,198
 3,300
 —
 —
 4,498
 Mortgage-Backed Securities:          
     Residential - Government Agencies 795
 —
 —
 98,253
 99,048
     Residential - U.S. Government-Sponsored Enterprises —
 —
 5,283
 83,579
 88,862
 Total $1,993
 $3,300
 $75,000
 $425,000
 $505,293
           
December 31, 2016          
 Class of Collateral Pledged:          
 Debt Securities Issued by the U.S. Treasury and Government Agencies $—
 $—
 $200,000
 $104,681
 $304,681
 Debt Securities Issued by States and Political Subdivisions 22,050
 590
 —
 —
 22,640
 Mortgage-Backed Securities:          
     Residential - Government Agencies 738
 —
 —
 97,281
 98,019
     Residential - U.S. Government-Sponsored Enterprises —
 —
 —
 98,038
 98,038
 Total $22,788
 $590
 $200,000
 $300,000
 $523,378



The following table presents the assets and liabilities subject to an enforceable master netting arrangement, or repurchase agreements, as of SeptemberJune 30, 20172019 and December 31, 2016.2018. The swap agreements we havethe Company has with our commercial banking customers are not subject to an enforceable master netting arrangement, and therefore, are excluded from this table. As previously mentioned, centrally cleared swap agreements between the Company and institutional counterparties are also excluded from this table.
 (i) (ii) (iii) = (i)-(ii) (iv) (v) = (iii)-(iv) (i) (ii) (iii) = (i)-(ii) (iv) (v) = (iii)-(iv)
 
Gross Amounts
Recognized in the
Statements
 of Condition
 
 Gross Amounts
Offset in the
Statements
 of Condition
 
 Net Amounts
Presented in the
Statements
 of Condition
  Gross Amounts Not Offset in the Statements of Condition   
Gross Amounts
Recognized in the
Statements
 of Condition
 
 Gross Amounts
Offset in the
Statements
 of Condition
 
 Net Amounts
Presented in the
Statements
 of Condition
  Gross Amounts Not Offset in the Statements of Condition  
(dollars in thousands) 
Netting
Adjustments
per Master
Netting
Arrangements
 
Fair Value of Collateral
Pledged 1
  Net Amount 
Netting
Adjustments
per Master
Netting
Arrangements
 
Fair Value of Collateral
Pledged/Received 1
  Net Amount
September 30, 2017            
June 30, 2019            
Assets:                        
Interest Rate Swap Agreements:                        
Institutional Counterparties $4,168
 $—
 $4,168
 $4,168
 $—
 $—
 $1,106
 $—
 $1,106
 $1,106
 $—
 $—
                        
Liabilities:                        
Interest Rate Swap Agreements:                        
Institutional Counterparties 5,998
 —
 5,998
 4,168
 1,830
 —
 6,308
 —
 6,308
 1,106
 4,409
 793
                        
Repurchase Agreements:                        
Private Institutions 500,000
 —
 500,000
 —
 500,000
 —
 500,000
 —
 500,000
 —
 500,000
 —
Government Entities 5,293
 —
 5,293
 —
 5,293
 —
 4,299
 —
 4,299
 —
 4,299
 —
 $505,293
 $—
 $505,293
 $—
 $505,293
 $—
 $504,299
 $—
 $504,299
 $—
 $504,299
 $—
                        
December 31, 2016          
December 31, 2018          
Assets:                        
Interest Rate Swap Agreements:                        
Institutional Counterparties $5,094
 $—
 $5,094
 $5,094
 $—
 $—
 $7,572
 $—
 $7,572
 $1,490
 $—
 $6,082
                        
Liabilities:                        
Interest Rate Swap Agreements:                        
Institutional Counterparties 6,489
 —
 6,489
 5,094
 500
 895
 1,490
 —
 1,490
 1,490
 —
 —
     
     
     
     
Repurchase Agreements:     
           
      
Private Institutions 500,000
 —
 500,000
 —
 500,000
 —
 500,000
 —
 500,000
 —
 500,000
 —
Government Entities 23,378
 —
 23,378
 —
 23,378
 —
 4,296
 —
 4,296
 —
 4,296
 —
 $523,378
 $—
 $523,378
 $—
 $523,378
 $—
 $504,296
 $—
 $504,296
 $—
 $504,296
 $—
1 The application of collateral cannot reduce the net amount below zero. Therefore, excess collateral is not reflected in this column. For swap agreements with institutional counterparties, the fair value of investment securities pledged was $6.0 million as of September 30, 2017.table. For repurchase agreements with private institutions, the fair value of investment securities pledged was $567.3$542.0 million and $599.3$526.7 million as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively. For repurchase agreements with government entities, the fair value of investment securities pledged was $7.0$5.2 million and $28.9$6.8 million as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively.



Note 7.8.  Accumulated Other Comprehensive Income (Loss)


The following table presents the components of other comprehensive income (loss) for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016:2018:
(dollars in thousands)Before Tax
 Tax Effect
 Net of Tax
Three Months Ended June 30, 2019 
  
  
Net Unrealized Gains (Losses) on Investment Securities: 
  
  
Net Unrealized Gains (Losses) Arising During the Period$21,812
 $5,782
 $16,030
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) that (Increase) Decrease Net Income: 
  
  
  (Gain) Loss on Sale(127) (34) $(93)
  Amortization of Unrealized Holding (Gains) Losses on Held-to-Maturity Securities 1
368
 96
 272
Net Unrealized Gains (Losses) on Investment Securities22,053
 5,844
 16,209
Defined Benefit Plans: 
  
  
Amortization of Net Actuarial Losses (Gains)406
 108
 298
Amortization of Prior Service Credit(72) (19) (53)
Defined Benefit Plans, Net334
 89
 245
Other Comprehensive Income (Loss)$22,387
 $5,933
 $16,454
      
Three Months Ended June 30, 2018 
  
  
Net Unrealized Gains (Losses) on Investment Securities: 
  
  
Net Unrealized Gains (Losses) Arising During the Period$(4,622) $(1,223) $(3,399)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) that (Increase) Decrease Net Income:     
  Amortization of Unrealized Holding (Gains) Losses on Held-to-Maturity Securities 1
578
 153
 425
Net Unrealized Gains (Losses) on Investment Securities(4,044) (1,070) (2,974)
Defined Benefit Plans: 
  
  
Amortization of Net Actuarial Losses (Gains)436
 116
 320
Amortization of Prior Service Credit(142) (38) (104)
Defined Benefit Plans, Net294
 78
 216
Other Comprehensive Income (Loss)$(3,750) $(992) $(2,758)
      
Six Months Ended June 30, 2019 
  
  
Net Unrealized Gains (Losses) on Investment Securities: 
  
  
Net Unrealized Gains (Losses) Arising During the Period$30,764
 $8,153
 $22,611
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) that (Increase) Decrease Net Income:     
  (Gain) Loss on Sale(63) (17) (46)
  Amortization of Unrealized Holding (Gains) Losses on Held-to-Maturity Securities 1
764
 201
 563
Net Unrealized Gains (Losses) on Investment Securities31,465
 8,337
 23,128
Defined Benefit Plans: 
  
  
Amortization of Net Actuarial Losses (Gains)812
 215
 597
Amortization of Prior Service Credit(144) (38) (106)
Defined Benefit Plans, Net668
 177
 491
Other Comprehensive Income (Loss)$32,133
 $8,514
 $23,619
      
Six Months Ended June 30, 2018 
  
  
Net Unrealized Gains (Losses) on Investment Securities: 
  
  
Net Unrealized Gains (Losses) Arising During the Period$(17,679) $(4,675) $(13,004)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) that (Increase) Decrease Net Income:     
  Amortization of Unrealized Holding (Gains) Losses on Held-to-Maturity Securities 1
1,237
 328
 909
Net Unrealized Gains (Losses) on Investment Securities(16,442) (4,347) (12,095)
Defined Benefit Plans: 
  
  
Amortization of Net Actuarial Losses (Gains)872
 232
 640
Amortization of Prior Service Credit(284) (76) (208)
Defined Benefit Plans, Net588
 156
 432
Other Comprehensive Income (Loss)$(15,854) $(4,191) $(11,663)
(dollars in thousands)Before Tax
 Tax Effect
 Net of Tax
Three Months Ended September 30, 2017 
  
  
Net Unrealized Gains (Losses) on Investment Securities: 
  
  
Net Unrealized Gains (Losses) Arising During the Period$236
 $93
 $143
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) that (Increase) Decrease Net Income: 
  
  
  Amortization of Unrealized Holding (Gains) Losses on Held-to-Maturity Securities 1
497
 196
 301
Net Unrealized Gains (Losses) on Investment Securities733
 289
 444
Defined Benefit Plans: 
  
  
Amortization of Net Actuarial Losses (Gains)322
 127
 195
Amortization of Prior Service Credit(81) (32) (49)
Defined Benefit Plans, Net241
 95
 146
Other Comprehensive Income (Loss)$974
 $384
 $590
      
Three Months Ended September 30, 2016 
  
  
Net Unrealized Gains (Losses) on Investment Securities: 
  
  
Net Unrealized Gains (Losses) Arising During the Period$(9,420) $(3,719) $(5,701)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) that (Increase) Decrease Net Income:     
  Amortization of Unrealized Holding (Gains) Losses on Held-to-Maturity Securities 1
286
 113
 173
Net Unrealized Gains (Losses) on Investment Securities(9,134) (3,606) (5,528)
Defined Benefit Plans: 
  
  
Amortization of Net Actuarial Losses (Gains)314
 124
 190
Amortization of Prior Service Credit(81) (31) (50)
Defined Benefit Plans, Net233
 93
 140
Other Comprehensive Income (Loss)$(8,901) $(3,513) $(5,388)
      
Nine Months Ended September 30, 2017 
  
  
Net Unrealized Gains (Losses) on Investment Securities: 
  
  
Net Unrealized Gains (Losses) Arising During the Period$12,458
 $4,917
 $7,541
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) that (Increase) Decrease Net Income:     
  Amortization of Unrealized Holding (Gains) Losses on Held-to-Maturity Securities 1
1,492
 589
 903
Net Unrealized Gains (Losses) on Investment Securities13,950
 5,506
 8,444
Defined Benefit Plans: 
  
  
Amortization of Net Actuarial Losses (Gains)967
 382
 585
Amortization of Prior Service Credit(242) (96) (146)
Defined Benefit Plans, Net725
 286
 439
Other Comprehensive Income (Loss)$14,675
 $5,792
 $8,883
      
Nine Months Ended September 30, 2016 
  
  
Net Unrealized Gains (Losses) on Investment Securities: 
  
  
Net Unrealized Gains (Losses) Arising During the Period$12,804
 $5,055
 $7,749
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) that (Increase) Decrease Net Income:     
  Amortization of Unrealized Holding (Gains) Losses on Held-to-Maturity Securities 1
949
 375
 574
Net Unrealized Gains (Losses) on Investment Securities13,753
 5,430
 8,323
Defined Benefit Plans: 
  
  
Amortization of Net Actuarial Losses (Gains)940
 371
 569
Amortization of Prior Service Credit(242) (95) (147)
Defined Benefit Plans, Net698
 276
 422
Other Comprehensive Income (Loss)$14,451
 $5,706
 $8,745

1 
The amount relates to the amortization/accretion of unrealized net gains and losses related to the Company’s reclassification of available-for-sale investment securities to the held-to-maturity category. The unrealized net gains/losses will be amortized/accreted over the remaining life of the investment securities as an adjustment of yield.


The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three and ninesix months endedSeptemberJune 30, 20172019 and 20162018:
(dollars in thousands) Investment Securities-Available-for-Sale
 Investment Securities-Held-to-Maturity
 Defined Benefit Plans
 Accumulated Other Comprehensive Income (Loss)
 Investment Securities-Available-for-Sale
 Investment Securities-Held-to-Maturity
 Defined Benefit Plans
 Accumulated Other Comprehensive Income (Loss)
Three Months Ended September 30, 2017        
Three Months Ended June 30, 2019        
Balance at Beginning of Period $(3,819) $(4,295) $(35,764) $(43,878)
Other Comprehensive Income (Loss) Before Reclassifications 16,030
 —
 —
 16,030
Transfers (3,259) 3,259
 —
 —
Amounts Reclassified from Accumulated Other
Comprehensive Income (Loss)
 (93) 272
 245
 424
Total Other Comprehensive Income (Loss) 12,678
 3,531
 245
 16,454
Balance at End of Period $8,859
 $(764) $(35,519) $(27,424)
        
Three Months Ended June 30, 2018        
Balance at Beginning of Period $8,668
 $(5,682) $(28,599) $(25,613) $(11,932) $(5,697) $(33,468) $(51,097)
Other Comprehensive Income (Loss) Before Reclassifications 143
 —
 —
 143
 (3,399) —
 —
 (3,399)
Amounts Reclassified from Accumulated Other
Comprehensive Income (Loss)
 —
 301
 146
 447
 —
 425
 216
 641
Total Other Comprehensive Income (Loss) 143
 301
 146
 590
 (3,399) 425
 216
 (2,758)
Balance at End of Period $8,811
 $(5,381) $(28,453) $(25,023) $(15,331) $(5,272) $(33,252) $(53,855)
                
Three Months Ended September 30, 2016        
Six Months Ended June 30, 2019        
Balance at Beginning of Period $(10,447) $(4,586) $(36,010) $(51,043)
Other Comprehensive Income (Loss) Before Reclassifications 22,611
 —
 —
 22,611
Transfers (3,259) 3,259
 —
 —
Amounts Reclassified from Accumulated Other
Comprehensive Income (Loss)
 (46) 563
 491
 1,008
Total Other Comprehensive Income (Loss) 19,306
 3,822
 491
 23,619
Balance at End of Period $8,859
 $(764) $(35,519) $(27,424)
        
Six Months Ended June 30, 2018        
Balance at Beginning of Period $26,009
 $(6,854) $(28,579) $(9,424) $(1,915) $(5,085) $(27,715) $(34,715)
Other Comprehensive Income (Loss) Before Reclassifications (5,701) —
 —
 (5,701) (13,004) —
 —
 (13,004)
Amounts Reclassified from Accumulated Other
Comprehensive Income (Loss)
 —
 173
 140
 313
 —
 909
 432
 1,341
Total Other Comprehensive Income (Loss) (5,701) 173
 140
 (5,388) (13,004) 909
 432
 (11,663)
Reclassification of the Income Tax Effects of the
Tax Cuts and Jobs Act from AOCI		 (412) (1,096) (5,969) (7,477)
Balance at End of Period $20,308
 $(6,681) $(28,439) $(14,812) $(15,331) $(5,272) $(33,252) $(53,855)
        
Nine Months Ended September 30, 2017        
Balance at Beginning of Period $1,270
 $(6,284) $(28,892) $(33,906)
Other Comprehensive Income (Loss) Before Reclassifications 7,541
 —
 —
 7,541
Amounts Reclassified from Accumulated Other
Comprehensive Income (Loss)
 —
 903
 439
 1,342
Total Other Comprehensive Income (Loss) 7,541
 903
 439
 8,883
Balance at End of Period $8,811
 $(5,381) $(28,453) $(25,023)
        
Nine Months Ended September 30, 2016        
Balance at Beginning of Period $12,559
 $(7,255) $(28,861) $(23,557)
Other Comprehensive Income (Loss) Before Reclassifications 7,749
 —
 —
 7,749
Amounts Reclassified from Accumulated Other
Comprehensive Income (Loss)
 —
 574
 422
 996
Total Other Comprehensive Income (Loss) 7,749
 574
 422
 8,745
Balance at End of Period $20,308
 $(6,681) $(28,439) $(14,812)



The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and ninesix months endedSeptemberJune 30, 20172019 and 20162018:
Details about Accumulated Other
Comprehensive Income (Loss) Components
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)1
 Affected Line Item in the Statement Where Net Income Is Presented
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)1
 Affected Line Item in the Statement Where Net Income Is Presented
Three Months Ended September 30, Three Months Ended June 30, 
(dollars in thousands)2017
2016
 2019
2018
 
Amortization of Unrealized Holding Gains (Losses) on
Investment Securities Held-to-Maturity
$(497)$(286)Interest Income$(368)$(578)Interest Income
96
153
Provision for Income Tax
(272)(425)Net of Tax
Sale of Investment Securities Available-for-Sale127
—
Investment Securities Gains (Losses), Net

196
113
Provision for Income Tax(34)—
Provision for Income Tax
(301)(173)Net of Tax93
—
Net of tax
    
Amortization of Defined Benefit Plan Items    
Prior Service Credit 2
81
81
 72
142
 
Net Actuarial Losses 2
(322)(314) (406)(436) 
(241)(233)Total Before Tax(334)(294)Total Before Tax
95
93
Provision for Income Tax89
78
Provision for Income Tax
(146)(140)Net of Tax(245)(216)Net of Tax
    
Total Reclassifications for the Period$(447)$(313)Net of Tax$(424)$(641)Net of Tax
    
Details about Accumulated Other
Comprehensive Income (Loss) Components
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)1
 Affected Line Item in the Statement Where Net Income Is Presented
Amount Reclassified from Accumulated Other Comprehensive Income (Loss)1
 Affected Line Item in the Statement Where Net Income Is Presented
Nine Months Ended September 30, Six Months Ended June 30, 
(dollars in thousands)2017
2016
 2019
2018
 
Amortization of Unrealized Holding Gains (Losses) on
Investment Securities Held-to-Maturity
$(1,492)$(949)Interest Income$(764)$(1,237)Interest Income
589
375
Provision for Income Tax201
328
Provision for Income Tax
(903)(574)Net of Tax(563)(909)Net of Tax
Sale of Investment Securities Available-for-Sale63
—
Investment Securities Gains (Losses), Net

(17)—
Provision for Income Tax
46
—
Net of tax
    
Amortization of Defined Benefit Plan Items    
Prior Service Credit 2
242
242
 144
284
 
Net Actuarial Losses 2
(967)(940) (812)(872) 
(725)(698)Total Before Tax(668)(588)Total Before Tax
286
276
Provision for Income Tax177
156
Provision for Income Tax
(439)(422)Net of Tax(491)(432)Net of Tax
    
Total Reclassifications for the Period$(1,342)$(996)Net of Tax$(1,008)$(1,341)Net of Tax
1 
Amounts in parentheses indicate reductions to net income.
2 
These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost and are included in Salaries and BenefitsOther Noninterest Expense on the consolidated statements of income (see Note 10 11 Pension Plans and Postretirement Benefit Plan for additional details).



Note 8.9.  Earnings Per Share


There were no adjustments to net income, the numerator, for purposes of computing earnings per share. The following is a reconciliation of the weighted average number of common shares outstanding for computing diluted earnings per share and antidilutive stock options and restricted stock outstanding for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016:2018:
 Three Months Ended
June 30,		 Six Months Ended
June 30,
 2019
 2018
 2019
 2018
Denominator for Basic Earnings Per Share40,541,594
 41,884,221
 40,738,772
 41,960,743
Dilutive Effect of Equity Based Awards228,173
 267,979
 249,229
 292,157
Denominator for Diluted Earnings Per Share40,769,767
 42,152,200
 40,988,001
 42,252,900
        
Antidilutive Stock Options and Restricted Stock Outstanding4,706
 1,293
 4,706
 1,293

 Three Months Ended
September 30,		 Nine Months Ended
September 30,
 2017
 2016
 2017
 2016
Denominator for Basic Earnings Per Share42,251,541
 42,543,122
 42,336,441
 42,730,571
Dilutive Effect of Equity Based Awards313,823
 235,224
 325,722
 216,488
Denominator for Diluted Earnings Per Share42,565,364
 42,778,346
 42,662,163
 42,947,059
        
Antidilutive Stock Options and Restricted Stock Outstanding1,070
 —
 363
 —


Note 9.10.  Business Segments


The Company’s business segments are defined as Retail Banking, Commercial Banking, Investment Services and Private Banking, and Treasury and Other.  The Company’s internal management accounting process measures the performance of these business segments. This process, which is not necessarily comparable with the process used by any other financial institution, uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of income, expense, the provision for credit losses, and capital.  This process is dynamic and requires certain allocations based on judgment and other subjective factors.  Unlike financial accounting, there is no comprehensive authoritative guidance for management accounting that is equivalent to GAAP.  Previously reported results have been reclassified to conform to the current reporting structure.


The net interest income of the business segments reflects the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics and reflects the allocation of net interest income related to the Company’s overall asset and liability management activities on a proportionate basis.  The basis for the allocation of net interest income is a function of the Company’s assumptions that are subject to change based on changes in current interest rates and market conditions.  Funds transfer pricing also serves to transfer interest rate risk to Treasury.  However, the other business segments have some latitude to retain certain interest rate exposures related to customer pricing decisions within guidelines.


The provision for credit losses reflects the actual net charge-offs of the business segments.  The amount of the consolidated provision for loan and lease losses is based on the methodology that we use to estimate ourthe Company’s consolidated Allowance.  The residual provision for credit losses to arrive at the consolidated provision for credit losses is included in Treasury and Other.


Noninterest income and expense includes allocations from support units to business units.  These allocations are based on actual usage where practicably calculated or by management’s estimate of such usage.


The provision for income taxes is allocated to business segments using a 37%26% effective income tax rate. However, the provision for income taxes for ourthe Company’s Leasing business unit (included in the Commercial Banking segment) and Auto Leasing portfolio and Pacific Century Life Insurance business unit (both included in the Retail Banking segment) are assigned their actual effective income tax rates due to the unique relationship that income taxes have with their products. The residual income tax expense or benefit to arrive at the consolidated effective income tax rate is included in Treasury and Other.


Retail Banking


Retail Banking offers a broad range of financial products and services to consumers and small businesses.  Loan and lease products include residential mortgage loans, home equity lines of credit, automobile loans and leases, personal lines of credit, installment loans, and small business loans and leases, and credit cards.leases.  Deposit products include checking, savings, and time deposit accounts.  Retail Banking also offers co-branded credit cards and some types of consumer insurance products.  Products and services from Retail Banking are delivered to customers through 6968 branch locations and 388383 ATMs throughout Hawaii and the Pacific Islands, e-Bankoh (on-line banking service), a 24-hour customer service center, and a mobile banking service.



Commercial Banking


Commercial Banking offers products including corporate banking, commercial real estate loans, commercial lease financing, auto dealer financing, and deposit products.  Commercial lending and deposit products are offered to middle-market and large companies in Hawaii and the Pacific Islands.  In addition, Commercial Banking offers deposit products to government entities in Hawaii. Commercial real estate mortgages focus on customers that include investors, developers, and builders predominantly domiciled in Hawaii.  Commercial Banking also includes international banking and provides merchant services to its customers.


Investment Services and Private Banking


Investment Services and Private Banking includes private banking and international client banking services, trust services, investment management, and institutional investment advisory services.  A significant portion of this segment’s income is derived from fees, which are generally based on the market values of assets under management.  The private banking and personal trust groups assist individuals and families in building and preserving their wealth by providing investment, credit, and trust services to high-net-worth individuals.  The investment management group manages portfolios utilizing a variety of investment products. Institutional client services offer investment advice to corporations, government entities, and foundations.  This segment also provides a full service brokerage offering equities, mutual funds, life insurance, and annuity products.


Treasury and Other


Treasury consists of corporate asset and liability management activities, including interest rate risk management and a foreign currency exchange business.  This segment’s assets and liabilities (and related interest income and expense) consist of interest-bearing deposits, investment securities, federal funds sold and purchased, and short and long-term borrowings.  The primary sources of noninterest income are from bank-owned life insurance, net gains from the sale of investment securities, and foreign exchange income related to customer-driven currency requests from merchants and island visitors.  The net residual effect of the transfer pricing of assets and liabilities is included in Treasury, along with the elimination of intercompany transactions.


Other organizational units (Technology, Operations, Marketing, Human Resources, Finance, Credit and Risk Management, and Corporate and Regulatory Administration) provide a wide-range of support to the Company’s other income earning segments.  Expenses incurred by these support units are charged to the business segments through an internal cost allocation process.




Selected business segment financial information as of and for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 were as follows:


(dollars in thousands)Retail Banking
 Commercial Banking
 Investment Services and Private Banking
 
Treasury
and Other

 Consolidated Total
Three Months Ended June 30, 2019 
  
  
  
  
Net Interest Income$67,217
 $45,703
 $9,846
 $1,331
 $124,097
Provision for Credit Losses2,527
 (175) (1) 1,649
 4,000
Net Interest Income After Provision for Credit Losses64,690
 45,878
 9,847
 (318) 120,097
Noninterest Income21,108
 6,938
 14,859
 2,545
 45,450
Noninterest Expense(52,086) (21,260) (16,457) (2,922) (92,725)
Income Before Provision for Income Taxes33,712
 31,556
 8,249
 (695) 72,822
Provision for Income Taxes(8,231) (7,945) (2,174) 2,447
 (15,903)
Net Income$25,481
 $23,611
 $6,075
 $1,752
 $56,919
Total Assets as of June 30, 2019$6,586,854
 $4,089,452
 $337,484
 $6,675,055
 $17,688,845
         

Three Months Ended June 30, 2018 
  
  
  
 

Net Interest Income$65,683
 $44,010
 $10,526
 $277
 $120,496
Provision for Credit Losses3,445
 (194) —
 249
 3,500
Net Interest Income After Provision for Credit Losses62,238
 44,204
 10,526
 28
 116,996
Noninterest Income19,598
 5,512
 14,745
 1,443
 41,298
Noninterest Expense(51,939) (19,858) (16,400) (2,594) (90,791)
Income Before Provision for Income Taxes29,897
 29,858
 8,871
 (1,123) 67,503
Provision for Income Taxes(7,473) (6,740) (2,338) 3,766
 (12,785)
Net Income$22,424
 $23,118
 $6,533
 $2,643
 $54,718
Total Assets as of June 30, 2018$6,142,457
 $3,799,535
 $342,464
 $6,839,706
 $17,124,162
         

Six Months Ended June 30, 2019 
  
  
  
 

Net Interest Income$133,371
 $92,993
 $20,044
 $2,526
 $248,934
Provision for Credit Losses4,768
 1,271
 (18) 979
 7,000
Net Interest Income After Provision for Credit Losses128,603
 91,722
 20,062
 1,547
 241,934
Noninterest Income42,341
 13,999
 28,104
 4,685
 89,129
Noninterest Expense(104,610) (42,215) (33,360) (5,597) (185,782)
Income Before Provision for Income Taxes66,334
 63,506
 14,806
 635
 145,281
Provision for Income Taxes(16,336) (13,947) (3,903) 4,623
 (29,563)
Net Income$49,998
 $49,559
 $10,903
 $5,258
 $115,718
Total Assets as of June 30, 2019$6,586,854
 $4,089,452
 $337,484
 $6,675,055
 $17,688,845
         

Six Months Ended June 30, 2018 
  
  
  
 

Net Interest Income$130,080
 $86,908
 $20,413
 $2,051
 $239,452
Provision for Credit Losses7,188
 (345) (60) 842
 7,625
Net Interest Income After Provision for Credit Losses122,892
 87,253
 20,473
 1,209
 231,827
Noninterest Income38,851
 11,154
 28,415
 6,913
 85,333
Noninterest Expense(106,538) (40,190) (32,607) (5,840) (185,175)
Income Before Provision for Income Taxes55,205
 58,217
 16,281
 2,282
 131,985
Provision for Income Taxes(13,764) (13,564) (4,292) 8,393
 (23,227)
Net Income$41,441
 $44,653
 $11,989
 $10,675
 $108,758
Total Assets as of June 30, 2018$6,142,457
 $3,799,535
 $342,464
 $6,839,706
 $17,124,162

(dollars in thousands)Retail Banking
 Commercial Banking
 Investment Services and Private Banking
 
Treasury
and Other

 Consolidated Total
Three Months Ended September 30, 2017 
  
  
  
  
Net Interest Income$67,128
 $43,438
 $7,321
 $(1,570) $116,317
Provision for Credit Losses3,512
 (35) (5) 528
 4,000
Net Interest Income After Provision for Credit Losses63,616
 43,473
 7,326
 (2,098) 112,317
Noninterest Income21,287
 5,137
 13,593
 2,393
 42,410
Noninterest Expense(51,507) (17,721) (14,925) (4,445) (88,598)
Income Before Provision for Income Taxes33,396
 30,889
 5,994
 (4,150) 66,129
Provision for Income Taxes(11,908) (10,891) (2,218) 4,769
 (20,248)
Net Income$21,488
 $19,998
 $3,776
 $619
 $45,881
Total Assets as of September 30, 2017$5,758,799
 $3,695,606
 $305,015
 $7,508,882
 $17,268,302
         

Three Months Ended September 30, 2016 
  
  
  
 

Net Interest Income$61,747
 $38,613
 $6,029
 $(2,477) $103,912
Provision for Credit Losses2,574
 (168) (7) 101
 2,500
Net Interest Income After Provision for Credit Losses59,173
 38,781
 6,036
 (2,578) 101,412
Noninterest Income24,786
 6,977
 13,662
 2,689
 48,114
Noninterest Expense(51,892) (17,449) (14,579) (3,612) (87,532)
Income Before Provision for Income Taxes32,067
 28,309
 5,119
 (3,501) 61,994
Provision for Income Taxes(11,329) (10,073) (1,894) 4,795
 (18,501)
Net Income$20,738
 $18,236
 $3,225
 $1,294
 $43,493
Total Assets as of September 30, 2016$5,206,442
 $3,428,424
 $290,207
 $7,089,570
 $16,014,643
         

Nine Months Ended September 30, 2017 
  
  
  
 

Net Interest Income$198,633
 $127,106
 $20,685
 $(7,956) $338,468
Provision for Credit Losses10,413
 (355) (16) 2,608
 12,650
Net Interest Income After Provision for Credit Losses188,220
 127,461
 20,701
 (10,564) 325,818
Noninterest Income64,132
 16,451
 43,389
 19,590
 143,562
Noninterest Expense(155,786) (54,483) (45,692) (9,394) (265,355)
Income Before Provision for Income Taxes96,566
 89,429
 18,398
 (368) 204,025
Provision for Income Taxes(34,323) (31,472) (6,807) 10,296
 (62,306)
Net Income$62,243
 $57,957
 $11,591
 $9,928
 $141,719
Total Assets as of September 30, 2017$5,758,799
 $3,695,606
 $305,015
 $7,508,882
 $17,268,302
         

Nine Months Ended September 30, 2016 
  
  
  
 

Net Interest Income$179,798
 $115,112
 $18,518
 $(2,942) $310,486
Provision for Credit Losses7,415
 (7,052) (18) 1,155
 1,500
Net Interest Income After Provision for Credit Losses172,383
 122,164
 18,536
 (4,097) 308,986
Noninterest Income67,364
 21,015
 43,632
 18,829
 150,840
Noninterest Expense(155,391) (52,479) (44,786) (8,333) (260,989)
Income Before Provision for Income Taxes84,356
 90,700
 17,382
 6,399
 198,837
Provision for Income Taxes(29,958) (32,337) (6,431) 7,837
 (60,889)
Net Income$54,398
 $58,363
 $10,951
 $14,236
 $137,948
Total Assets as of September 30, 2016$5,206,442
 $3,428,424
 $290,207
 $7,089,570
 $16,014,643



Note 10.11.  Pension Plans and Postretirement Benefit Plan
Components of net periodic benefit cost for the Company’s pension plans and the postretirement benefit plan are presented in the following table for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016.2018.
 Pension Benefits Postretirement Benefits
(dollars in thousands)2019
 2018
 2019
 2018
Three Months Ended June 30, 
  
  
  
Service Cost$—
 $—
 $117
 $115
Interest Cost1,093
 1,041
 257
 236
Expected Return on Plan Assets(1,249) (1,282) —
 —
Amortization of: 
  
  
  
Prior Service Credit—
 —
 (72) (142)
Net Actuarial Losses (Gains)484
 498
 (78) (62)
Net Periodic Benefit Cost$328
 $257
 $224
 $147
        
Six Months Ended June 30, 
  
  
  
Service Cost$—
 $—
 $235
 $230
Interest Cost2,187
 2,082
 515
 471
Expected Return on Plan Assets(2,498) (2,564) —
 —
Amortization of: 
  
  
  
Prior Service Credit—
 —
 (144) (284)
Net Actuarial Losses (Gains)968
 996
 (156) (124)
Net Periodic Benefit Cost$657
 $514
 $450
 $293

 Pension Benefits Postretirement Benefits
(dollars in thousands)2017
 2016
 2017
 2016
Three Months Ended September 30, 
  
  
  
Service Cost$—
 $—
 $123
 $137
Interest Cost1,161
 1,210
 272
 294
Expected Return on Plan Assets(1,238) (1,282) —
 —
Amortization of: 
  
  
  
Prior Service Credit—
 —
 (81) (81)
Net Actuarial Losses (Gains)433
 389
 (111) (75)
Net Periodic Benefit Cost$356
 $317
 $203
 $275
        
Nine Months Ended September 30, 
  
  
  
Service Cost$—
 $—
 $369
 $411
Interest Cost3,483
 3,628
 816
 882
Expected Return on Plan Assets(3,714) (3,844) —
 —
Amortization of: 
  
  
  
Prior Service Credit—
 —
 (242) (242)
Net Actuarial Losses (Gains)1,298
 1,166
 (331) (226)
Net Periodic Benefit Cost$1,067
 $950
 $612
 $825


The service cost component of net periodic benefit cost are included in salaries and benefits and all other components of net periodic benefit cost are included in other noninterest expense in the consolidated statements of income for the Company’s pension plans and postretirement benefit plan are recorded as a component of salaries and benefits in the consolidated statements of income.plan. For the three and ninesix months ended SeptemberJune 30, 2017,2019, the Company contributed $10.2$0.1 million and $10.4$0.2 million, respectively, to the pension plans and $0.2$0.3 million and $0.7$0.6 million, respectively, to the postretirement benefit plan.  The Company expects to contribute a total of $10.5$0.5 million to the pension plans and $1.0$0.9 million to the postretirement benefit plan for the year ending December 31, 2017.2019.


Note 11.12.  Derivative Financial Instruments


The notional amount and fair value of the Company’s derivative financial instruments as of SeptemberJune 30, 20172019 and December 31, 20162018 were as follows:
 June 30, 2019 December 31, 2018
(dollars in thousands)Notional Amount  Fair Value
 Notional Amount  Fair Value
Interest Rate Lock Commitments $84,652
 $2,143
  $33,133
 $871
Forward Commitments 89,635
 (800)  34,102
 (352)
Interest Rate Swap Agreements         
Receive Fixed/Pay Variable Swaps 686,865
 23,015
  505,034
 (2,537)
Pay Fixed/Receive Variable Swaps 686,865
 (5,202)  505,034
 6,082
Foreign Exchange Contracts 55,317
 421
  55,663
 793
Conversion Rate Swap Agreement 106,211
 —
  80,746
 —

  September 30, 2017  December 31, 2016
(dollars in thousands)Notional Amount  Fair Value
 Notional Amount  Fair Value
Interest Rate Lock Commitments $50,050
 $958
  $55,223
 $1,067
Forward Commitments 51,263
 19
  104,962
 847
Interest Rate Swap Agreements         
Receive Fixed/Pay Variable Swaps 378,618
 2,187
  357,441
 1,381
Pay Fixed/Receive Variable Swaps 378,618
 (1,830)  357,441
 (1,395)
Foreign Exchange Contracts 56,130
 (677)  38,172
 (757)


The following table presents the Company’s derivative financial instruments, their fair values, and their location in the consolidated statements of condition as of SeptemberJune 30, 20172019 and December 31, 2016:2018:
Derivative Financial InstrumentsSeptember 30, 2017 December 31, 2016June 30, 2019 December 31, 2018
Not Designated as Hedging Instruments 1
Asset
 Liability
 Asset
 Liability
Asset
 Liability
 Asset
 Liability
(dollars in thousands)Derivatives
 Derivatives
 Derivatives
 Derivatives
Derivatives
 Derivatives
 Derivatives
 Derivatives
Interest Rate Lock Commitments$962
 $4
 $1,236
 $169
$2,143
 $—
 $877
 $6
Forward Commitments76
 57
 873
 26
—
 800
 4
 356
Interest Rate Swap Agreements10,522
 10,165
 11,569
 11,583
25,228
 7,415
 12,915
 9,370
Foreign Exchange Contracts26
 703
 53
 810
498
 77
 808
 15
Total$11,586
 $10,929
 $13,731
 $12,588
$27,869
 $8,292
 $14,604
 $9,747
1 
Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the consolidated statements of condition.



The following table presents the Company’s derivative financial instruments and the amount and location of the net gains or losses recognized in the consolidated statements of income for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016:2018:
 Location of        
Derivative Financial InstrumentsNet Gains (Losses) Three Months Ended Six Months Ended
Not Designated as Hedging InstrumentsRecognized in the June 30, June 30,
(dollars in thousands)Statements of Income 2019
 2018
 2019
 2018
Interest Rate Lock CommitmentsMortgage Banking $3,561
 $968
 $5,286
 $1,498
Forward CommitmentsMortgage Banking (1,382) 240
 (1,974) 925
Interest Rate Swap AgreementsOther Noninterest Income 1,760
 632
 2,896
 750
Foreign Exchange ContractsOther Noninterest Income 1,152
 995
 2,066
 1,959
Conversion Rate Swap AgreementInvestment Securities Gains (Losses), Net —
 (1,000) —
 (1,000)
Total  $5,091
 $1,835
 $8,274
 $4,132

 Location of        
Derivative Financial InstrumentsNet Gains (Losses) Three Months Ended Nine Months Ended
Not Designated as Hedging InstrumentsRecognized in the September 30, September 30,
(dollars in thousands)Statements of Income 2017
 2016
 2017
 2016
Interest Rate Lock CommitmentsMortgage Banking $1,550
 $4,154
 $4,472
 $8,113
Forward CommitmentsMortgage Banking (434) (934) (1,322) (2,430)
Interest Rate Swap AgreementsOther Noninterest Income 10
 1,595
 690
 2,416
Foreign Exchange ContractsOther Noninterest Income 754
 772
 2,600
 2,245
Total  $1,880
 $5,587
 $6,440
 $10,344


Management has received authorization from the Bank’s Board of Directors to use derivative financial instruments as an end-user in connection with the Bank’s risk management activities and to accommodate the needs of the Bank’s customers.  As with any financial instrument, derivative financial instruments have inherent risks.  Market risk is defined as the risk of adverse financial impact due to fluctuations in interest rates, foreign exchange rates, and equity prices.  Market risks associated with derivative financial instruments are balanced with the expected returns to enhance earnings performance and shareholder value, while limiting the volatility of each.  The Company uses various processes to monitor its overall market risk exposure, including sensitivity analysis, value-at-risk calculations, and other methodologies.


Derivative financial instruments are also subject to credit and counterparty risk, which is defined as the risk of financial loss if a borrower or counterparty is either unable or unwilling to repay borrowings or settle transactions in accordance with the underlying contractual terms.  Credit and counterparty risks associated with derivative financial instruments are similar to those relating to traditional financial instruments.  The Company manages derivative credit and counterparty risk by evaluating the creditworthiness of each borrower or counterparty, adhering to the same credit approval process used for commercial lending activities.


As of SeptemberJune 30, 20172019 and December 31, 2016,2018, the Company did not designate any derivative financial instruments as formal hedging relationships.  The Company’s free-standing derivative financial instruments are required to be carried at their fair value on the Company’s consolidated statements of condition.  These financial instruments have been limited to interest rate lock commitments (“IRLCs”), forward commitments, interest rate swap agreements,Swap Agreements, foreign exchange contracts, and conversion rate swap agreements.


The Company enters into IRLCs for residential mortgage loans which commit us to lend funds to a potential borrower at a specific interest rate and within a specified period of time.  IRLCs that relate to the origination of mortgage loans that will be held for sale are considered derivative financial instruments under applicable accounting guidance.  Outstanding IRLCs expose the Company to the risk that the price of the mortgage loans underlying the commitments may decline due to increases in mortgage interest rates from inception of the rate lock to the funding of the loan.  To mitigate this risk, the Company utilizes forward commitments as economic hedges against the potential decreases in the values of the loans held for sale.  IRLCs and forward commitments are free-standing derivatives which are carried at fair value with changes recorded in the mortgage banking component of noninterest income in the Company’s consolidated statements of income.


The Company enters into interest rate swap agreementsSwap Agreements to facilitate the risk management strategies of a small number of commercial banking customers.  The Company mitigates the interest rate risk of entering into these agreements by entering into equal and offsetting interest rate swap agreements with highly rated third party financial institutions.  The interest rate swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated statements of condition. Fair value changes are recorded in other noninterest income in the Company’s consolidated statements of income.  The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes.  Collateral, usually in the form of cash or marketable securities, is posted by the counterparty with net liability positions in accordance with contract thresholds.  See Note 6 7 Balance Sheet Offsetting for more information.


The Company’s interest rate swap agreements with financial institution counterparties may contain credit-risk-related contingent features tied to a specified credit rating of the Company.  Under these provisions, should the Company’s specified rating fall below a particular level (e.g., investment grade rating)grade), or if the Company no longer obtains the specified rating, the counterparty may require the Company to pledge collateral on an immediate and ongoing basis (subject to the requirement that such swaps are in a net liability position beyond the level specified in the contract), or require immediate settlement of the swap

agreement.  Other credit-risk-related contingent features may also allow the counterparty to require immediate settlement of the swap agreement if the Company fails to maintain a specified minimum level of capitalization. 


With regard to derivative contracts not centrally cleared through a clearinghouse, new regulations require collateral to be posted by the party with a net liability position (i.e., the threshold for posting collateral was reduced to zero, subject to certain minimum transfer amounts).  The requirements generally applyapplied to new derivative contracts entered into by the Company after the applicable compliance date of the regulation (MarchMarch 1, 2017, for the Company), although certain counterparties may elect to apply lower thresholds to existing contracts.


Parties to a centrally cleared over-the-counter derivative exchange daily payments that reflect the daily change in value of the derivative. These payments are commonly referred to as variation margin. Historically, variation margin payments have typically been treated as collateral against the derivative position. Effective 2017, the Chicago Mercantile Exchange and LCH.Clearnet Limited (collectively, the “clearinghouses”) amended their rulebooks to legally characterize variation margin payments for over-the-counter derivatives they clear as settlements of the derivatives’ mark-to-market exposure rather than collateral against the exposures. This rule change effectively results incauses any derivative cleared through one of the clearinghouses to have a fair value that approximates zero on a daily basis. During the second quarter of 2017, the Company executed its first swap agreements cleared through the clearinghouses. As of September 30, 2017, the applicationThe majority of the rule change reduced the swap agreement liability by $0.4 million, as reflected in the table above. Going forward, the Company expects most of theCompany’s swap agreements executed with third party financial institutions will beare now required to be cleared through one of the clearinghouses. The uncleared swap agreements executed with third party financial institutions will remain subject to the collateral requirements and credit-risk-related contingent features described in the previous paragraphs, and therefore, are not subject to the variation margin rule change. Likewise, the swap agreements executed with the Company’s commercial banking customers will remain uncleared and will also not be subject to the variation margin rule change.


The Company utilizes foreign exchange contracts to offset risks related to transactions executed on behalf of customers.  The foreign exchange contracts are free-standing derivatives which are carried at fair value with changes included in other noninterest income in the Company’s consolidated statements of income.


As each sale of Visa Class B restricted shares was completed, the Company entered into a conversion rate swap agreement with the buyer that requires payment to the buyer in the event Visa further reduces the conversion ratio of Class B into Class A unrestricted common shares.  In the event of Visa increasing the conversion ratio, the buyer would be required to make payment to the Company.  As of SeptemberJune 30, 2017,2019, the conversion rate swap agreement was valued at zero (i.e., no contingent liability recorded) as further reductions to the conversion ratio were deemed neither probable nor reasonably estimable by management. However, in June 2018, Visa announced a reduction of the conversion ratio from 1.6483 to 1.6298 effective June 28, 2018. As a result, the Company recorded a $1.0 million liability in June 2018 which represents the amount due to the buyers of the Visa Class B shares in July 2018. See Note 2 3 Investment Securities for more information.


Note 12.13.  Commitments, Contingencies, and Guarantees
The Company’s credit commitments as of SeptemberJune 30, 20172019 and December 31, 20162018 were as follows:
(dollars in thousands)June 30,
2019
 December 31,
2018
Unfunded Commitments to Extend Credit$2,701,892
 $2,646,085
Standby Letters of Credit61,923
 62,344
Commercial Letters of Credit14,893
 9,411
Total Credit Commitments$2,778,708
 $2,717,840

(dollars in thousands)September 30,
2017
 December 31,
2016
Unfunded Commitments to Extend Credit$2,793,531
 $2,732,734
Standby Letters of Credit122,137
 112,830
Commercial Letters of Credit18,601
 16,269
Total Credit Commitments$2,934,269
 $2,861,833


Unfunded Commitments to Extend Credit


Commitments to extend credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.



Standby and Commercial Letters of Credit


Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party.  Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and a third party.  The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Company.  The Company has recourse against the customer for any amount it is required to pay to a third party under a standby letter of credit, and generally holds cash or deposits as collateral on those standby letters of credit for which collateral is deemed necessary.


Contingencies

On September 9, 2016, a purported class action lawsuit was filed by a Bank customer primarily alleging Bank of Hawaii’s practice of determining whether consumer deposit accounts were overdrawn based on “available balance” (which deducts debit card transactions that have taken place but which have not yet been posted) was not properly applied or disclosed to customers. Additionally, on January 20, 2017, another purported class action lawsuit was filed by a Bank customer alleging Bank of Hawaii’s practice of assessing continuous negative balance overdraft fees on accounts remaining in a negative balance for extended periods of time beyond the date of the initial overdraft constituted a usurious interest charge and a breach of contract with the customer. This lawsuit was resolved by way of settlement for an amount that was not material.  

These lawsuits are similar to lawsuits filed against other financial institutions pertaining to available balance overdraft fee disclosures and continuing negative balance overdraft fees. The outcome of the first lawsuit remains uncertain at this time. Management disputes any wrongdoing and the case is being vigorously defended.


TheIn addition to the litigation noted above, the Company is subject to various other pending and threatened legal proceedings arising withinout of the normal course of business or operations. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizingusing the most recent information available. On a case-by-case basis, reserves are established for those legal claims for which it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated. Based on information currently available, management believes that the eventual outcome of these claims against the Company will not be materially in excess of such amounts reserved by the Company. However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters may result in a loss that materially exceeds the reserves established by the Company.


Risks Related to Representation and Warranty Provisions


The Company sells residential mortgage loans in the secondary market primarily to the Federal National Mortgage Association (“Fannie Mae”). The Company also pools Federal Housing Administration (“FHA”) insured and U.S. Department of Veterans Affairs (“VA”) guaranteed residential mortgage loans for sale to the Government National Mortgage Corporation (“Ginnie Mae”). These pools of FHA-insured and VA-guaranteed residential mortgage loans are securitized by Ginnie Mae. The agreements under which the Company sells residential mortgage loans to Fannie Mae or Ginnie Mae and the insurance or guaranty agreements with FHA and VA contain provisions that include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the specific representations and warranties vary among investors, insurance or guarantee agreements, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state, and local laws, and other matters. As of SeptemberJune 30, 2017,2019, the unpaid principal balance of residential mortgage loans sold by the Company was $2.7 billion. The agreements under which the Company sells residential mortgage loans require delivery of various documents to the investor or its document custodian. Although these loans are primarily sold on a non-recourse basis, the Company may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred if a loan review reveals that underwriting and documentation standards were potentially not met. Some agreements may require the Company to repurchase delinquent loans. Upon receipt of a repurchase request, the Company works with investors or insurers to arrive at a mutually agreeable resolution. Repurchase demands are typically reviewed on an individual loan-by-loan basis to validate the claims made by the investor or insurer and to determine if a contractually required repurchase event has occurred. The Company manages the risk associated with potential repurchases or other forms of settlement through its underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards. During the ninesix months ended SeptemberJune 30, 2017,2019, there was one residential mortgage loan repurchased with an aggregate unpaid principal balance of $0.2$0.4 million as a result of the representation and warranty provisions contained in these contracts.the applicable contract. The one loan was delinquent in payment of principal and interest at the time of repurchase, however no material loss was incurred related to this repurchase. As of SeptemberJune 30, 2017,2019, there were no pending repurchase requests related to representation and warranty provisions.


Risks Relating to Residential Mortgage Loan Servicing Activities


In addition to servicing loans in the Company’s portfolio, substantially all of the loans the Company sells to investors are sold with servicing rights retained. The Company also services loans originated by other mortgage loan originators. As servicer, the Company’s primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans or, to the extent consistent with the documents governing a securitization, consider alternatives to foreclosure, such as loan modifications or short sales. Each agreement under which the Company acts as servicer generally specifies a standard of responsibility for actions taken by the Company in such capacity and provides protection against expenses and liabilities incurred by the Company when acting in compliance with the respective

servicing agreements. However, if the Company commits a material breach of obligations as servicer, the Company may be subject to termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards vary by investor. These standards and remedies are determined by servicing guides issued by the investors as well as the contract provisions established between the investors and the Company. Remedies could include repurchase of an affected loan. For the ninesix months ended SeptemberJune 30, 2017,2019, there were no loans repurchased related to loan servicing activities. As of SeptemberJune 30, 2017,2019, there were no pending repurchase requests related to loan servicing activities.


Although to date repurchase requests related to representation and warranty provisions and servicing activities have been limited, it is possible that requests to repurchase mortgage loans may increase in frequency as investors more aggressively pursue all means of recovering losses on their purchased loans. However, as of SeptemberJune 30, 2017,2019, management believes that this exposure is not material due to the historical level of repurchase requests and loss trends and thus has not established a liability for losses related to mortgage loan repurchases. As of SeptemberJune 30, 2017,2019, 99% of the Company’s residential mortgage loans serviced for investors were current. The Company maintains ongoing communications with investors and continues to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in the loans sold to investors.


Note 13.14.  Fair Value of Assets and Liabilities


Fair Value Hierarchy


Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date.  GAAP established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:
Level 1:Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets.  A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available.  A contractually binding sales price also provides reliable evidence of fair value.
  
Level 2:Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that utilize model-based techniques for which all significant assumptions are observable in the market.
  
Level 3:Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that require significant management judgment or estimation, some of which may be internally developed.
Management maximizesIn some instances, an instrument may fall into multiple levels of the use of observable inputs and minimizes the use of unobservable inputs when determining fair value measurements.  Management reviews and updateshierarchy. In such instances, the instrument’s level within the fair value hierarchy classificationsis based on the lowest of the Company’s assetsthree levels (with Level 3 being the lowest) that is significant to the fair value measurement. Our assessment of the significance of an input requires judgment and liabilities on a quarterly basis.

considers factors specific to the instrument.
Assets and Liabilities Measured at Fair Value on a Recurring Basis


Investment Securities Available-for-Sale


Fair values of investment securities available-for-sale were primarily measured using information from a third-party pricing service.  This service provides pricing information by utilizing evaluated pricing models supported with market data information.  Standard inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data from market research publications.  Level 1 investment securities are comprised of debt securities issued by the U.S. Treasury, as quoted prices were available, unadjusted, for identical securities in active markets.  Level 2 investment securities were primarily comprised of debt securities issued by the Small Business Administration, states and municipalities, corporations, as well as mortgage-backed securities issued by government agencies and government-sponsored enterprises.  Fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models.  In cases where there may be limited or less transparent

information provided by the Company’s third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.

On a quarterly basis, management reviews the pricing information received from the Company’s third-party pricing service. This review process includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by the Company’s third-party pricing service.  Management primarily identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume or frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets.  Investment securities that are deemed to have been trading in illiquid or inactive markets may require the use of significant unobservable inputs to determine fair value.  As of September 30, 2017 and December 31, 2016, management did not make adjustments to prices provided by the third-party pricing service as a result of illiquid or inactive markets.  On a quarterly basis, management also reviews a sample of securities priced by the Company’s third-party pricing service to review the significant assumptions and valuation methodologies used by the service.  Based on this review, management determines whether the current placement of the security in the fair value hierarchy is appropriate or whether transfers may be warranted.second source. The Company’s third-party pricing service has also established processes for us to submit inquiries regarding quoted prices. Periodically, webased on these reviews, the Company will challenge the quoted prices provided by ourthe Company’s third-party pricing service. The Company’s third-party pricing service will review the inputs to the evaluation in light of the new market data presented by us. The Company’s third-party pricing service may then affirm the original quoted price or may update the evaluation on a going-forward basis. Generally, we do not adjust the price from the third-party service provider. On a quarterly basis, management also reviews a sample of securities priced by the Company’s third-party pricing service to review the significant assumptions and valuation methodologies used by the service. The information provided is comprised of market reference data, which may include reported trades; bids, offers, or broker-dealer dealer quotes; benchmark yields and spreads; as well as other reference data as appropriate. Based on this review, management determines whether the current placement of the security in the fair value hierarchy is appropriate or whether transfers may be warranted.


Loans Held for Sale


The fair value of the Company’s residential mortgage loans held for sale was determined based on quoted prices for similar loans in active markets, and therefore, is classified as a Level 2 measurement.


Mortgage Servicing Rights


Mortgage servicing rights do not trade in an active market with readily observable market data.  As a result, the Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income.  The Company stratifies its mortgage servicing portfolio on the basis of loan type.  The assumptions used in the discounted cash flow model are those that we believethe Company believes market participants would use in estimating future net servicing income.  Significant assumptions in the valuation of mortgage servicing rights include estimated loan repayment rates, the discount rate, servicing costs, and the timing of cash flows, among other factors.  Mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.


Other Assets


Other assets recorded at fair value on a recurring basis are primarily comprised of investments related to deferred compensation arrangements.  Quoted prices for these investments, primarily in mutual funds, are available in active markets.  Thus, the Company’s investments related to deferred compensation arrangements are classified as Level 1 measurements in the fair value hierarchy.


Derivative Financial Instruments


Derivative financial instruments recorded at fair value on a recurring basis are comprised of interest rate lock commitments (“IRLCs”),IRLCs, forward commitments, interest rate swap agreements, foreign exchange contracts, and Visa Class B to Class A shares conversion rate swap agreements.  The fair values of IRLCs are calculated based on the value of the underlying loan held for sale, which in turn is based on quoted prices for similar loans in the secondary market.  However, this value is adjusted by a factor which considers the likelihood that the loan in a locked position will ultimately close.  This factor, the closing ratio, is derived from the Bank’s internal data and is adjusted using significant management judgment.  As such, IRLCs are classified as Level 3 measurements.  Forward commitments are classified as Level 2 measurements as they are primarily based on quoted prices from the secondary market based on the settlement date of the contracts, interpolated or extrapolated, if necessary, to estimate a fair value as of the end of the reporting period.  The fair values of interest rate swap agreements are calculated using a discounted cash flow approach and utilize Level 2 observable inputs such as a market yield curve, effective date, maturity date, notional amount, and stated interest rate.  In addition, the Company includes in its fair value calculation a credit factor adjustment which is based primarily on management judgment.  Thus, interest rate swap agreements are classified as a Level 3 measurement.  The fair values of foreign exchange contracts are calculated using the Bank’s multi-currency accounting system which utilizes contract specific information such as currency, maturity date, contractual amount, and strike price, along with

market data information such as the spot rates of specific currency and yield curves.  Foreign exchange contracts are classified as Level 2 measurements because while they are valued using the Bank’s multi-currency accounting system, significant management judgment or estimation is not required. The fair value of the Visa Class B restricted shares to Class A unrestricted common shares conversion rate swap agreements represent the amount owed by the Company to the buyer of the Visa Class B shares as a result of a reduction of the conversion ratio subsequent to the sales date. As of SeptemberJune 30, 20172019 and December 31, 2016,2018, the conversion rate swap agreements were valued at zero as reductions to the conversion ratio were neither probable nor reasonably estimable by management. See Note 11 12 Derivative Financial Instruments for more information.


The Company is exposed to credit risk if borrowers or counterparties fail to perform.  The Company seeks to minimize credit risk through credit approvals, limits, monitoring procedures, and collateral requirements.  The Company generally enters into transactions with borrowers and counterparties that carry high quality credit ratings.  Credit risk associated with borrowers or counterparties as well as the Company’s non-performance risk is factored into the determination of the fair value of derivative financial instruments.



The table below presents the balances of assets and liabilities measured at fair value on a recurring basis as of SeptemberJune 30, 20172019 and December 31, 2016:2018:
Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities

 
Significant
Other
Observable
Inputs

 
Significant
Unobservable
Inputs

  
Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities

 
Significant
Other
Observable
Inputs

 
Significant
Unobservable
Inputs

  
(dollars in thousands)(Level 1)
 (Level 2)
 (Level 3)
 Total
(Level 1)
 (Level 2)
 (Level 3)
 Total
September 30, 2017 
  
  
  
June 30, 2019 
  
  
  
Assets: 
  
  
  
 
  
  
  
Investment Securities Available-for-Sale 
  
  
  
 
  
  
  
Debt Securities Issued by the U.S. Treasury
and Government Agencies
$541
 $448,663
 $—
 $449,204
$1,004
 $334,528
 $—
 $335,532
Debt Securities Issued by States and Political Subdivisions—
 641,963
 —
 641,963
—
 62,219
 —
 62,219
Debt Securities Issued by U.S. Government-Sponsored Enterprises—
 196
 —
 196
Debt Securities Issued by Corporations—
 265,846
 —
 265,846
—
 349,812
 —
 349,812
Mortgage-Backed Securities: 
  
  
 

 
  
  
 

Residential - Government Agencies—
 249,976
 —
 249,976
—
 1,227,930
 —
 1,227,930
Residential - U.S. Government-Sponsored Enterprises—
 642,113
 —
 642,113
—
 503,057
 —
 503,057
Commercial - Government Agencies—
 73,566
 —
 73,566
—
 171,203
 —
 171,203
Total Mortgage-Backed Securities—
 965,655
 —
 965,655
—
 1,902,190
 —
 1,902,190
Total Investment Securities Available-for-Sale541
 2,322,127

—
 2,322,668
1,004
 2,648,945

—
 2,649,949
Loans Held for Sale—
 9,752
 —
 9,752
—
 22,706
 —
 22,706
Mortgage Servicing Rights—
 —
 1,509
 1,509
—
 —
 1,212
 1,212
Other Assets28,064
 —
 —
 28,064
36,941
 —
 —
 36,941
Derivatives 1
—
 102
 11,484
 11,586
—
 498
 27,371
 27,869
Total Assets Measured at Fair Value on a
Recurring Basis as of September 30, 2017		$28,605
 $2,331,981
 $12,993
 $2,373,579
Total Assets Measured at Fair Value on a
Recurring Basis as of June 30, 2019		$37,945
 $2,672,149
 $28,583
 $2,738,677
              
Liabilities: 
  
  
  
 
  
  
  
Derivatives 1
$—
 $760
 $10,169
 $10,929
$—
 $877
 $7,415
 $8,292
Total Liabilities Measured at Fair Value on a
Recurring Basis as of September 30, 2017		$—
 $760

$10,169
 $10,929
Total Liabilities Measured at Fair Value on a
Recurring Basis as of June 30, 2019		$—
 $877

$7,415
 $8,292
              
December 31, 2016 
  
  
  
December 31, 2018 
  
  
  
Assets: 
  
  
  
 
  
  
  
Investment Securities Available-for-Sale 
  
  
  
 
  
  
  
Debt Securities Issued by the U.S. Treasury
and Government Agencies
$539
 $408,176
 $—
 $408,715
$972
 $391,429
 $—
 $392,401
Debt Securities Issued by States and Political Subdivisions—
 671,799
 —
 671,799
—
 563,996
 —
 563,996
Debt Securities Issued by U.S. Government-Sponsored Enterprises—
 56
 —
 56
Debt Securities Issued by Corporations—
 269,179
 —
 269,179
—
 223,140
 —
 223,140
Mortgage-Backed Securities: 
  
  
 

 
  
  
 

Residential - Government Agencies—
 243,844
 —
 243,844
—
 190,442
 —
 190,442
Residential - U.S. Government-Sponsored Enterprises—
 506,987
 —
 506,987
—
 578,527
 —
 578,527
Commercial - Government Agencies—
 85,517
 —
 85,517
—
 59,380
 —
 59,380
Total Mortgage-Backed Securities—
 836,348

—

836,348
—
 828,349

—

828,349
Total Investment Securities Available-for-Sale539
 2,185,502

—
 2,186,041
972
 2,006,970

—
 2,007,942
Loans Held for Sale—
 62,499
 —
 62,499
—
 10,987
 —
 10,987
Mortgage Servicing Rights—
 —
 1,655
 1,655
—
 —
 1,290
 1,290
Other Assets21,952
 —
 —
 21,952
31,871
 —
 —
 31,871
Derivatives 1
—
 926
 12,805
 13,731
—
 812
 13,792
 14,604
Total Assets Measured at Fair Value on a
Recurring Basis as of December 31, 2016		$22,491
 $2,248,927
 $14,460
 $2,285,878
Total Assets Measured at Fair Value on a
Recurring Basis as of December 31, 2018		$32,843
 $2,018,769
 $15,082
 $2,066,694
      

      

Liabilities: 
  
  
 

 
  
  
 

Derivatives 1
$—
 $836
 $11,752
 $12,588
$—
 $371
 $9,376
 $9,747
Total Liabilities Measured at Fair Value on a
Recurring Basis as of December 31, 2016		$—
 $836

$11,752
 $12,588
Total Liabilities Measured at Fair Value on a
Recurring Basis as of December 31, 2018		$—
 $371

$9,376
 $9,747
1 
The fair value of each class of derivatives is shown in Note 11 12 Derivative Financial Instruments.


For the three and ninesix months endedSeptember June 30, 20172019 and 2016,2018, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:
(dollars in thousands)
Mortgage
Servicing Rights 1

 
Net Derivative
Assets and
Liabilities 2

Three Months Ended September 30, 2017 
  
Balance as of July 1, 2017$1,548
 $1,369
Realized and Unrealized Net Gains (Losses): 
  
Included in Net Income(39) 1,561
Transfers to Loans Held for Sale—
 (1,631)
Variation Margin Payments—
 16
Balance as of September 30, 2017$1,509
 $1,315
Total Unrealized Net Gains (Losses) Included in Net Income
Related to Assets Still Held as of September 30, 2017		$—
 $1,315
    
Three Months Ended September 30, 2016 
  
Balance as of July 1, 2016$1,819
 $1,908
Realized and Unrealized Net Gains (Losses): 
  
Included in Net Income(79) 4,149
Transfers to Loans Held for Sale—
 (3,696)
Balance as of September 30, 2016$1,740
 $2,361
Total Unrealized Net Gains (Losses) Included in Net Income
Related to Assets Still Held as of September 30, 2016		$—
 $2,361
    
Nine Months Ended September 30, 2017 
  
Balance as of January 1, 2017$1,655
 $1,053
Realized and Unrealized Net Gains (Losses): 
  
Included in Net Income(146) 4,469
Transfers to Loans Held for Sale—
 (4,581)
Variation Margin Payments—
 374
Balance as of September 30, 2017$1,509
 $1,315
Total Unrealized Net Gains (Losses) Included in Net Income
Related to Assets Still Held as of September 30, 2017		$—
 $1,315
    
Nine Months Ended September 30, 2016 
  
Balance as of January 1, 2016$1,970
 $240
Realized and Unrealized Net Gains (Losses): 
  
Included in Net Income(230) 8,003
Transfers to Loans Held for Sale—
 (5,882)
Balance as of September 30, 2016$1,740
 $2,361
Total Unrealized Net Gains (Losses) Included in Net Income
Related to Assets Still Held as of September 30, 2016		$—
 $2,361
(dollars in thousands)
Mortgage
Servicing Rights 1

 
Net Derivative
Assets and
Liabilities 2

Three Months Ended June 30, 2019 
  
Balance as of April 1, 2019$1,268
 $9,175
Realized and Unrealized Net Gains (Losses): 
  
Included in Net Income(56) 3,530
Transfers to Loans Held for Sale—
 (2,517)
Variation Margin Payments—
 9,768
Balance as of June 30, 2019$1,212
 $19,956
Total Unrealized Net Gains (Losses) Included in Net Income
Related to Assets Still Held as of June 30, 2019		$—
 $19,956
    
Three Months Ended June 30, 2018 
  
Balance as of April 1, 2018$1,404
 $547
Realized and Unrealized Net Gains (Losses): 
  
Included in Net Income(38) 968
Transfers to Loans Held for Sale—
 (1,198)
Variation Margin Payments—
 74
Balance as of June 30, 2018$1,366
 $391
Total Unrealized Net Gains (Losses) Included in Net Income
Related to Assets Still Held as of June 30, 2018		$—
 $391
    
Six Months Ended June 30, 2019 
  
Balance as of January 1, 2019$1,290
 $4,416
Realized and Unrealized Net Gains (Losses): 
  
Included in Net Income(78) 5,243
Transfers to Loans Held for Sale—
 (4,014)
Variation Margin Payments—
 14,311
Balance as of June 30, 2019$1,212
 $19,956
Total Unrealized Net Gains (Losses) Included in Net Income
Related to Assets Still Held as of June 30, 2019		$—
 $19,956
    
Six Months Ended June 30, 2018 
  
Balance as of January 1, 2018$1,454
 $894
Realized and Unrealized Net Gains (Losses): 
  
Included in Net Income(88) 1,505
Transfers to Loans Held for Sale—
 (1,580)
Variation Margin Payments—
 (428)
Balance as of June 30, 2018$1,366
 $391
Total Unrealized Net Gains (Losses) Included in Net Income
Related to Assets Still Held as of June 30, 2018		$—
 $391
1 
Realized and unrealized gains and losses related to mortgage servicing rights are reported as a component of mortgage banking income in the Company’s consolidated statements of income.
2 
Realized and unrealized gains and losses related to interest rate lock commitments are reported as a component of mortgage banking income in the Company’s consolidated statements of income.  Realized and unrealized gains and losses related to interest rate swap agreements are reported as a component of other noninterest income in the Company’s consolidated statements of income.

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of SeptemberJune 30, 20172019 and December 31, 2016,2018, the significant unobservable inputs used in the fair value measurements were as follows:
    
Significant Unobservable Inputs
(weighted-average)
 Fair Value
(dollars in thousands) 
Valuation
 Technique
 Description June 30,
2019
 Dec. 31,
2018
 June 30,
2019
 Dec. 31,
2018
Mortgage Servicing Rights Discounted Cash Flow 
Constant Prepayment Rate 1
 10.39% 7.01% $26,117
 $30,508
    
Discount Rate 2
 7.49% 9.59%    
             
Net Derivative Assets and Liabilities:            
Interest Rate Lock Commitments Pricing Model Closing Ratio 88.21% 89.00% $2,143
 $871
Interest Rate Swap Agreements Discounted Cash Flow Credit Factor 0.21% 0.06% $17,813
 $3,545
    
Significant Unobservable Inputs
(weighted-average)
 Fair Value
(dollars in thousands) 
Valuation
 Technique
 Description Sept. 30,
2017
 Dec. 31,
2016
 Sept. 30,
2017
 Dec. 31,
2016
Mortgage Servicing Rights Discounted Cash Flow 
Constant Prepayment Rate 1
 9.21% 8.13% $25,270
 $26,803
    
Discount Rate 2
 8.89% 9.33%    
             
Net Derivative Assets and Liabilities:            
Interest Rate Lock Commitments Pricing Model Closing Ratio 93.40% 92.26% $958
 $1,067
Interest Rate Swap Agreements Discounted Cash Flow Credit Factor 0.16% 0.13% $357
 $(14)

1 
Represents annualized loan repayment rate assumption.
2 
Derived from multiple interest rate scenarios that incorporate a spread to a market yield curve and market volatilities.
The significant unobservable inputs used in the fair value measurement of the Company’s mortgage servicing rights are the weighted-average constant prepayment rate and weighted-average discount rate. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.  Although the constant prepayment rate and the discount rate are not directly interrelated, they generally move in opposite directions of each other.


The Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income.  The Company’s Treasury Division enters observable and unobservable inputs into the model to arrive at an estimated fair value.  To assess the reasonableness of the fair value measurement, the Treasury Division performs a back-test by comparing the model’s results to historical prepayment data.  The fair value and constant prepayment rate are also compared to forward-looking estimates to assess reasonableness.  The Treasury Division also compares the fair value of the Company’s mortgage servicing rights to a value calculated by an independent third party.  Discussions are held with members from the Treasury, Mortgage Banking, and Controllers Divisions, along with the independent third party to discuss and reconcile the fair value estimates and key assumptions used by the respective parties in arriving at those estimates.  A subcommittee of the Company’s Asset/Liability Management Committee is responsible for providing oversight over the valuation methodology and key assumptions.


The significant unobservable input used in the fair value measurement of the Company’s IRLCs is the closing ratio, which represents the percentage of loans currently in a lock position which management estimates will ultimately close.  Generally, the fair value of an IRLC is positive (negative) if the prevailing interest rate is lower (higher) than the IRLC rate.  Therefore, an increase in the closing ratio (i.e., higher percentage of loans are estimated to close) will increase the gain or loss.  The closing ratio is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock.  The closing ratio is computed by ourthe Company’s secondary marketing system using historical data and the ratio is periodically reviewed by the Company’s Secondary Marketing Department of the Mortgage Banking DivisionCompany for reasonableness.


The unobservable input used in the fair value measurement of the Company’s interest rate swap agreements is the credit factor.  This factor represents the risk that a counterparty is either unable or unwilling to settle a transaction in accordance with the underlying contractual terms.  A significant increase (decrease) in the credit factor could result in a significantly lower (higher) fair value measurement.  The credit factor is determined by the Treasury Division based on the risk rating assigned to each counterparty in which the Company holds a net asset position.  The Company’s Credit Policy Committee periodically reviews and approves the Expected Default Frequency of the Economic Capital Model for Credit Risk.  The Expected Default Frequency is used as the credit factor for interest rate swap agreements.



Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis


The Company may be required periodically to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with GAAP.  These adjustments to fair value usually result from the application of lower-of-cost-or-fair value accounting or impairment write-downs of individual assets. The following table represents the assets measured at fair value on
a nonrecurring basis as of SeptemberJune 30, 2017.2019. There were no assets measured at fair value on a nonrecurring basis as of
December 31, 2016.2018.


(dollars in thousands)Fair Value Hierarchy Net Carrying Amount
 Valuation Allowance
June 30, 2019     
Mortgage Servicing Rights - amortization methodLevel 3 $24,905
 $(10)

(dollars in thousands)
Fair Value
Hierarchy
 
Net Carrying
Amount

 
Valuation
Allowance

September 30, 2017     
Mortgage Servicing Rights - amortization methodLevel 3 $22,927
 $210



The write-down of mortgage servicing rights accounted for under the amortization method was primarily due to changes in certain key assumptions used to estimate fair value. As previously mentioned, all of the Company's mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.



Fair Value Option


The Company elects the fair value option for all residential mortgage loans held for sale.  This election allows for a more effective offset of the changes in fair values of the loans held for sale and the derivative financial instruments used to financially hedge them without having to apply complex hedge accounting requirements.  As noted above, the fair value of the Company’s residential mortgage loans held for sale was determined based on quoted prices for similar loans in active markets.


The following table reflects the difference between the aggregate fair value and the aggregate unpaid principal balance of the Company’s residential mortgage loans held for sale as of SeptemberJune 30, 20172019 and December 31, 2016.2018.
(dollars in thousands)Aggregate Fair Value
 Aggregate Unpaid Principal  
Aggregate Fair Value
Less Aggregate
 Unpaid Principal
 
June 30, 2019 
   
   
Loans Held for Sale$22,706
  $22,102
  $604
        
December 31, 2018 
   
   
Loans Held for Sale$10,987
  $10,656
  $331

(dollars in thousands)Aggregate Fair Value
 Aggregate Unpaid Principal  
Aggregate Fair Value
Less Aggregate
 Unpaid Principal
 
September 30, 2017 
   
   
Loans Held for Sale$9,752
  $9,458
  $294
        
December 31, 2016 
   
   
Loans Held for Sale$62,499
  $61,782
  $717
Changes in the estimated fair value of residential mortgage loans held for sale are reported as a component of mortgage banking income in the Company’s consolidated statements of income.  For the three and ninesix months endedSeptember June 30, 20172019 and 2016,2018, the net gains or losses from the change in fair value of the Company’s residential mortgage loans held for sale were not material.


Financial Instruments Not Recorded at Fair Value on a Recurring Basis

The assumptions used below are expected to approximate those that market participants would use in valuing these financial instruments.

Investment Securities Held-to-Maturity

The fair value of the Company’s investment securities held-to-maturity was primarily measured using information from a third-party pricing service.  Level 1 investment securities are comprised of debt securities issued by the U.S. Treasury as quoted prices were available, unadjusted, for identical securities in active markets.  If quoted prices were not available, fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models.  In cases where there may be limited or less transparent information provided by the Company’s third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.


Loans

The fair value of the Company’s loans was estimated by discounting the expected future cash flows using the current interest rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  Loans were first segregated by type such as commercial, real estate, and consumer, and were then further segmented into fixed and variable rate.  Expected future cash flows were projected based on contractual cash flows, adjusted for estimated prepayments.

Time Deposits

The fair value of the Company’s time deposits was calculated using discounted cash flow analyses, applying discount rates based on market yield curve rates for similar maturities.  The fair values of the Company’s time deposit liabilities do not take into consideration the value of the Company’s long-term relationships with depositors, which may have significant value.

Securities Sold Under Agreements to Repurchase

The fair value of the Company’s securities sold under agreements to repurchase was calculated using discounted cash flow analyses, applying discount rates based on market yield curve rates for similar maturities.

Other Debt

The fair value of the Company’s other debt was calculated using a discounted cash flow analyses, applying discount rates based on market yield curve rates for similar maturities.



The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments not recorded at fair value on a recurring basis as of SeptemberJune 30, 20172019 and December 31, 2016.2018.  This table excludes financial instruments for which the carrying amount approximates fair value.  For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.  For non-marketable equity securities such as Federal Home Loan Bank and Federal Reserve Bank stock, the carrying amount is a reasonable estimate of fair value as 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.  For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.
    Fair Value Measurements    Fair Value Measurements
Carrying
   
Quoted Prices
 in Active
 Markets for
Identical
 Assets or
Liabilities

 
Significant
Other
Observable
Inputs

 
Significant
Unobservable
Inputs

Carrying
   
Quoted Prices
 in Active
 Markets for
Identical
 Assets or
Liabilities

 
Significant
Other
Observable
Inputs

 
Significant
Unobservable
Inputs

(dollars in thousands)Amount
 Fair Value
 (Level 1)
 (Level 2)
 (Level 3)
Amount
 Fair Value
 (Level 1)
 (Level 2)
 (Level 3)
September 30, 2017 
  
  
  
  
June 30, 2019 
  
  
  
  
Financial Instruments - Assets 
  
  
  
  
 
  
  
  
  
Investment Securities Held-to-Maturity$3,960,598
 $3,960,956
 $424,731
 $3,536,225
 $—
$2,959,611
 $2,973,229
 $355,211
 $2,618,018
 $—
Loans 1
9,193,837
 9,361,879
 —
 —
 9,361,879
10,398,345
 10,605,674
 —
 —
 10,605,674
  

        

      
Financial Instruments - Liabilities 
 

  
  
  
 
 

  
  
  
Time Deposits1,962,092
 1,956,957
 —
 1,956,957
 —
1,922,976
 1,920,792
 —
 1,920,792
 —
Securities Sold Under Agreements to Repurchase505,293
 505,278
 —
 505,278
 —
504,299
 523,892
 —
 523,892
 —
Other Debt 2
257,153
 256,548
 —
 256,548
 —
100,000
 100,572
 —
 100,572
 —
  

        

      
December 31, 2016 
 

  
  
  
December 31, 2018 
 

  
  
  
Financial Instruments - Assets 
 

  
  
  
 
 

  
  
  
Investment Securities Held-to-Maturity$3,832,997
 $3,827,527
 $530,940
 $3,296,587
 $—
$3,482,092
 $3,413,994
 $352,216
 $3,061,778
 $—
Loans 1
8,583,726
 8,743,191
 —
 —
 8,743,191
10,084,527
 10,008,417
 —
 —
 10,008,417
                  
Financial Instruments - Liabilities 
 

  
  
  
 
 

  
  
  
Time Deposits1,217,707
 1,213,705
 —
 1,213,705
 —
1,745,522
 1,734,447
 —
 1,734,447
 —
Securities Sold Under Agreements to Repurchase523,378
 523,374
 —
 523,374
 —
504,296
 504,288
 —
 504,288
 —
Other Debt 2
257,153
 256,718
 —
 256,718
 —
125,000
 124,559
 —
 124,559
 —
1 
NetCarrying amount is net of unearned income and the Allowance.
2 
Excludes capitalized lease obligations.



Note 15. Revenue Recognition

On January 1, 2018, the Company adopted ASU No. 2014-09 “Revenue from Contracts with Customers” (Topic 606) and all subsequent ASUs that modified Topic 606. 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. Topic 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities, which comprise the majority of the Company’s revenue. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not within the scope of the new guidance. Topic 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. However, the recognition of these covered revenue streams did not change significantly upon adoption of Topic 606. Substantially all of the Company’s revenue is generated from contracts with customers. Noninterest revenue streams in-scope of Topic 606 are discussed below.

Trust and Asset Management

Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.

Service Charges on Deposit Accounts

Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Fees, Exchange, and Other Service Charges

Fees, exchange, and other service charges are primarily comprised of debit card income, ATM fees, merchant services income, and other service charges. Debit card income is primarily comprised of interchange fees earned whenever the Company’s debit cards are processed through card payment networks such as Visa. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. Other service charges include revenue from processing wire transfers, bill pay service, cashier’s checks, and other services. The Company’s performance obligation for fees, exchange, and other service charges are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Annuity and Insurance

Annuity and insurance income primarily consists of commissions received on annuity product sales. The Company acts as an intermediary between the Company’s customer and the insurance carrier. The Company’s performance obligation is generally satisfied upon the issuance of the annuity policy. Shortly after the policy is issued, the carrier remits the commission payment to the Company, and the Company recognizes the revenue. The Company does not earn a significant amount of trailer fees on annuity sales. The majority of the trailer fees relates to variable annuity products and are calculated based on a percentage of market value at period end. Revenue is not recognized until the annuity’s market value can be determined.


Other

Other noninterest income consists of other recurring revenue streams such as commissions from sales of mutual funds and other investments, investment advisor fees from the Company’s Managed Account Platform Services (MAPS) wealth management product, safety deposit box rental fees, and other miscellaneous revenue streams. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value. Trailer revenue is recorded over time, usually monthly or quarterly, as net asset value is determined. Investment advisor fees from the MAPS wealth management product is earned over time and based on an annual percentage rate of the net asset value. The investment advisor fees are charged to the customer’s account in advance on the first month of the quarter, and the revenue is recognized over the following three-month period. Safe deposit box rental fees are charged to the customer on an annual basis and recognized upon receipt of payment. The Company determined that since rentals and renewals occur fairly consistently over time, revenue is recognized on a basis consistent with the duration of the performance obligation.

The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of Topic 606, for the three and six months ended June 30, 2019 and 2018.

  Three Months Ended
June 30,		 Six Months Ended
June 30,
(dollars in thousands)2019
 2018
 2019
 2018
Noninterest Income       
 In-scope of Topic 606:       
    Trust and Asset Management$11,385
 $11,356
 $22,146
 $22,537
    Service Charges on Deposit Accounts3,295
 3,214
 6,644
 6,788
    Fees, Exchange, and Other Service Charges11,602
 11,457
 23,154
 23,050
    Annuity and Insurance1,772
 1,796
 4,316
 2,940
    Other2,504
 2,532
 4,975
 4,810
 Noninterest Income (in-scope of Topic 606)30,558
 30,355
 61,235
 60,125
 Noninterest Income (out-of-scope of Topic 606)14,892
 10,943
 27,894
 25,208
Total Noninterest Income$45,450
 $41,298
 $89,129
 $85,333


Contract Balances

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due) from the customer. The Company’s noninterest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into long-term revenue contracts with customers, and therefore, does not experience significant contract balances. As of June 30, 2019 and December 31, 2018, the Company did not have any significant contract balances.

Contract Acquisition Costs

In connection with the adoption of Topic 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of Topic 606, the Company did not capitalize any contract acquisition cost.

Note 16. Leases

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02 “Leases” (Topic 842) and all subsequent ASUs that modified Topic 842. For the Company, Topic 842 primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.

Lessee Accounting

Substantially all of the leases in which the Company is the lessee are comprised of real estate property for branches, ATM locations, and office space with terms extending through 2052. Portions of certain properties are subleased for terms extending through 2033. Substantially all of the Company’s leases are classified as operating leases, and therefore, were previously not recognized on the Company’s consolidated statements of condition. With the adoption of Topic 842, operating lease agreements are required to be recognized on the consolidated statements of condition as a right-of-use (“ROU”) asset and a corresponding lease liability. The Company has one existing finance lease (previously referred to as a capital lease) for a portion of the Company’s headquarters’ building with a lease term through 2052. As this lease was previously required to be recorded on the Company’s consolidated statements of condition, Topic 842 did not materially impact the accounting for this lease.

The following table represents the consolidated statements of condition classification of the Company’s ROU assets and lease liabilities. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated statements of condition.
(dollars in thousands)June 30, 2019 
Lease Right-of-Use AssetsClassification 
Operating lease right-of-use assetsOperating Lease Right-of-Use Assets$103,336
Finance lease right-of-use assetsPremises and Equipment, Net2,412
Total Lease Right-of-Use Assets $105,748
   
Lease Liabilities  
Operating lease liabilitiesOperating Lease Liabilities$110,483
Finance lease liabilitiesOther Debt10,605
Total Lease Liabilities $121,088


The calculated amount of the ROU assets and lease liabilities in the table above are impacted by the length of the lease term and the discount rate used to present value the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability. Regarding the discount rate, Topic 842 requires the use of the rate implicit in the lease whenever this rate is readily determinable. As this rate is rarely determinable, the Company utilizes its incremental borrowing rate at lease inception, on a collateralized basis, over a similar term. For operating leases existing prior to January 1, 2019, the rate for the remaining lease term as of January 1, 2019 was used. For the Company’s only finance lease, the Company utilized its incremental borrowing rate at lease inception.
June 30, 2019
Weighted-average remaining lease term
Operating leases17.2 years
Finance leases33.5 years
Weighted-average discount rate
Operating leases3.67%
Finance leases7.04%



The following table represents lease costs and other lease information. As the Company elected, for all classes of underlying assets, not to separate lease and non-lease components and instead to account for them as a single lease component, the variable lease cost primarily represents variable payments such as common area maintenance and utilities. Variable lease cost also includes payments for ATM location leases in which payments are based on a percentage of ATM transactions (i.e., ATM surcharge fees), rather than a fixed amount.
(dollars in thousands)Three Months Ended
June 30, 2019
 Six Months Ended
June 30, 2019
Lease Costs   
 Operating lease cost$3,175
 $6,359
 Variable lease cost734
 1,594
 Short-term lease cost134
 217
 Finance lease cost   
 
Interest on lease liabilities 1
187
 374
 Amortization of right-of-use assets18
 36
 Sublease income(2,035) (4,261)
Net lease cost$2,213
 $4,319
    
Other Information   
 Cash paid for amounts included in the measurement of lease liabilities:   
 Operating cash flows from operating leases$3,174
 $6,325
 Operating cash flows from finance leases187
 374
 Financing cash flows from finance leases19
 38
     
 Right-of-use assets obtained in exchange for new operating lease liabilities1,725
 1,725
 Right-of-use assets obtained in exchange for new finance lease liabilities—
 —
1
Included in other debt interest expense in the Company’s consolidated statements of income. All other lease costs in this table are included in net occupancy expense.

Future minimum payments for finance leases and operating leases with initial or remaining terms of one year or more as of June 30, 2019 were as follows:
(dollars in thousands)Finance Leases
 Operating Leases
Twelve Months Ended:   
June 30, 2020$825
 $12,438
June 30, 2021825
 11,308
June 30, 2022825
 10,989
June 30, 2023825
 9,910
June 30, 2024825
 8,929
Thereafter23,518
 103,800
Total Future Minimum Lease Payments27,643
 157,374
Amounts Representing Interest(17,038) (46,891)
Present Value of Net Future Minimum Lease Payments$10,605
 $110,483



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


Forward-Looking Statements


This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts and may include statements concerning, among other things, the anticipated economic and business environment in our service area and elsewhere, credit quality and other financial and business matters in future periods, our future results of operations and financial position, our business strategy and plans and our objectives and future operations. We also may make forward-looking statements in our other documents filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”). In addition, our senior management may make forward-looking statements orally to analysts, investors, representatives of the media and others. Our forward-looking statements are based on numerous assumptions, any of which could prove to be inaccurate, and actual results may differ materially from those projected because of a variety of risks and uncertainties, including, but not limited to: 1) general economic conditions either nationally, internationally, or locally may be different than expected, and particularly, any event that negatively impacts the tourism industry in Hawaii; 2) unanticipated changes in the securities markets, public debt markets, and other capital markets in the U.S. and internationally;internationally, including, without limitation, the potential elimination of the London Interbank Offered Rate (“LIBOR”) as a benchmark interest rate; 3) competitive pressures in the markets for financial services and products; 4) the impact of legislative and regulatory initiatives, particularly the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and the current administration’s reviewEconomic Growth, Regulatory Relief, and Consumer Protection Act of potential changes to such initiatives;2018; 5) changes in fiscal and monetary policies of the markets in which we operate; 6) the increased cost of maintaining or the Company’s ability to maintain adequate liquidity and capital, based on the requirements adopted by the Basel Committee on Banking Supervision and U.S. regulators; 7) actual or alleged conduct which could harm our reputation; 8) changes in accounting standards; 9) changes in tax laws or regulations, including Public Law 115-97, commonly known as the Tax Cuts and Jobs Act, or the interpretation of such laws and regulations; 10) changes in our credit quality or risk profile that may increase or decrease the required level of our reserve for credit losses; 11) changes in market interest rates that may affect credit markets and our ability to maintain our net interest margin; 12) the impact of litigation and regulatory investigations of the Company, including costs, expenses, settlements, and judgments; 13) any failure in or breach of our operational systems, information systems or infrastructure, or those of our merchants,customers, third party vendors and other service providers; 14) any interruption or breach of security of our information systems resulting in failures or disruptions in customer account management, general ledger processing, and loan or deposit systems; 15) changes to the amount and timing of proposed common stock repurchases; and 16) natural disasters, public unrest or adverse weather, public health, and other conditions impacting us and our customers’ operations.operations or negatively impacting the tourism industry in Hawaii. Given these risks and uncertainties, investors should not place undue reliance on any forward-looking statement as a prediction of our actual results. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included under the section entitled “Risk Factors” in Part II of this report and Part I of our Annual Report on Form 10-K for the year ended December 31, 2016,2018, and subsequent periodic and current reports filed with the SEC. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. We undertake no obligation to update forward-looking statements to reflect later events or circumstances, except as may be required by law.



Overview


Bank of Hawaii Corporation (the “Parent”) is a Delaware corporation and a bank holding company headquartered in Honolulu, Hawaii.  The Parent’s principal operating subsidiary is Bank of Hawaii (the “Bank”).


The Bank, directly and through its subsidiaries, provides a broad range of financial services and products to businesses, consumers, and governments in Hawaii, Guam, and other Pacific Islands.  References to “we,” “our,” “us,” or the “Company” refer to the Parent and its subsidiaries that are consolidated for financial reporting purposes.


OurThe Company’s business strategy is to use our unique market knowledge, prudent management discipline and brand strength to deliver exceptional value to our stakeholders.
Hawaii Economy


General economic conditions in Hawaii remained positive during the thirdsecond quarter of 2017 due2019. The statewide seasonally-adjusted unemployment rate continues to a continuation ofremain low at 2.8% in June 2019, well below the strong tourism market, active construction industry, low3.7% unemployment and robustrate nationally.

The real estate market.market on Oahu remained strong during the first six months of 2019 despite a moderate decrease in sales volume. For the first eightsix months of 2017, total visitor arrivals increased 4.7% while total visitor spending increased 8.5%2019, single-family home sales declined 3.7% and condominium sales declined 8.8% compared with the same period in 2018. The median sales price of a single-family home and condominium decreased 0.5% and 1.4%, respectively, for the first six months of 2019 compared to the same period in 2016. The Hawaii statewide seasonally-adjusted unemployment rate was 2.5% in September 2017 compared to 4.2% nationally. For the first nine months of 2017, the volume of single-family home sales on Oahu increased 5.0%, while the volume of condominium sales on Oahu increased 5.8% compared with the same period in 2016.  The median price of single-family home sales and condominium sales on Oahu increased 3.4% and 5.4%, respectively, for the first nine months of 2017 compared to the same period in 2016.2018. As of SeptemberJune 30, 2017,2019, months of inventory of single-family homes and condominiums on Oahu remained low at 2.4were 3.6 months and 2.63.9 months, respectively.


Earnings Summary

Net income forFor the third quarterfirst five months of 2017 was $45.9 million, an increase of $2.4 million or 5%2019, total visitor arrivals increased 3.8% and air seat capacity increased 1.6% compared to the same period in 2016.  Diluted earnings per share was $1.082018. For the first five months of 2019, visitor spending decreased 3.1% despite the continued growth in arrivals.

Earnings Summary

Net income for the thirdsecond quarter of 2017,2019 was $56.9 million, an increase of $0.06$2.2 million or 6%4% compared to the same period in 2016.2018.  Diluted earnings per share was $1.40 for the second quarter of 2019, an increase of $0.10 or 8% compared to the same period in 2018.


OurThe Company’s higher earnings for the thirdsecond quarter of 20172019 were primarily due to the following:


Net interest income for the thirdsecond quarter of 20172019 was $116.3$124.1 million, an increase of $12.4$3.6 million or 12%3% compared to the same period in 2016.2018. This increase was primarily due to a higher level of earning assets, including growth in both our commercial and consumer lending portfolios, combined with a higher net interest margin.portfolios. The higher level of earning assets was primarily funded by higher deposit balances. Our netNet interest margin was 2.92% in3.04% for the thirdsecond quarter of 2017,2019, unchanged compared to the same period in 2018. We experienced higher yields in both our investment securities portfolio and loan portfolios, which were offset by higher rates paid on our interest-bearing deposits, a reflection of the higher short-term rate environment.
Other noninterest income for the second quarter of 2019 was $6.4 million, an increase of 12$1.8 million or 40% compared to the same period in 2018 primarily due to a $1.2 million increase in fees received related to our customer interest rate swap derivatives combined with a $0.4 million increase in net gain on sale of leased assets.
Mortgage banking income second quarter of 2019 was $3.3 million, an increase of $1.2 million or 53% compared to the same period in 2018. This increase was primarily due to increased sales of conforming saleable loans from current production.
This increase was partially offset by the following:
The provision for income taxes for the second quarter of 2019 was $15.9 million, an increase of $3.1 million or 24% compared to the same period in 2018 primarily due to higher pre-tax income. The effective tax rate for the second quarter of 2019 was 21.84%, compared to 18.94% for the same period in 2018. The increase was primarily due to a reduced tax benefit from municipal bonds, which were sold as part of a portfolio repositioning.

Total salaries and benefits expense for the second quarter of 2019 was $53.5 million, an increase of $1.4 million or 3% compared to the same period in 2018 primarily due to a $1.0 million increase in incentive compensation. Commission expense increased by $0.4 million primarily due to an increase in mortgage banking production volume as refinancing activity increased. These increases were partially offset by a $0.4 million decrease in salaries expense primarily due to a higher amount of salaries deferred in the current year, the result of higher portfolio loan production compared to the prior year.
Net income for the first six months of 2019 was $115.7 million, an increase of $7.0 million or 6% compared to the same period in 2018. Diluted earnings per share was $2.82 for the first six months of 2019, an increase of $0.25 or 10% compared to the same period in 2018.

The Company’s higher earnings for the first six months of 2019 were primarily due to the following:

Net interest income was $248.9 million for the first six months of 2019, an increase of $9.5 million or 4% compared to the same period in 2018. This increase was primarily due to a higher level of earning assets, including growth in both our commercial and consumer lending portfolios. The higher level of earning assets was primarily funded by higher deposit balances. Net interest margin was 3.08% for the first six months of 2019, an increase of six basis points compared to the same period in 2016. The higher margin in 2017 was2018 primarily due to our loans, which generally have higher yields than our investment securities, comprising a larger percentage of our earning assets compared to 2016.2018. In addition, our yields increased particularly infor our commercial loans due to higher variable rates. Our investments portfolio yields also increased due to higher variable rates on our floating rate securities coupled with lower premium amortization. These increases were partially offset by higher funding costs.

Total other expense was $29.3 million, a decrease of $2.7 million or 8% for the first six months of 2019 compared to the same period in 2018 due to a $2.0 million legal reserve recorded in first quarter 2018 and investments portfolio. This increase wasa $1.7 million decrease in credit card expense due to the sale of the MyBankoh Rewards Credit Card portfolio on November 1, 2018. These items were partially offset by an increase in ratesoperating losses ($0.7 million) and education and recruitment ($0.4 million).

FDIC insurance for the first six months of 2019 was $2.6 million, a decrease of $1.8 million or 41% compared to the same period in 2018 due to the end of an FDIC surcharge in September 2018 and a decrease in FDIC assessment rates.

Annuity and insurance income for the first six months was $4.4 million, an increase of $1.3 million or 44% compared to the same period in 2018 primarily due to a one-time commission received related to insurance products offered on our deposit products.through a third-party administrator.

Mortgage banking income first six months of 2019 was $5.6 million, an increase of $1.3 million of 30% compared to the same period in 2018. This increase was primarily due to increased sales of conforming saleable loans from current production.

This increase was partially offset by the following:
Mortgage banking
The provision for income taxes for the third quarterfirst six months of 20172019 was $3.2$29.6 million, a decreasean increase of $3.1$6.3 million or 49%27% compared to the same period in 2016 primarily due to lower loan sales and reduced margins on those sales.
Other noninterest income for the third quarter of 2017 was $3.4 million, a decrease of $1.5 million or 30% compared to the same period in 2016 primarily due to $1.6 million in fees received in the third quarter of 2016 related to our customer interest rate swap derivatives.
Salaries and benefits for the third quarter of 2017 was $51.6 million, an increase of $1.9 million or 4% compared to the same period in 2016 primarily due to $2.1 million of separation expense.
Provision for income taxes for the third quarter of 2017 was $20.2 million, an increase of $1.7 million or 9% compared to the same period in 20162018 primarily due to higher pretaxpre-tax income. The effective tax rate for the third quarterfirst six months of 20172019 was 30.62%20.35%, up from 29.84%compared to 17.60% for the same period in 2016.2018. The increase was primarily due to a reduced tax benefit from municipal bonds, which were sold as part of a portfolio repositioning.
Provision for credit lossesTotal salaries and benefits expense for the third quarterfirst six months of 20172019 was $4.0$110.1 million, an increase of $1.5 million compared to the same period in 2016. The level of the provision recorded is reflective of our evaluation of the adequacy of the Allowance.


Net income for the first nine months of 2017 was $141.7 million, an increase of $3.8$3.5 million or 3% compared to the same period in 2016.  Diluted earnings per share was $3.32 for the first nine months of 2017, an increase of $0.11 or 3% compared to the same period in 2016.

Our higher earnings for the first nine months of 2017 were primarily due to the following:

Net interest income for the first nine months of 2017 was $338.5 million, an increase of $28.0 million or 9% compared to the same period in 2016. This increase was primarily due to a higher level of earning assets, including growth in both our commercial and consumer lending portfolios, combined with a higher net interest margin. The higher level of earning assets was primarily funded by higher deposit balances. Our net interest margin was 2.91% for the first nine months of 2017, an increase of 7 basis points compared to the same period in 2016. The higher margin in 2017 was primarily due to our loans, which generally have higher yields than our investment securities, comprising a larger percentage of our earning assets compared to 2016.
This increase was partially offset by the following:

Provision for credit losses for the first nine months of 2017 was $12.7 million compared to a $1.5 million provision in the same period in 2016. The level of the provision recorded is reflective of our evaluation of the adequacy of the Allowance.
Mortgage banking income for the first nine months of 2017 was $10.4 million, a decrease of $3.3 million or 24% compared to the same period in 2016 primarily due to lower loan sales and reduced margins on those sales.
Other noninterest income for the first nine months of 2017 was $11.8 million, a decrease of $2.8 million or 19% compared to the same period in 2016 primarily due to a $1.8 million decrease in fees for our customer interest rate swap derivatives, and a $1.5 million decrease in net gain on sale of leased assets. This decrease was partially offset by a $0.4 million increase in profit from foreign exchange contracts.
Total salaries and benefits for the first nine months of 2017 was $153.3 million, an increase of $2.8 million or 2% compared to the same period in 2016. Salaries2018. Incentive compensation increased by $3.9$1.8 million. Medical, dental, and life insurance increased by $1.1 million primarily due to merit increases.an increase in group health plan costs. In addition, separation expenseshare-based compensation increased by $1.3 million.$0.6 million due to the value of restricted stock units increasing as a result of the Company’s higher share price and additional restricted stock grants being amortized. These increases were partially offset by a $1.9$0.8 million decrease in incentive compensation andsalaries due to a $0.9higher amount of salaries deferred in the current year, the result of higher portfolio loan production compared to the prior year coupled with a $0.5 million decrease in share-based compensation.separation expense
Net occupancy expense for the first nine months of 2017 was $24.0 million, an increase of $1.4 million or 6% compared to the same period in 2016. This increase was primarily due to a $2.4 million decrease in net gain on sale of real estate property, partially offset by a $0.7 million decrease in net rental expense primarily due to an increase in sublease rental income.
We maintained a strong balance sheet during the thirdsecond quarter of 2017,2019, with what we believe are adequate reserves for credit losses and high levels of liquidity and capital.
Total loans and leases were $9.6$10.8 billion as of SeptemberJune 30, 2017,2019, an increase of $624.2$310.4 million or 7%3% from December 31, 2016 primarily2018 due to growth in both our consumer and commercial lending portfolio.portfolios.
The allowance for loan and lease losses (the “Allowance”) was $106.9$107.7 million as of SeptemberJune 30, 2017,2019, an increase of $2.6$1.0 million or 3%1% from December 31, 2016.2018.  The Allowance represents 1.12%1.00% of total loans and leases outstanding as of SeptemberJune 30, 20172019 and 1.17%1.02% of total loans and leases outstanding as of December 31, 2016.2018. The level of our Allowance was commensurate with the Company’s credit risk profile, loan portfolio growth and composition, and a healthy Hawaii economy.
As of SeptemberJune 30, 2017,2019, the total carrying value of our investment securities portfolio was $6.3$5.6 billion, an increase of $264.2$119.5 million or 4%2% compared to December 31, 2016. During the first nine months2018. On June 10, 2019, prepayable debt securities with a carrying value of 2017, we primarily increased our holdings in$1.0 billion and a net unrealized gain of $3.1 million were transferred from held-to-maturity to available-for-sale. The reclassified securities consisted of mortgage-backed securities issued by Ginnie Maegovernment agencies and Fannie Mae. In addition,U.S. government-sponsored enterprises, municipal debt securities, and corporate debt securities. During the first six months of 2019 we also increasedreduced our holdingspositions in Small Business Administrationmunicipal debt securities while decreasing our holdings in U.S. Treasury securities.and certain mortgage-backed securities as part of a portfolio repositioning. Ginnie Mae mortgage-backed securities continue to be the largest concentration in our portfolio.
Total deposits were $15.0$15.5 billion as of SeptemberJune 30, 2017,2019, an increase of $727.9$461.6 million or 5%3% from December 31, 20162018 primarily due to an increase in public and other deposits. In addition, consumer deposits increased due to an increase in time and core deposits.
Total shareholders’ equity was $1.2$1.3 billion as of SeptemberJune 30, 2017, an increase of $66.4 million or 6%2019, relatively unchanged from December 31, 2016.2018.  We continued to return capital to our shareholders in the form of share repurchases and dividends.  During the first ninesix months of 2017,2019, we acquired 442,007986,888 shares of our common stock at a total cost of $36.4$78.2 million under our share repurchase program and from shares obtained from employees and/or directors in connection with income

tax withholdings related to the vesting of restricted stock and shares purchased for a deferred compensation plan, and stock swaps, less shares distributed from the deferred compensation plan. We also paid cash dividends of $64.9$52.2 million during the first ninesix months of 2017.2019.

Our financial highlights are presented in Table 1.
Financial Highlights      Table 1
      Table 1
Three Months Ended Nine Months EndedThree Months Ended Six Months Ended
September 30, September 30,June 30, June 30,
(dollars in thousands, except per share amounts)2017
 2016
 2017
 2016
2019
 2018
 2019
 2018
For the Period: 
  
  
  
 
  
  
  
Operating Results 
  
  
  
 
  
  
  
Net Interest Income$116,317
 $103,912
 $338,468
 $310,486
$124,097
 $120,496
 $248,934
 $239,452
Provision for Credit Losses4,000
 2,500
 12,650
 1,500
4,000
 3,500
 7,000
 7,625
Total Noninterest Income42,410
 48,114
 143,562
 150,840
45,450
 41,298
 89,129
 85,333
Total Noninterest Expense88,598
 87,532
 265,355
 260,989
92,725
 90,791
 185,782
 185,175
Net Income45,881
 43,493
 141,719
 137,948
56,919
 54,718
 115,718
 108,758
Basic Earnings Per Share1.09
 1.02
 3.35
 3.23
1.40
 1.31
 2.84
 2.59
Diluted Earnings Per Share1.08
 1.02
 3.32
 3.21
1.40
 1.30
 2.82
 2.57
Dividends Declared Per Share0.52
 0.48
 1.52
 1.41
0.65
 0.60
 1.27
 1.12
              
Performance Ratios 
  
  
  
 
  
  
  
Return on Average Assets1.07% 1.09% 1.14% 1.17%1.31% 1.30% 1.34% 1.29%
Return on Average Shareholders’ Equity14.89
 14.89
 15.77
 16.09
17.97
 17.68
 18.39
 17.71
Efficiency Ratio 1
55.82
 57.58
 55.05
 56.57
54.69
 56.12
 54.95
 57.01
Net Interest Margin 2
2.92
 2.80
 2.91
 2.84
3.04
 3.04
 3.08
 3.02
Dividend Payout Ratio 3
47.71
 47.06
 45.37
 43.65
46.43
 45.80
 44.72
 43.24
Average Shareholders’ Equity to Average Assets7.21
 7.30
 7.22
 7.30
7.27
 7.34
 7.31
 7.31
              
Average Balances 
  
  
  
 
  
  
  
Average Loans and Leases$9,451,972
 $8,483,588
 $9,231,615
 $8,210,596
$10,631,558
 $9,962,860
 $10,549,893
 $9,883,746
Average Assets16,972,202
 15,906,760
 16,636,213
 15,695,251
17,480,651
 16,921,820
 17,359,031
 16,939,527
Average Deposits14,727,469
 13,687,186
 14,401,698
 13,492,609
15,162,782
 14,709,299
 15,067,622
 14,714,752
Average Shareholders’ Equity1,222,885
 1,161,655
 1,201,850
 1,145,094
1,270,162
 1,241,672
 1,268,808
 1,238,628
              
Market Price Per Share of Common Stock 
  
  
  
 
  
  
  
Closing$83.36
 $72.62
 $83.36
 $72.62
$82.91
 $83.42
 $82.91
 $83.42
High86.19
 73.44
 90.80
 73.44
84.53
 88.92
 84.53
 89.09
Low74.72
 65.19
 74.72
 54.55
75.24
 80.20
 66.54
 78.40
              
    September 30,
2017
 December 31,
2016
    June 30,
2019
 December 31,
2018
As of Period End: 
  
  
  
 
  
  
  
Balance Sheet Totals 
  
  
  
 
  
  
  
Loans and Leases    $9,573,956
 $8,949,785
    $10,759,129
 $10,448,774
Total Assets    17,268,302
 16,492,367
    17,688,845
 17,143,974
Total Deposits    15,048,160
 14,320,240
    15,488,821
 15,027,242
Other Debt    267,887
 267,938
    110,605
 135,643
Total Shareholders’ Equity    1,227,893
 1,161,537
    1,285,948
 1,268,200
              
Asset Quality     
  
     
  
Non-Performing Assets    $17,035
 $19,761
    $21,782
 $12,930
Allowance for Loan and Lease Losses    106,881
 104,273
    107,672
 106,693
Allowance to Loans and Leases Outstanding    1.12% 1.17%    1.00% 1.02%
              
Capital Ratios     
  
     
  
Common Equity Tier 1 Capital Ratio    13.27% 13.24%    12.46% 13.07%
Tier 1 Capital Ratio    13.27
 13.24
    12.46
 13.07
Total Capital Ratio    14.51
 14.49
    13.57
 14.21
Tier 1 Leverage Ratio    7.24
 7.21
    7.36
 7.60
Total Shareholders’ Equity to Total Assets    7.11
 7.04
    7.27
 7.40
Tangible Common Equity to Tangible Assets 4
    6.94
 6.86
    7.10
 7.23
Tangible Common Equity to Risk-Weighted Assets 4
    12.96
 12.81
    12.17
 12.52
              
Non-Financial Data     
  
     
  
Full-Time Equivalent Employees    2,120
 2,122
    2,152
 2,122
Branches    69
 69
    68
 69
ATMs    388
 449
    383
 382
1 
Efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and total noninterest income).
2 
Net interest margin is defined as net interest income, on a taxable-equivalent basis, as a percentage of average earning assets.
3 
Dividend payout ratio is defined as dividends declared per share divided by basic earnings per share.
4 
Tangible common equity to tangible assets and tangible common equity to risk-weighted assets are Non-GAAP financial measures.  See the “Use of Non-GAAP Financial Measures” section below.

Use of Non-GAAP Financial Measures


The ratios “tangible common equity to tangible assets” and “tangible common equity to risk-weighted assets” are Non-GAAP financial measures.  The Company believes these measurements are useful for investors, regulators, management and others to evaluate capital adequacy relative to other financial institutions.  Although these Non-GAAP financial measures are frequently used by stakeholders in the evaluation of a financial institution, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP.  Table 2 provides a reconciliation of these Non-GAAP financial measures with their most closely related GAAP measures.

GAAP to Non-GAAP Reconciliation 
 Table 2
 
 Table 2
(dollars in thousands)September 30,
2017
 December 31,
2016
June 30,
2019
 December 31,
2018
Total Shareholders’ Equity$1,227,893
 $1,161,537
$1,285,948
 $1,268,200
Less: Goodwill31,517
 31,517
31,517
 31,517
Tangible Common Equity$1,196,376
 $1,130,020
$1,254,431
 $1,236,683
      
Total Assets$17,268,302
 $16,492,367
$17,688,845
 $17,143,974
Less: Goodwill31,517
 31,517
31,517
 31,517
Tangible Assets$17,236,785
 $16,460,850
$17,657,328
 $17,112,457
Risk-Weighted Assets, determined in accordance with prescribed regulatory requirements$9,233,969
 $8,823,485
$10,309,085
 $9,878,904
      
Total Shareholders’ Equity to Total Assets
7.11% 7.04%7.27% 7.40%
Tangible Common Equity to Tangible Assets (Non-GAAP)
6.94% 6.86%7.10% 7.23%
      
Tier 1 Capital Ratio13.27% 13.24%12.46% 13.07%
Tangible Common Equity to Risk-Weighted Assets (Non-GAAP)12.96% 12.81%12.17% 12.52%



Analysis of Statements of Income


Average balances, related income and expenses, and resulting yields and rates are presented in Table 3.  An analysis of the change in net interest income, on a taxable-equivalent basis, is presented in Table 4.
Average Balances and Interest Rates - Taxable-Equivalent BasisAverage Balances and Interest Rates - Taxable-Equivalent Basis   Table 3 Average Balances and Interest Rates - Taxable-Equivalent Basis   Table 3 
Three Months Ended Three Months Ended Nine Months Ended Nine Months EndedThree Months Ended Three Months Ended Six Months Ended Six Months Ended
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016June 30, 2019 June 30, 2018 June 30, 2019 June 30, 2018
Average
 Income/
 Yield/
 Average
 Income/
 Yield/
 Average
 Income/
 Yield/
 Average
 Income/
 Yield/
Average
 Income/
 Yield/
 Average
 Income/
 Yield/
 Average
 Income/
 Yield/
 Average
 Income/
 Yield/
(dollars in millions)Balance
 Expense
 Rate
 Balance
 Expense
 Rate
 Balance
 Expense
 Rate
 Balance
 Expense
 Rate
Balance
 Expense
 Rate
 Balance
 Expense
 Rate
 Balance
 Expense
 Rate
 Balance
 Expense
 Rate
Earning Assets 
  
  
  
  
  
  
  
  
      
 
  
  
  
  
  
  
  
  
      
Interest-Bearing Deposits in Other Banks$3.5
 $—
 0.48% $4.1
 $—
 0.19% $3.5
 $—
 0.44% $4.2
 $—
 0.26%$2.9
 $—
 1.25% $2.9
 $—
 (0.52)% $2.9
 $—
 1.65% $2.9
 $—
 0.94%
Funds Sold575.2
 1.6
 1.07
 585.9
 0.7
 0.46
 491.1
 3.2
 0.85
 586.8
 2.0
 0.46
123.6
 0.8
 2.34
 185.2
 0.8
 1.81
 182.3
 2.2
 2.37
 194.9
 1.6
 1.64
Investment Securities                                              
Available-for-Sale                                              
Taxable1,658.2
 8.6
 2.08
 1,574.9
 6.8
 1.72
 1,655.8
 24.6
 1.98
 1,594.3
 20.9
 1.75
2,004.3
 14.3
 2.87
 1,564.5
 9.2
 2.35
 1,801.2
 25.9
 2.88
 1,579.7
 18.0
 2.29
Non-Taxable636.7
 5.2
 3.26
 687.1
 5.4
 3.16
 652.0
 15.9
 3.26
 697.9
 16.5
 3.16
86.8
 0.9
 4.15
 583.6
 4.0
 2.78
 182.5
 3.3
 3.63
 594.1
 8.2
 2.76
Held-to-Maturity                                              
Taxable3,631.1
 18.8
 2.07
 3,563.8
 17.8
 1.99
 3,605.8
 55.4
 2.05
 3,627.4
 55.2
 2.03
3,358.0
 21.0
 2.50
 3,471.7
 19.2
 2.22
 3,365.7
 41.5
 2.46
 3,551.0
 39.0
 2.20
Non-Taxable239.9
 2.4
 3.87
 243.7
 2.4
 3.90
 240.9
 7.0
 3.88
 244.6
 7.2
 3.91
193.0
 1.5
 3.08
 237.1
 1.9
 3.17
 213.4
 3.3
 3.12
 237.6
 3.8
 3.17
Total Investment Securities6,165.9
 35.0
 2.27
 6,069.5
 32.4
 2.13
 6,154.5
 102.9
 2.23
 6,164.2
 99.8
 2.16
5,642.1
 37.7
 2.68
 5,856.9
 34.3
 2.35
 5,562.8
 74.0
 2.66
 5,962.4
 69.0
 2.32
Loans Held for Sale20.6
 0.2
 3.88
 57.7
 0.5
 3.52
 24.9
 0.7
 3.98
 30.0
 0.8
 3.58
18.7
 0.2
 4.05
 14.8
 0.2
 4.44
 15.6
 0.3
 4.16
 14.5
 0.3
 4.11
Loans and Leases 1
                                              
Commercial and Industrial1,251.5
 11.3
 3.58
 1,192.0
 9.8
 3.26
 1,255.4
 32.7
 3.49
 1,165.2
 30.3
 3.48
1,385.7
 14.9
 4.31
 1,307.6
 12.8
 3.92
 1,371.8
 30.2
 4.43
 1,294.3
 24.6
 3.83
Commercial Mortgage2,015.0
 19.6
 3.87
 1,730.2
 15.4
 3.55
 1,948.1
 55.5
 3.81
 1,702.1
 47.5
 3.73
2,386.3
 25.9
 4.35
 2,123.5
 21.9
 4.13
 2,348.6
 50.7
 4.36
 2,110.0
 42.4
 4.06
Construction241.0
 2.9
 4.73
 239.4
 2.6
 4.38
 246.7
 8.6
 4.66
 206.9
 6.9
 4.47
125.3
 1.7
 5.51
 183.4
 2.2
 4.82
 137.8
 3.6
 5.27
 186.4
 4.3
 4.63
Commercial Lease Financing204.7
 1.2
 2.30
 195.1
 1.2
 2.38
 207.1
 3.5
 2.25
 196.8
 3.7
 2.48
159.9
 1.0
 2.49
 179.4
 1.0
 2.24
 160.4
 1.9
 2.38
 179.5
 2.0
 2.22
Residential Mortgage3,333.3
 31.8
 3.82
 3,082.9
 30.4
 3.94
 3,269.7
 93.8
 3.82
 3,002.6
 90.0
 4.00
3,730.4
 36.0
 3.87
 3,526.9
 33.6
 3.81
 3,705.4
 71.5
 3.86
 3,502.6
 66.9
 3.82
Home Equity1,502.9
 13.8
 3.65
 1,254.4
 11.3
 3.59
 1,439.2
 38.9
 3.61
 1,176.5
 32.0
 3.63
1,694.9
 16.2
 3.83
 1,612.7
 15.1
 3.76
 1,692.5
 32.3
 3.85
 1,604.1
 29.7
 3.73
Automobile493.2
 5.9
 4.71
 426.2
 5.5
 5.15
 476.4
 17.5
 4.90
 407.0
 15.8
 5.17
688.5
 6.2
 3.62
 573.6
 5.7
 3.97
 678.4
 12.3
 3.64
 557.7
 11.3
 4.08
Other 2
410.4
 8.2
 7.98
 363.4
 7.0
 7.69
 389.0
 23.2
 7.98
 353.5
 20.4
 7.70
460.6
 8.4
 7.33
 455.8
 8.9
 7.86
 455.0
 16.3
 7.23
 449.1
 17.6
 7.88
Total Loans and Leases9,452.0
 94.7
 3.99
 8,483.6
 83.2
 3.91
 9,231.6
 273.7
 3.96
 8,210.6
 246.6
 4.01
10,631.6
 110.3
 4.16
 9,962.9
 101.2
 4.07
 10,549.9
 218.8
 4.17
 9,883.7
 198.8
 4.04
Other40.2
 0.2
 2.34
 39.9
 0.1
 1.66
 40.4
 0.7
 2.22
 38.8
 0.5
 1.83
35.0
 0.2
 2.40
 39.8
 0.4
 3.43
 35.2
 0.5
 3.00
 40.3
 0.7
 3.19
Total Earning Assets 3
16,257.4
 131.7
 3.23
 15,240.7
 116.9
 3.06
 15,946.0
 381.2
 3.19
 15,034.6
 349.7
 3.10
16,453.9
 149.2
 3.63
 16,062.5
 136.9
 3.41
 16,348.7
 295.8
 3.63
 16,098.7
 270.4
 3.37
Cash and Due From Banks151.2
     133.2
     134.8
     128.2
    241.6
     251.0
     241.2
     239.9
    
Other Assets563.6
     532.9
     555.4
     532.5
    785.2
     608.3
     769.1
     600.9
    
Total Assets$16,972.2
     $15,906.8
     $16,636.2
     $15,695.3
    $17,480.7
     $16,921.8
     $17,359.0
     $16,939.5
    
                                              
Interest-Bearing Liabilities             
  
  
                             
Interest-Bearing Deposits                                              
Demand$2,880.0
 $0.5
 0.07% $2,770.2
 $0.2
 0.03% $2,869.7
 $1.3
 0.06% $2,756.7
 $0.7
 0.03%$2,902.5
 $1.4
 0.19% $2,969.8
 $1.2
 0.16 % $2,921.1
 $2.8
 0.20% $2,974.0
 $1.9
 0.13%
Savings5,374.4
 1.8
 0.13
 5,208.3
 1.1
 0.09
 5,385.7
 4.7
 0.12
 5,177.0
 3.4
 0.09
6,002.0
 8.9
 0.60
 5,392.2
 3.1
 0.23
 5,882.1
 15.7
 0.54
 5,379.3
 5.3
 0.20
Time1,788.2
 4.4
 0.97
 1,272.6
 1.9
 0.59
 1,529.2
 9.4
 0.82
 1,232.1
 5.1
 0.55
1,866.6
 8.3
 1.79
 1,705.7
 5.2
 1.21
 1,785.4
 15.4
 1.74
 1,709.6
 9.8
 1.16
Total Interest-Bearing Deposits10,042.6
 6.7
 0.26
 9,251.1
 3.2
 0.14
 9,784.6
 15.4
 0.21
 9,165.8
 9.2
 0.13
10,771.1
 18.6
 0.69
 10,067.7
 9.5
 0.38
 10,588.6
 33.9
 0.65
 10,062.9
 17.0
 0.34
Short-Term Borrowings—
 —
 —
 8.7
 —
 0.13
 15.3
 0.1
 0.91
 7.9
 —
 0.14
82.3
 0.5
 2.46
 21.0
 0.1
 1.80
 56.8
 0.7
 2.47
 20.0
 0.2
 1.64
Securities Sold Under Agreements to Repurchase505.3
 4.7
 3.61
 556.5
 5.7
 4.02
 507.7
 14.9
 3.88
 582.0
 18.0
 4.06
504.3
 4.7
 3.63
 505.1
 4.6
 3.62
 504.3
 9.2
 3.63
 505.2
 9.2
 3.61
Other Debt267.9
 1.1
 1.66
 268.0
 1.1
 1.66
 267.9
 3.3
 1.66
 242.5
 3.1
 1.73
110.6
 0.7
 2.57
 235.7
 0.9
 1.56
 115.3
 1.5
 2.56
 246.3
 1.9
 1.55
Total Interest-Bearing Liabilities10,815.8
 12.5
 0.45
 10,084.3
 10.0
 0.39
 10,575.5
 33.7
 0.42
 9,998.2
 30.3
 0.40
11,468.3
 24.5
 0.85
 10,829.5
 15.1
 0.56
 11,265.0
 45.3
 0.81
 10,834.4
 28.3
 0.52
Net Interest Income  $119.2
     $106.9
     $347.5
     $319.4
    $124.7
     $121.8
     $250.5
     $242.1
  
Interest Rate Spread    2.78%     2.67%     2.77%     2.70%    2.78%     2.85 %     2.82%     2.85%
Net Interest Margin    2.92%     2.80%     2.91%     2.84%    3.04%     3.04 %     3.08%     3.02%
Noninterest-Bearing Demand Deposits4,684.9
     4,436.1
     4,617.1
     4,326.8
    4,391.7
     4,641.6
     4,479.0
     4,651.9
    
Other Liabilities248.6
     224.7
     241.7
     225.2
    350.5
     209.0
     346.2
     214.6
    
Shareholders’ Equity1,222.9
     1,161.7
     1,201.9
     1,145.1
    1,270.2
     1,241.7
     1,268.8
     1,238.6
    
Total Liabilities and Shareholders’ Equity$16,972.2
     $15,906.8
     $16,636.2
     $15,695.3
    $17,480.7
     $16,921.8
     $17,359.0
     $16,939.5
    
1 
Non-performing loans and leases are included in the respective average loan and lease balances.  Income, if any, on such loans and leases is recognized on a cash basis.
2 
Comprised of other consumer revolving credit, installment, and consumer lease financing.
3 
Interest income includes taxable-equivalent basis adjustments, based upon a federal statutory tax rate of 35%21%, of $3.0$0.6 million for both the three months endedSeptember 30, 2017 and 2016 and $9.0$1.6 million for the ninethree and six months ended SeptemberJune 30, 20172019 and 2016.of $1.3 million and $2.6 million for the three and six months endedJune 30, 2018, respectively.

Analysis of Change in Net Interest Income - Taxable-Equivalent BasisAnalysis of Change in Net Interest Income - Taxable-Equivalent Basis Table 4
Analysis of Change in Net Interest Income - Taxable-Equivalent Basis Table 4
Nine Months Ended September 30, 2017Six Months Ended June 30, 2019
Compared to September 30, 2016Compared to June 30, 2018
(dollars in millions)
Volume 1

 
Rate 1

 Total
Volume 1

 
Rate 1

 Total
Change in Interest Income: 
  
  
 
  
  
Funds Sold$(0.4) $1.6
 $1.2
$(0.1) $0.7
 $0.6
Investment Securities     
     
Available-for-Sale    

    

Taxable0.9
 2.8
 3.7
2.8
 5.1
 7.9
Non-Taxable(1.1) 0.5
 (0.6)(6.9) 2.0
 (4.9)
Held-to-Maturity    

    

Taxable(0.3) 0.5
 0.2
(2.1) 4.6
 2.5
Non-Taxable(0.1) (0.1) (0.2)(0.4) (0.1) (0.5)
Total Investment Securities(0.6) 3.7
 3.1
(6.6) 11.6
 5.0
Loans Held for Sale(0.2) 0.1
 (0.1)
Loans and Leases    

    

Commercial and Industrial2.3
 0.1
 2.4
1.5
 4.1
 5.6
Commercial Mortgage6.9
 1.1
 8.0
5.0
 3.3
 8.3
Construction1.4
 0.3
 1.7
(1.2) 0.5
 (0.7)
Commercial Lease Financing0.2
 (0.4) (0.2)(0.2) 0.1
 (0.1)
Residential Mortgage7.8
 (4.0) 3.8
3.9
 0.7
 4.6
Home Equity7.1
 (0.2) 6.9
1.7
 0.9
 2.6
Automobile2.6
 (0.9) 1.7
2.3
 (1.3) 1.0
Other 2
2.1
 0.7
 2.8
0.2
 (1.5) (1.3)
Total Loans and Leases30.4
 (3.3) 27.1
13.2
 6.8
 20.0
Other—
 0.2
 0.2
(0.1) (0.1) (0.2)
Total Change in Interest Income29.2
 2.3
 31.5
6.4
 19.0
 25.4
          
Change in Interest Expense:     
     
Interest-Bearing Deposits     
     
Demand0.1
 0.5
 0.6
—
 0.9
 0.9
Savings0.1
 1.2
 1.3
0.5
 9.9
 10.4
Time1.5
 2.8
 4.3
0.5
 5.1
 5.6
Total Interest-Bearing Deposits1.7
 4.5
 6.2
1.0
 15.9
 16.9
Short-Term Borrowings—
 0.1
 0.1
0.4
 0.1
 0.5
Securities Sold Under Agreements to Repurchase(2.3) (0.8) (3.1)
Other Debt0.3
 (0.1) 0.2
(1.3) 0.9
 (0.4)
Total Change in Interest Expense(0.3) 3.7
 3.4
0.1
 16.9
��17.0
    

    

Change in Net Interest Income$29.5
 $(1.4) $28.1
$6.3
 $2.1
 $8.4
1 
The change in interest income and expense not solely due to changes in volume or rate has been allocated on a pro-rata basis to the volume and rate columns.
2 
Comprised of other consumer revolving credit, installment, and consumer lease financing.


Net Interest Income
Net interest income is affected by the size and mix of our balance sheet components as well as the spread between interest earned on assets and interest paid on liabilities.  Net interest margin is defined as net interest income, on a taxable-equivalent basis, as a percentage of average earning assets.

Net interest income was $116.3$124.1 million for the thirdsecond quarter of 2017,2019, an increase of $12.4$3.6 million or 12%3% compared to the same period in 2016.2018. On a taxable-equivalent basis, net interest income was $119.2$124.7 million for the thirdsecond quarter of 2017,2019, an increase of $12.3$2.9 million or 12%2% compared to the same period in 2016.2018. Net interest income was $338.5$248.9 million for the first ninesix months of 2017,2019, an increase of $28.0$9.5 million or 9%4% compared to the same period in 2016.2018. On a taxable-equivalent basis, net interest income was $347.5$250.5 million for the first ninesix months of 2017,2019, an increase of $28.1$8.5 million or 9%4% compared to the same period in 2016.2018. This increase was primarily due to a higher level of earning assets, including growth in both our commercial and consumer lending portfolios, and higher net interest margin.portfolios. The higher level of earning assets was primarily funded by higher

deposit balances. Net interest margin was 2.92%3.04% in the second quarter of 2019, unchanged from the same period in 2018. We experienced higher yields in both our investment securities portfolio and loan portfolios, which were offset by higher rates paid on our interest-bearing deposits, a reflection of the higher short-term rate environment. Net interest margin was 3.08% for the third quarterfirst six months of 2017,2019, an increase of twelvesix basis points compared to the same period in 2016. Net interest margin was 2.91% for the first nine months of 2017, an increase of seven basis points compared to the same period in 2016. The higher interest margin in 2017 was2018 primarily due to our loans, which generally have higher yields than our investment securities, comprising a larger percentage of our earning assets compared to 2016.2018. In addition, yields increased for our commercial loans anddue to higher variable rates. Our investments portfolio. This increase wasportfolio yields also increased due to higher variable rates on our floating rate securities coupled with lower premium amortization. These increases were partially offset by an increase in rates offered on our deposit products.higher funding costs.

Yields on our earning assets increased by 1722 basis points in the thirdsecond quarter of 20172019, and 26 basis points in the first six months of 2019 compared to the same periodperiods in 20162018 primarily due to the aforementioned shift in the mix of our earning assets from investment securities to loans, which generally have higher yields. In addition, yields onYield increases in our construction loans and commercial and industrial loans increased by 32 basis pointswere primarily due to higher yields on floating rate loans. Yields on our commercial mortgageconstruction loans also increased by 3269 basis points primarily due to higher yields on floating rate loans. The commercial mortgage loan yield for the third quarter of 2016 included a reversal of $0.8 million for an interest recovery previously recorded in the second quarter of 2016.2019 and by 64 basis points in the first six months of 2019 compared to the same periods in 2018 primarily due to new loans with higher rates than the loans that were paid off or transferred to commercial mortgage upon completion. Yields on our commercial and industrial loans increased by 39 basis points in the second quarter of 2019 and by 60 basis points in the first six months of 2019 compared to the same periods in 2018 primarily due to an increase in interest recoveries in the current year and new loans with slightly higher rates. In addition, yields on our investment securities portfolio increased by 1433 basis points in the second quarter of 2019 and by 34 basis points in the first six months of 2019 compared to the same periods in 2018. Yields on our funds sold increased by 53 basis points in the second quarter of 2019 and by 73 basis points in the first six months of 2019 compared to the same periods in 2018 primarily due to the higher interestfederal fund rate environment and lower premium amortization.increases. These yield increases were partially offset by a 1253 basis point yield decrease in the second quarter of 2019 and by a 65 basis point decrease in the first six months of 2019 in our residential mortgage loanother loans portfolio primarily due to continued payoff activitythe completed sale of higher-rate mortgage loansour MyBankoh Rewards Credit Card portfolio on November 1, 2018, combined with a 35 basis point decrease in the second quarter of 2019 and the addition of lower-rate mortgage loans to our portfolio. Yields on our earning assets increased by ninea 44 basis points forpoint decrease in the first ninesix months of 20172019 in our automobile loans portfolio compared to the same periodperiods in 2016 primarily due to the aforementioned shift in the mix of our earning assets from investment securities to loans. In addition, yields on our commercial mortgage loan portfolio increased by eight basis points primarily due to higher year-over-year2018.

Interest rates on floating rate loans. Yields on our commercial and industrial loans remained relatively unchanged as higher yields on floating rate loans were largely offset by an additional $1.3 million of interest income in the first quarter of 2016 due to the recovery of a non-performing loan in Guam. Yields on our investment securities portfolio increased by seven basis points primarily due to the higher interest rate environment and lower premium amortization. Partially offsetting the year-to-date yield increase was an 18 basis point yield decrease in our residential mortgage loan portfolio, primarily due to continued payoff activity of higher-rate mortgage loans and the addition of lower-rate mortgage loans to our portfolio.

Rates paid on our interest-bearing liabilities increased by six29 basis points in both the thirdsecond quarter of 20172019 and by two basis points in the first ninesix months of 20172019 compared to the same periods in 2016. Interest2018. Increases to our funding costs were primarily due to higher rates paid on our timeinterest-bearing deposits, a reflection of the higher short-term rate environment coupled with a shift from non-interest-bearing demand deposits into interest-bearing savings deposits. The average balance of savings deposits increased by 38 basis points$609.8 million or 11% in the thirdsecond quarter of 20172019 and by 27 basis points$502.8 million or 9% for the first ninesix months of 20172019 compared to the same periods in 2016, a reflection of the higher interest rate environment. Rates paid on our repurchase agreements decreased2018. Other debt increased by 41101 basis points in the thirdsecond quarter of 20172019, and by 18101 basis points forin the first ninesix months of 20172019 compared to the same periods in 20162018. Other debt is comprised primarily due to repurchase agreements with private institutions totaling $75.0 million, which carried relatively higher rates, maturing during the second half of 2016. In addition, during the second quarter of 2017, we restructured three of our repurchase agreements with private institutions with an aggregate total of $200.0 million. These repurchase agreements were to mature in 2018 andFHLB advances. Our outstanding FHLB advances had a weighted-average interest rate of 3.94%.2.12% and 1.28% as of June 30, 2019 and June 30, 2018, respectively. The restructuring of the agreements extended the maturity dates to June 2022 and lowered theFHLB advances weighted-average interest rate increased primarily due to 2.70% effective June 2017.lower cost FHLB advances that matured during the time period combined with the addition of higher cost FHLB advances.


Average balances of our earning assets increased by $1.0 billion$391.4 million or 7%2% in the thirdsecond quarter of 20172019 and by $911.4$250.0 million or 6% for2% in the first ninesix months of 20172019 compared to the same periods in 20162018 primarily due to loan growth as the average balances of our loan and lease portfolio increased by $1.0 billion for both$668.7 million in the thirdsecond quarter of 20172019 and by $666.2 million in the first ninesix months of 20172019 compared to the same periods in 2016. The2018. Partially offsetting this increase in the average balance of our commercialloan and industriallease portfolio increased by $59.5was a $214.8 million decrease in the thirdaverage balance of investment securities in the second quarter of 20172019 and by $90.2a $399.6 million fordecrease in the first ninesix months of 20172019 compared to the same periods in 2016 primarily due to an increase in corporate demand for funding.2018. The average balance of our commercial mortgage portfolio increased by $284.8$262.8 million in the thirdsecond quarter of 20172019 and by $246.0$238.6 million forin the first ninesix months of 20172019 compared to the same periods in 20162018 as a result of increasedcontinued demand from new and existing customers as a result of a strongthe Hawaii economy.economy continues to be strong. The average balance ofin our residential mortgage portfolio increased by $250.4$203.5 million in the thirdsecond quarter of 20172019 and by $267.1$202.8 million forin the first ninesix months of 20172019 compared to the same periods in 20162018 primarily due to higher loan originations partially offset by an increase in loan origination and slowdown in payoff activity. The average balance in our automobile portfolio increased by $114.9 million in the second quarter of 2019 and by $120.7 million in the first six months of 2019 compared to the same periods in 2018 primarily due to competitive loan programs and steady loan production. The average balance of our home equity portfolio increased by $248.5$82.2 million in the thirdsecond quarter of 20172019 and by $262.7$88.4 million forin the first ninesix months of 20172019 compared to the same periods in 2016 due2018 as a result of slightly lower but consistent loan demand in large part to the continueda strong economy and increase in new loan originations. In addition, we experienced healthy lineHawaii economy. Additionally, utilization rates remained steady on existing home equity lines during 2017. In addition to the increase in the average balances of our loan and lease portfolio was a $96.4 million increase in the average balance of our investment securities portfolio in the third quarter of 2017. Average balances of our investment securities portfolio decreased by $9.7 million for the first ninesix months of 2017 compared to the same periods in 2016 primarily due to the shift in the mix of our earning assets from investment securities to loans.2019.

Average balances of our interest-bearing liabilities increased by $731.5$638.8 million or 7%6% in the thirdsecond quarter of 20172019 and by $577.3$430.6 million or 6%for4% in the first ninesix months of 20172019 compared to the same periods in 20162018 primarily due to growth in our time deposits, along with continued growth in our relationship checking and savings products. Average balances ofbalance in our interest-bearing demand accountscore deposit products increased by $109.8$542.5 million forin the thirdsecond quarter of 20172019 and by $113.1$449.9 million forin the first

nine six months of 20172019 compared to the same periods in 2016.2018. Average balances of our savings accounts increasedin other debt decreased by $166.0$125.1 million forin the thirdsecond quarter of 20172019 and by $208.7$131.0 million forin the first ninesix months of 20172019 compared to the same periods in 2016. Average balances of our time deposits increased by $515.6 million for the third quarter of 2017 and by $297.1 million for the first nine months of 2017 compared2018 primarily due to the same periods in 2016.maturing of FHLB advances.

Provision for Credit Losses


The provision for credit losses (the “Provision”) reflects our judgment of the expense or benefit necessary to achieve the appropriate amount of the Allowance.  We maintain the Allowance at levels we believe adequate to cover our estimate of probable credit losses as of the end of the reporting period.  The Allowance is determined through detailed quarterly analyses of the loan and lease portfolio.  The Allowance is based on our loss experience and changes in the economic environment, as well as an ongoing assessment of credit quality.  Additional factors that are considered in determining the amount of the Allowance are the level of net charge-offs, non-performing assets, risk-rating migration, as well as changes in our portfolio size and composition. We recorded a provision of $4.0 million in the thirdsecond quarter of 20172019 compared to a $2.5$3.5 million provision in the same period in 2016.2018. For the first ninesix months of 2017,2019 we recorded a provision of $12.7$7.0 million compared to a provision of $1.5$7.6 million forin the same period in 2016. The lower year-to-date 2016 provision was primarily due to the recovery in 2016 of a commercial and industrial loan previously charged off.2018. Our decision to record a provision is reflective of our evaluation of the adequacy of the Allowance. For further discussion on the Allowance, see “Corporate Risk Profile - Reserve for Credit Losses” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations.


Noninterest Income


Noninterest income decreasedincreased by $5.7$4.2 million or 12%10% in the thirdsecond quarter of 20172019 and by $7.3$3.8 million or 5%4% for the first ninesix months of 20172019 compared to the same periods in 2016.2018.


Table 5 presents the components of noninterest income.
Noninterest Income          Table 5
          Table 5
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands)2017
 2016
 Change
 2017
 2016
 Change
2019
 2018
 Change
 2019
 2018
 Change
Trust and Asset Management$11,050
 $11,008
 $42
 $34,325
 $34,971
 $(646)$11,385
 $11,356
 $29
 $22,146
 $22,537
 $(391)
Mortgage Banking3,237
 6,362
 (3,125) 10,356
 13,639
 (3,283)3,336
 2,179
 1,157
 5,623
 4,324
 1,299
Service Charges on Deposit Accounts8,188
 8,524
 (336) 24,522
 25,117
 (595)7,283
 6,865
 418
 14,647
 13,994
 653
Fees, Exchange, and Other Service Charges13,764
 14,023
 (259) 41,061
 41,445
 (384)14,252
 14,400
 (148) 28,460
 28,733
 (273)
Investment Securities Gains (Losses), Net(566) (328) (238) 11,047
 10,540
 507
(776) (1,702) 926
 (1,611) (2,368) 757
Annuity and Insurance1,429
 1,653
 (224) 5,585
 5,560
 25
1,806
 1,847
 (41) 4,384
 3,053
 1,331
Bank-Owned Life Insurance1,861
 1,911
 (50) 4,908
 5,010
 (102)1,779
 1,796
 (17) 3,489
 3,638
 (149)
Other Income3,447
 4,961
 (1,514) 11,758
 14,558
 (2,800)6,385
 4,557
 1,828
 11,991
 11,422
 569
Total Noninterest Income$42,410
 $48,114
 $(5,704) $143,562
 $150,840
 $(7,278)$45,450
 $41,298
 $4,152
 $89,129
 $85,333
 $3,796


Trust and asset management income is comprised of fees earned from the management and administration of trusts and other customer assets.  These fees are largely based upon the market value of the assets we manage and the fee rate charged to customers.  Total trust assets under administration were $9.0$10.3 billion and $9.3 billion as of SeptemberJune 30, 20172019 and 2016,2018, respectively.  Trust and asset management income remained relatively unchanged in the thirdsecond quarter of 20172019 compared to the same period in 2016.2018. Trust and asset management income decreased by $0.6$0.4 million or 2% for the first ninesix months of 20172019 compared to the same periodperiods in 2016. This decrease was primarily2018 due to a $0.9 million decrease in service fees, mainly the result of fees received from the sale of real estate in the second quarter of 2016, and a decrease in employee benefit trust fees of $0.2 million. This decrease was partially offset by a $0.5 million increase in agency fees due to an increasedecreases in market value, number of assets under management.accounts, and tax service fees.


Mortgage banking income is highly influenced by mortgage interest rates, the housing market, the amount of our loan sales, and our valuation of mortgage servicing rights.  Mortgage banking income decreasedincreased by $3.1$1.2 million or 49%53% in the thirdsecond quarter of 20172019 and by $3.3$1.3 million or 24%30% for the first ninesix months of 20172019 compared to the same periods in 2016. These decreases were2018. This increase was primarily due to lower loanincreased sales and reduced margins on those sales. The lower loan sales for the first nine months of 2017 were partially offset by a $2.1 million net valuation impairment to our mortgage servicing rights, recorded in 2016.conforming saleable loans from current production.

Service charges on deposit accounts decreasedincreased by $0.3$0.4 million or 4%6% in the thirdsecond quarter of 2017 and by $0.6 million or 2% for the first nine months of 20172019 compared to the same periodsperiod in 20162018. This increase was primarily due to a decrease$0.3 million increase in overdraft fees.

Fees, exchange, and other service Service charges are primarily comprised of debit and credit card income, fees from ATMs, merchant service activity, and other loan fees and service charges.  Fees, exchange, and other service charges decreasedon deposit accounts increased by $0.3$0.7 million or 2% in in the third quarter of 2017 and $0.4 million or 1%5% for the first ninesix months of 20172019 compared to the same periodsperiod in 20162018. This increase was primarily due to a $0.8 million increase in overdraft fees partially offset by a $0.3 million decrease in loanaccount analysis and credit cardother fees.


Net losses on sales of investmentInvestment securities gains (losses), net totaled $0.6$(0.8) million in the thirdsecond quarter of 20172019 compared to $0.3$(1.7) million during the same period in 2016.2018. The net losses in the third quarterssecond quarter of 2017 and 20162019 were due to quarterly fees paid to the counterparties of our prior Visa Class B share sale transactions. Net gains on salesIn June 2018, Visa announced a reduction of investment securities totaled $11.0the conversion ratio of its Class B shares from 1.6483 to 1.6298 effective June 28, 2018. As a result, the Company recorded a $1.0 million forliability in June 2018, which represents the first nine months of 2017 compared to $10.5 million during the same period in 2016. The net gain in 2017 was primarilyamount due to a $12.1 million gain on the salebuyers of 90,000our Visa Class B shares in July 2018. In addition, the firstnet losses in the second quarter of 2017. The net gain in 2016 was primarily due to an $11.2 million gain on2018 included the sale of 100,000 Visa Class B shares in the first quarter of 2016.aforementioned quarterly fees. We received these Class B shares in 2008 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 shares. This conversion will not occur until the settlement of certain litigation which is indemnified by Visa members such as the Company. Visa funded an escrow account from its initial public offering to settle these litigation claims. Should this escrow account be insufficient to cover these litigation claims, Visa is entitled to fund additional amounts to the escrow account by reducing each member bank's Class B conversion ratio to unrestricted Class A shares. Concurrent with each sale of Visa Class B shares, we 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 covered litigation, the remaining 90,91483,014 Visa Class B shares (149,854(135,296 Class A equivalent shares)equivalents) that we own are carried at a zero cost basis.


Annuity and insurance income remained relatively unchanged in the second quarter of 2019 compared to the same period in 2018. Annuity and insurance income increased by $1.3 million or 44% for the first six months of 2019 compared to the same period in 2018 primarily due to a one-time commission received related to insurance products offered through a third-party administrator.

Other noninterest income decreasedincreased by $1.5$1.8 million or 30%40% in the thirdsecond quarter of 20172019 compared to the same periodsperiod in 20162018 primarily due to $1.6a $1.2 million increase in fees received in the third quarter of 2016 related to our customer interest rate swap derivatives. Other noninterest income decreased by $2.8derivatives combined with a $0.4 million or 19% for the first nine months of 2017 compared to the same period in 2016. This decrease was primarily due to a $1.8 million decrease in fees for our customer interest rate swap derivatives, and a $1.5 million decreaseincrease in net gain on sale of leased assets. Other noninterest income increased by $0.6 million or 5% for the first six months of 2019 compared to the same period in 2018. This decreaseincrease was primarily due to a $2.3 million increase in fees related to our customer interest rate swap derivatives combined with a $0.9 million increase in net gain on sale of leased assets. These increases were partially offset by a $0.4 million increasedistribution received in profitthe first quarter of 2018 from foreign exchange contracts.a low-income housing investment sale totaling $2.8 million.



Noninterest Expense


Noninterest expense increased by $1.1 million or 1% in the third quarter of 2017 and by $4.4$1.9 million or 2% in the second quarter of 2019 and by $0.6 million or less than 1% for the first ninesix months of 20172019 compared to the same periods in 2016.2018.


Table 6 presents the components of noninterest expense.
Noninterest Expense          Table 6
          Table 6
Three Months Ended September 30, Nine Months Ended September 30,Three Months Ended June 30, Six Months Ended June 30,
(dollars in thousands)2017
 2016
 Change
 2017
 2016
 Change
2019
 2018
 Change
 2019
 2018
 Change
Salaries$31,224
 $29,401
 $1,823
 $91,202
 $87,339
 $3,863
$32,834
 $33,269
 $(435) $65,314
 $65,973
 $(659)
Incentive Compensation4,857
 5,743
 (886) 15,756
 17,625
 (1,869)5,464
 4,416
 1,048
 11,368
 9,594
 1,774
Share-Based Compensation1,962
 2,968
 (1,006) 7,144
 8,024
 (880)1,994
 2,423
 (429) 5,073
 4,504
 569
Commission Expense1,439
 2,051
 (612) 5,066
 5,559
 (493)1,704
 1,272
 432
 2,634
 2,226
 408
Retirement and Other Benefits4,279
 3,866
 413
 13,479
 12,912
 567
4,580
 4,178
 402
 9,687
 9,019
 668
Payroll Taxes2,353
 2,224
 129
 8,724
 8,089
 635
2,643
 2,568
 75
 6,890
 6,740
 150
Medical, Dental, and Life Insurance3,444
 3,366
 78
 9,859
 10,130
 (271)3,926
 3,820
 106
 8,391
 7,281
 1,110
Separation Expense2,068
 106
 1,962
 2,111
 850
 1,261
366
 202
 164
 740
 1,233
 (493)
Total Salaries and Benefits51,626
 49,725

1,901

153,341

150,528

2,813
53,511
 52,148

1,363

110,097

106,570

3,527
Net Occupancy7,727
 8,510
 (783) 24,026
 22,671
 1,355
8,579
 8,588
 (9) 16,173
 17,122
 (949)
Net Equipment5,417
 4,913
 504
 16,624
 15,387
 1,237
6,895
 5,845
 1,050
 13,728
 11,372
 2,356
Data Processing3,882
 3,620
 262
 11,173
 11,543
 (370)4,727
 4,563
 164
 9,253
 8,454
 799
Professional Fees3,044
 2,396
 648
 8,415
 7,082
 1,333
2,177
 2,546
 (369) 4,630
 5,319
 (689)
FDIC Insurance2,107
 2,104
 3
 6,413
 6,600
 (187)1,290
 2,182
 (892) 2,559
 4,339
 (1,780)
Other Expense:    
     
    
     
Delivery and Postage Services2,186
 2,441
 (255) 6,726
 7,325
 (599)1,914
 2,132
 (218) 3,992
 4,421
 (429)
Mileage Program Travel1,250
 1,189
 61
 3,585
 3,519
 66
1,178
 1,208
 (30) 2,358
 2,343
 15
Merchant Transaction and Card Processing Fees946
 1,064
 (118) 2,982
 3,321
 (339)1,344
 1,196
 148
 2,619
 2,524
 95
Advertising1,423
 1,559
 (136) 3,974
 4,436
 (462)1,179
 1,253
 (74) 2,706
 2,508
 198
Amortization of Solar Energy Partnership Investments848
 1,400
 (552) 2,544
 2,666
 (122)940
 916
 24
 1,880
 1,832
 48
Other8,142
 8,611
 (469) 25,552
 25,911
 (359)8,991
 8,214
 777
 15,787
 18,371
 (2,584)
Total Other Expense14,795
 16,264
 (1,469) 45,363
 47,178
 (1,815)15,546
 14,919
 627
 29,342
 31,999
 (2,657)
Total Noninterest Expense$88,598
 $87,532
 $1,066
 $265,355
 $260,989
 $4,366
$92,725
 $90,791
 $1,934
 $185,782
 $185,175
 $607


Total salaries and benefits expense increased by $1.9$1.4 million or 4%3% in the thirdsecond quarter of 20172019 compared to the same period in 20162018 primarily due to a $2.0$1.0 million increase in separation expense. In addition, salariesincentive compensation. Commission expense increased by $1.8$0.4 million primarily due to merit increases. Thisan increase was largelyin mortgage banking production volume as refinancing activity increased. These increases were partially offset by a $1.0$0.4 million decrease in share-based compensation andsalaries expense primarily due to a $0.9 million decreasehigher amount of salaries deferred in incentive compensation.the current year, the result of higher portfolio loan production compared to the prior year. Total salaries and benefits expense increased by $2.8$3.5 million or 2%3% for the first ninesix months of 20172019 compared to the same period in 2016. Salaries2018. Incentive compensation increased by $3.9$1.8 million. Medical, dental, and life insurance increased by $1.1 million primarily due to merit increases.an increase in group health plan costs. In addition, separation expenseshare-based compensation increased by $1.3 million.$0.6 million due to the value of restricted stock units increasing as a result of the Company’s higher share price and additional restricted stock grants being amortized. These increases were partially offset by a $1.9$0.8 million decrease in incentive compensation andsalaries primarily due to a $0.9higher amount of salaries deferred in the current year, the result of higher portfolio loan production compared to the prior year coupled with a $0.5 million decrease in share-based compensation.separation expense.


Net occupancy expense decreased by $0.8 million or 9%remained relatively unchanged in the thirdsecond quarter of 20172019 compared to the same period in 2016 primarily due to a $0.4 million gain on sale of real estate property on the island of Oahu during the third quarter of 2017. In addition, building operating expense2018. Net occupancy decreased by $0.4 million. Net occupancy expense increased by $1.4$0.9 million or 6% for the first ninesix months of 20172019 compared to the same periods in 2018 primarily due to a $1.0 million decrease in net rental expense.

Net equipment increased by $1.1 million or 18% in the second quarter of 2019 and by $2.4 million or 21% for the first six months of 2019 compared to the same period in 2016. This increase was primarily2018. These increases were due to a $2.4higher depreciation expense.

Data processing increased by $0.2 million decrease in net gain on sale of real estate property ($0.4 million during the first nine months of 2017 compared to $2.8 millionor 4% in the same period in 2016). The increase in net occupancy expense was partially offsetsecond quarter of 2019 and by a $0.7 million decrease in net rental expense primarily due to an increase in sublease rental income, and a $0.4 million decrease in building operating expense.

Net equipment expense increased by $0.5$0.8 million or 10% in the third quarter of 2017 and by $1.2 million or 8%9% for the first ninesix months of 2017 compared to the same periods in 2016 primarily due to an increase in software license fees and maintenance.

Professional fees increased by $0.6 million or 27% in the third quarter of 20172019 compared to the same period in 2016 primarily2018 due to aongoing information technology projects.


Professional fees decreased by $0.4 million increaseor 14% in legal feesthe second quarter of 2019 and a $0.3 million increase in professional services primarily in our mortgage division. Professional fees increased by $1.3$0.7 million or 19%13% for the first ninesix months of 20172019 compared to the same period in 2016. This increase was2018 primarily due to a $0.8 million increasedecrease in in legal fees and a $0.6 million increase in professional services primarily in our mortgage division.


Total other expenseFDIC insurance decreased by $1.5$0.9 million or 9%41% in the thirdsecond quarter of 20172019 and by $1.8 million or 41% for the first six months of 2019 compared to the same period in 2016 primarily2018 due to the end of an FDIC surcharge in September 2018 and a decrease in FDIC assessment rates.

Total other expense increased by $0.6 million reductionor 4% in solar energy tax credit partnerships amortization expense. In addition, we experienced decreasesthe second quarter of 2019 compared to the same period in delivery2018 due to increases in operating losses, which include losses as a result of bank error, fraud, items processing, or theft, ($0.9 million) and postage serviceseducation and recruitment ($0.3 million) and insurance. These items were partially offset by a $0.9 million decrease in credit card expense ($0.2 million).due to the completed sale of our MyBankoh Rewards Credit Card portfolio on November 1, 2018. Total other expense decreased by $1.8$2.7 million or 4%8% for the first ninesix months of 20172019 compared to the same periods in 2016 primarily2018 due to decreasesa $2.0 million legal reserve recorded in deliverythe first quarter of 2018 and postage servicesa $1.7 million decrease in credit card expense due to the aforementioned sale of the MyBankoh Rewards Credit Card portfolio. These items were partially offset by an increase in operating losses ($0.60.7 million), advertising expense and education and recruitment ($0.50.4 million), and merchant transaction and card processing fees ($0.3 million).


Provision for Income Taxes


Table 7 presents our provision for income taxes and effective tax rates.
Provision for Income Taxes and Effective Tax Rates      Table 7
      Table 7
Three Months Ended
September 30,		 Nine Months Ended
September 30,		Three Months Ended
June 30,		 Six Months Ended
June 30,
(dollars in thousands)2017
 2016
 2017
 2016
2019
 2018
 2019
 2018
Provision for Income Taxes$20,248
 $18,501
 $62,306
 $60,889
$15,903
 $12,785
 $29,563
 $23,227
Effective Tax Rates30.62% 29.84% 30.54% 30.62%21.84% 18.94% 20.35% 17.60%


The effective tax rate for the thirdsecond quarter of 20172019 was 30.62%21.84%, up slightly from 29.84%18.94% for the same period in 2016.2018. The higher effective tax rate in the thirdsecond quarter of 20172019 was primarily due to a reduced tax benefit from municipal bonds, which were sold as part of a portfolio repositioning and higher pretax book income compared to a fixed amount of tax credits. The tax rate in the second quarter of 2018 was also favorably impacted by a $0.5 million tax benefit from an early buyout of a leveraged lease.


The effective tax rate for the first ninesix months of 20172019 was 30.54%20.35%, down slightlyup from 30.62%17.60% for the same period in 2016.2018. The higher effective tax rate for the first ninesix months of 20172019 compared to 2018 was favorably impacted byprimarily due to a $2.5$2.0 million basis adjustment to the company’s low income housing investments in the first quarter of 2018 and the aforementioned reduced tax benefit from the exercise of stock options and the vesting of restricted stock, while the effective tax rate formunicipal bonds in the first nine monthshalf of 2016 was favorably impacted by $1.9 million in releases of federal and state tax reserves.2019.



Analysis of Statements of Condition


Investment Securities


The carrying value of our investment securities portfolio was $6.3$5.6 billion as of SeptemberJune 30, 2017, an increase of $264.2 million or 4% compared to2019 and $5.5 billion at December 31, 2016.2018. As of SeptemberJune 30, 2017,2019, our investment securities portfolio was comprised of securities with an average base duration of approximately 3.053.2 years.


We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and the level of interest rate risk to which we are exposed.  These evaluations may cause us to change the level of funds we deploy into investment securities, change the composition of our investment securities portfolio, and change the proportion of investments made into the available-for-sale and held-to-maturity investment categories. On June 10, 2019, prepayable debt securities with a carrying value of $1.0 billion and a net unrealized gain of $3.1 million were transferred from held-to-maturity to available-for-sale. The reclassified securities consisted of mortgage-backed securities issued by government agencies and U.S. government-sponsored enterprises, municipal debt securities, and corporate debt securities. See Note 1 to the Consolidated Financial Statements for more information.


During the first ninesix months of 2017,2019 we primarily increasedreduced our holdingspositions in municipal debt securities and certain mortgage-backed securities issued by Ginnie Mae and Fannie Mae. In addition, we also increased our holdings in Small Business Administration securities, while decreasing our holdings in U.S. Treasury securities.as part of a portfolio repositioning.  Ginnie Mae mortgage-backed securities continue to be ourthe largest concentration in our portfolio. As of SeptemberJune 30, 2017,2019, our portfolio of Ginnie Mae mortgage-backed securities was primarily comprised of securities issued in 2008 or later. As of SeptemberJune 30, 2017,2019, these mortgage-backed securities were all AAA-rated, with a low probability of a change in their credit ratings in the near future. As of SeptemberJune 30, 2017,2019, our available-for-sale investment securities portfolio was comprised of securities with an average base duration of approximately 2.212.8 years.


Gross unrealized gains in our investment securities portfolio were $60.1$49.8 million as of SeptemberJune 30, 20172019 and $53.8$21.2 million as of December 31, 2016.2018.  Gross unrealized losses on our temporarily impaired investment securities were $45.2$24.1 million as of SeptemberJune 30, 20172019 and $57.2$103.5 million as of December 31, 2016.2018. The lower unrealized losses were primarily caused by the decrease in interest rates during the first six months of 2019. The gross unrealized loss positions were primarily related to mortgage-backed securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, and corporate debt securities.Mac. See Note 23 to the Consolidated Financial Statements for more information.


As of SeptemberJune 30, 2017,2019, included in our investment securities portfolio were debt securities issued by political subdivisions within the State of Hawaii of $510.3$127.8 million, representing 57%99% of the total fair value of the Company’s municipal debt securities. Of the entire Hawaii municipal bond portfolio, 95%80% were credit-rated Aa2 or better by Moody’s whileMoody’s. Most of the remaining Hawaii municipal bonds were credit-rated A2A1 or better by at least one nationally recognized statistical rating organization. Approximately 78%75% of our Hawaii municipal bond holdings were general obligation issuances. As of September 30, 2017, there were no other holdings of municipal debt securities that were issued by a single state or political subdivision which comprised more than 10% of the total fair value of our municipal debt securities.



Loans and Leases


Table 8 presents the composition of our loan and lease portfolio by major categories.

Loan and Lease Portfolio BalancesLoan and Lease Portfolio Balances Table 8
Loan and Lease Portfolio Balances Table 8
(dollars in thousands)September 30,
2017
 December 31,
2016
June 30,
2019
 December 31,
2018
Commercial 
  
 
  
Commercial and Industrial$1,252,238
 $1,249,791
$1,408,729
 $1,331,149
Commercial Mortgage2,050,998
 1,889,551
2,411,289
 2,302,356
Construction232,487
 270,018
119,228
 170,061
Lease Financing204,240
 208,332
163,070
 176,226
Total Commercial3,739,963
 3,617,692
4,102,316
 3,979,792
Consumer 
  
 
  
Residential Mortgage3,366,634
 3,163,073
3,785,006
 3,673,796
Home Equity1,528,353
 1,334,163
1,694,577
 1,681,442
Automobile506,102
 454,333
703,523
 658,133
Other 1
432,904
 380,524
473,707
 455,611
Total Consumer5,833,993
 5,332,093
6,656,813
 6,468,982
Total Loans and Leases$9,573,956
 $8,949,785
$10,759,129
 $10,448,774
1 
Comprised of other revolving credit, installment, and lease financing.


Total loans and leases as of SeptemberJune 30, 20172019 increased by $624.2$310.4 million or 7%3% from December 31, 2016 primarily2018 due to growth in many of our commercial and consumer lending portfolio.loan and lease portfolios.


Commercial loans and leases as of SeptemberJune 30, 20172019 increased by $122.3$122.5 million or 3% from December 31, 2016. Commercial and industrial loans increased by $2.4 million or less than 1% from December 31, 2016.2018.  Commercial mortgage loans increased by $161.4$108.9 million or 9%5% from December 31, 20162018 primarily due to continued demand from new and existing customers as the Hawaii economy continuescontinued to be strong coupled with the transfer of constructionstrong. Commercial and industrial loans into this loan portfolio upon project completion.increased by $77.6 million or 6% from December 31, 2018. Construction loans decreased by $37.5$50.8 million or 14%30% from December 31, 20162018 primarily due to the aforementioned construction loans transferred to the commercial mortgage loan portfolio, as well aspaydowns and successful completion of construction projects such as condominiums and low-income housing, partially offset by increased activity in our portfolio. Lease financing decreased by $4.1$13.2 million or 2%7% from December 31, 20162018 primarily due to higher payoff activitya lessee exercising its early buy-out option on equipment leases.a leveraged lease in the first quarter of 2019.


Consumer loans and leases as of SeptemberJune 30, 20172019 increased by $501.9$187.8 million or 9%3% from December 31, 2016.2018.  Residential mortgage loans increased by $203.6$111.2 million or 6%3% from December 31, 20162018, primarily due to higher loan originations, partially offset by an increase in loan origination and slowdown in payoff activity. Home equity lines and loans increased by $194.2 million or 15% from December 31, 2016 due to increased demand for new loan originations as a result of a strong Hawaii economy. In addition, we continued to experience steady line utilization during 2017. Automobile loans increased by $51.8$45.4 million or 11%7% from December 31, 20162018 primarily driven by revised pricing and focus on improving dealer relationships.competitive loan programs. Other consumer loans increased by $52.4$18.1 million or 14%4% from December 31, 2016,2018, primarily due to growth in our automobile leasinginstallment loans. Home equity lines and installment loans.loans rose by $13.1 million or 1% from December 31, 2018 as a result of slightly lower but consistent loan demand in a strong Hawaii economy. Additionally, utilization rates remained steady on existing home equity lines during 2019.



Table 9 presents the composition of our loan and lease portfolio by geographic area and by major categories.
Geographic Distribution of Loan and Lease PortfolioGeographic Distribution of Loan and Lease Portfolio Table 9
Geographic Distribution of Loan and Lease Portfolio Table 9
(dollars in thousands)Hawaii
 
U.S. Mainland 1

 Guam
 Other Pacific Islands
 
Foreign 2 

 Total
Hawaii
 
U.S. Mainland 1

 Guam
 Other Pacific Islands
 
Foreign 2 

 Total
September 30, 2017 
  
  
  
  
  
June 30, 2019 
  
  
  
  
  
Commercial 
  
  
  
  
  
 
  
  
  
  
  
Commercial and Industrial$1,095,107
 $106,459
 $49,343
 $730
 $599
 $1,252,238
$1,211,376
 $103,948
 $85,410
 $7,422
 $573
 $1,408,729
Commercial Mortgage1,786,030
 57,733
 207,235
 —
 —
 2,050,998
2,048,183
 119,196
 243,439
 471
 —
 2,411,289
Construction218,263
 —
 1,372
 12,852
 —
 232,487
119,228
 —
 —
 —
 —
 119,228
Lease Financing54,520
 145,416
 1,152
 —
 3,152
 204,240
67,081
 92,311
 679
 —
 2,999
 163,070
Total Commercial3,153,920
 309,608
 259,102
 13,582
 3,751
 3,739,963
3,445,868
 315,455
 329,528
 7,893
 3,572
 4,102,316
Consumer 
  
  
  
  
  
 
  
  
  
  
  
Residential Mortgage3,279,499
 —
 85,284
 1,851
 —
 3,366,634
3,710,065
 —
 73,662
 1,279
 —
 3,785,006
Home Equity1,491,254
 1,141
 34,713
 1,245
 —
 1,528,353
1,655,202
 133
 38,370
 872
 —
 1,694,577
Automobile406,713
 —
 95,822
 3,567
 —
 506,102
547,518
 —
 139,633
 16,372
 —
 703,523
Other 3
355,835
 —
 46,515
 30,554
 —
 432,904
387,407
 —
 57,696
 28,604
 —
 473,707
Total Consumer5,533,301
 1,141
 262,334
 37,217
 —
 5,833,993
6,300,192
 133
 309,361
 47,127
 —
 6,656,813
Total Loans and Leases$8,687,221
 $310,749
 $521,436
 $50,799
 $3,751
 $9,573,956
$9,746,060
 $315,588
 $638,889
 $55,020
 $3,572
 $10,759,129
                      
December 31, 2016 
  
  
  
  
  
December 31, 2018 
  
  
  
  
  
Commercial 
  
  
  
  
  
 
  
  
  
  
  
Commercial and Industrial$1,076,742
 $105,474
 $66,573
 $639
 $363
 $1,249,791
$1,142,172
 $100,786
 $86,763
 $1,277
 $151
 $1,331,149
Commercial Mortgage1,700,162
 31,003
 158,386
 —
 —
 1,889,551
1,926,172
 115,209
 260,501
 474
 —
 2,302,356
Construction262,558
 —
 1,196
 6,264
 —
 270,018
170,061
 —
 —
 —
 —
 170,061
Lease Financing56,752
 147,092
 1,309
 —
 3,179
 208,332
61,813
 109,933
 786
 —
 3,694
 176,226
Total Commercial3,096,214
 283,569
 227,464
 6,903
 3,542
 3,617,692
3,300,218
 325,928
 348,050
 1,751
 3,845
 3,979,792
Consumer 
  
  
  
  
  
 
  
  
  
  
  
Residential Mortgage3,067,079
 —
 93,764
 2,230
 —
 3,163,073
3,596,908
 —
 75,373
 1,515
 —
 3,673,796
Home Equity1,296,976
 1,776
 34,090
 1,321
 —
 1,334,163
1,643,529
 161
 36,571
 1,181
 —
 1,681,442
Automobile360,759
 13
 89,617
 3,944
 —
 454,333
513,836
 —
 131,967
 12,330
 —
 658,133
Other 3
303,372
 —
 40,293
 36,859
 —
 380,524
372,767
 —
 53,992
 28,852
 —
 455,611
Total Consumer5,028,186
 1,789
 257,764
 44,354
 —
 5,332,093
6,127,040
 161
 297,903
 43,878
 —
 6,468,982
Total Loans and Leases$8,124,400
 $285,358
 $485,228
 $51,257
 $3,542
 $8,949,785
$9,427,258
 $326,089
 $645,953
 $45,629
 $3,845
 $10,448,774
1 
For secured loans and leases, classification as U.S. Mainland is made based on where the collateral is located.  For unsecured loans and leases, classification as U.S. Mainland is made based on the location where the majority of the borrower’s business operations are conducted.
2 
Loans and leases classified as Foreign represent those which are recorded in the Company’s international business units.
3 
Comprised of other revolving credit, installment, and lease financing.


Our commercial and consumer lending activities are concentrated primarily in Hawaii and the Pacific Islands.  Our commercial loan and lease portfolio to borrowers based on the U.S. Mainland includes leveraged lease financing and participation in Shared National Credits.  Our consumer loan and lease portfolio includes limited lending activities on the U.S. Mainland.


Our Hawaii loan and lease portfolio increased by $562.8$318.8 million or 7%3% from December 31, 2016,2018, reflective of a healthy Hawaii economy.



Other Assets


Table 10 presents the major components of other assets.
Other Assets 
 Table 10
 
 Table 10
(dollars in thousands)September 30,
2017
 December 31,
2016
June 30,
2019
 December 31,
2018
Federal Home Loan Bank and Federal Reserve Bank Stock$40,645
 $40,063
$34,970
 $35,858
Derivative Financial Instruments11,586
 13,731
27,869
 14,604
Low-Income Housing and Other Equity Investments83,266
 78,900
78,866
 85,860
Deferred Compensation Plan Assets28,064
 21,952
36,941
 31,871
Prepaid Expenses9,336
 7,355
12,119
 8,533
Accounts Receivable31,382
 12,584
18,496
 18,996
Other29,955
 20,123
38,983
 35,160
Total Other Assets$234,234
 $194,708
$248,244
 $230,882


OtherTotal other assets increased by $39.5$17.4 million or 20%8% from December 31, 2016.2018. The increase was primarily due to a $20.0$13.3 million increase in receivablesderivative financial instruments, which was primarily relateddue to a matured security. Also contributingfair value increases of our interest rate swap agreement assets, which are impacted by prevailing interest rates. In addition, deferred compensation plan assets increased $5.1 million primarily due to thean increase in other assetsthe executive deferred compensation plan. These increases were higher balances relatedpartially offset by a $7.0 million decrease in low-income housing and solar energy partnership investments due to settlement timing of merchant services ($3.7 million) and ATM transactions ($2.6 million).amortization.


Deposits


Table 11 presents the composition of our deposits by major customer categories.
Deposits 
 Table 11
 
 Table 11
(dollars in thousands)September 30,
2017
 December 31,
2016
June 30,
2019
 December 31,
2018
Consumer$7,303,546
 $6,997,482
$7,880,284
 $7,726,731
Commercial6,091,800
 6,110,189
6,178,984
 6,098,186
Public and Other1,652,814
 1,212,569
1,429,553
 1,202,325
Total Deposits$15,048,160
 $14,320,240
$15,488,821
 $15,027,242


Total deposits were $15.0$15.5 billion as of SeptemberJune 30, 2017,2019, an increase of $727.9$461.6 million or 5%3% from December 31, 2016.2018. This increase was primarily due to a $440.2$227.2 million increase in public and other deposits mainly the result of a $563.5 milliondue to an increase in public demand deposits and time deposits which was offset by a decrease in core deposits of $123.3 million.$124.5 million and $102.7 million, respectively. In addition, consumer deposits increased by $306.1$153.6 million primarily due to an increase in time and core deposits and time deposits of $205.5$95.7 million and $100.6$57.9 million, respectively. Also, commercial deposits increased by $80.8 million primarily due to a $101.7 million increase in core deposits offset by a $20.9 million decrease in time deposits.


Table 12 presents the composition of our savings deposits.
Savings Deposits 
 Table 12
 
 Table 12
(dollars in thousands)September 30,
2017
 December 31,
2016
June 30,
2019
 December 31,
2018
Money Market$1,832,084
 $1,947,775
$2,345,970
 $1,973,979
Regular Savings3,531,782
 3,447,924
3,658,558
 3,565,220
Total Savings Deposits$5,363,866
 $5,395,699
$6,004,528
 $5,539,199



Securities Sold Under Agreements to Repurchase


Table 13 presents the composition of our securities sold under agreements to repurchase.
Securities Sold Under Agreements to RepurchaseSecurities Sold Under Agreements to Repurchase Table 13
Securities Sold Under Agreements to Repurchase Table 13
(dollars in thousands)September 30,
2017
 December 31,
2016
June 30,
2019
 December 31,
2018
Private Institutions$500,000
 $500,000
$500,000
 $500,000
Government Entities5,293
 23,378
4,299
 4,296
Total Securities Sold Under Agreements to Repurchase$505,293
 $523,378
$504,299
 $504,296


Securities sold under agreements to repurchase was $504.3 million as of SeptemberJune 30, 2017 decreased by $18.1 million or 3% from2019 and December 31, 2016. This decrease was primarily due to repurchase agreements maturing in the first quarter of 2017.2018. As of SeptemberJune 30, 2017,2019, the weighted-average maturity was 166143 days for our repurchase agreements with government entities and 3.92.1 years for our repurchase agreements with private institutions. Some of our repurchase agreements with private institutions may be terminated at earlier specified dates by the private institution or in some cases by either the private institution or the Company. If all such agreements were to terminate at the earliest possible date, the weighted-average maturity for our repurchase agreements with private institutions would decrease to 2.81.9 years.  As of SeptemberJune 30, 2017,2019, the weighted-average interest rate for outstanding agreements with government entities and private institutions was 0.54%1.61% and 3.64%, respectively, with all rates being fixed. Each of our repurchase agreements is accounted for as a collateralized financing arrangement (i.e., a secured borrowing) and not as a sale and subsequent repurchase of securities. 

In the second quarter of 2017, we restructured three of our repurchase agreements with private institutions with an aggregate total of $200.0 million. These repurchase agreements were to mature in 2018 and had a weighted-average interest rate of 3.94%. The restructuring of the agreements extended the maturity dates to June 2022 and lowered the weighted-average interest rate to 2.70% effective June 2017.


Other Debt


Table 14 presents the composition of our other debt.
Other Debt  Table 14
  Table 14
(dollars in thousands)September 30,
2017
 December 31,
2016
June 30,
2019
 December 31,
2018
Federal Home Loan Bank Advances$250,000
 $250,000
$100,000
 $125,000
Non-Recourse Debt7,153
 7,153
Capital Lease Obligations10,734
 10,785
10,605
 10,643
Total$267,887
 $267,938
$110,605
 $135,643


Other debt was $267.9$110.6 million as of SeptemberJune 30, 2017, unchanged2019, a decrease of $25.0 million or 18% from December 31, 2016.2018. This decrease was primarily due to a $25.0 million FHLB advance which matured during the first quarter of 2019. As of SeptemberJune 30, 2017,2019, our FHLB advances had a weighted-average interest rate of 1.28%2.12% with maturity dates ranging from 20182019 to 2020. These advances were primarily for asset/liability management purposes. As of SeptemberJune 30, 2017,2019, our remaining unused line of credit with the FHLB was $2.0$2.3 billion.



Analysis of Business Segments


Our business segments are defined as Retail Banking, Commercial Banking, Investment Services and Private Banking, and Treasury and Other.


Table 15 summarizes net income from our business segments.  Additional information about segment performance is presented in Note 910 to the Consolidated Financial Statements.
Business Segment Net Income      Table 15
      Table 15
Three Months Ended
September 30,		 Nine Months Ended
September 30,		Three Months Ended
June 30,		 Six Months Ended
June 30,
(dollars in thousands)2017
 2016
 2017
 2016
2019
 2018
 2019
 2018
Retail Banking$21,488
 $20,738
 $62,243
 $54,398
$25,481
 $22,424
 $49,998
 $41,441
Commercial Banking19,998
 18,236
��57,957
 58,363
23,611
 23,118
 49,559
 44,653
Investment Services and Private Banking3,776
 3,225
 11,591
 10,951
6,075
 6,533
 10,903
 11,989
Total45,262
 42,199

131,791

123,712
55,167
 52,075

110,460

98,083
Treasury and Other619
 1,294
 9,928
 14,236
1,752
 2,643
 5,258
 10,675
Consolidated Total$45,881
 $43,493

$141,719

$137,948
$56,919
 $54,718

$115,718

$108,758


Retail Banking


Net income increased by $0.8$3.1 million or 4%14% in the thirdsecond quarter of 20172019 compared to the same period in 20162018 primarily due to an increaseincreases in net interest income.income and noninterest income, and a decrease in the Provision. This was partially offset by an increase in the Provision and a decrease in noninterest income. The increase in net interest income was primarily due to higher average balances in both the lending and deposit portfolios as well as higher earnings credits on the segment’s deposit portfolio. The increase in the Provision was primarily due to higher net charge-offs in our installment loan, mortgage loan, credit card, and auto loan portfolios, partially offset by lower net charge-offs in our home equity loan and personal credit line portfolios. The decrease in noninterest income was primarily due to lower mortgage loan sales and reduced margins on those sales.

Net income increased by $7.8 million or 14% in the first nine months of 2017 compared to the same period in 2016 primarily due to an increase in net interest income. This was partially offset by an increase in the Provision and a decrease in noninterest income. The increase in net interest income was primarily due to higher average balances in both the lending and deposit portfolios as well as higher earnings credits on the segment’s deposit portfolio. The increase in the Provision was primarily due to higher net charge-offs in our installment loan, credit card, auto loan, and mortgage loan portfolios, partially offset by lower net charge-offs in our home equity loan and personal credit line portfolios. The decrease in noninterest income is primarily due to lower mortgage loan sales and reduced margins on those sales, partially offset by a $2.1 million net valuation impairment to our mortgage servicing rights, recorded in 2016.

Commercial Banking

Net income increased by $1.8 million or 10% in the third quarter of 2017 compared to the same period in 2016 primarily due to an increase in net interest income, partially offset by a decrease in noninterest income and an increase in noninterest expense. The increase in net interest income was primarily due to higher average balances in both the lending and deposit portfolios as well as higher earnings credits on the segment’s deposit portfolio and higher average balances in the segment’s loan portfolio. This was partially offset by lower average rates in the segment’s loan portfolio. The decreaseincrease in noninterest income was primarily due to lower feeshigher mortgage banking income and higher overdraft fees. Mortgage banking income increased primarily due to increased sales of conforming saleable loans from current production. The decrease in the Provision was primarily related to lower net charge-offs due to the sale of our customer interest rate swap derivatives and toMyBankoh Rewards Credit Card portfolio, as well as lower non-recurringnet charge-offs in our small business portfolio. This was partially offset by higher net charge-offs in our installment loan fees.portfolio. The increase in noninterest expense was primarily due to higher allocated expenses.administrative, technology, and collections expense. This was partially offset by lower salaries expense and lower credit card expenses related to the aforementioned sale of our MyBankoh Rewards Credit Card portfolio. The provision for income taxes increased due to higher pretax book income.


Net income decreasedincreased by $0.4$8.6 million or 1% for21% in the first nine monthshalf of 20172019 compared to the same period in 20162018 primarily due to increases in noninterest income and net interest income, and decreases in the Provision and noninterest expense. The increase in noninterest income was primarily due to due to a one-time commission received related to insurance products offered through a third-party administrator, as well as increases in mortgage banking income and overdraft fees. Mortgage banking income increased primarily due to increased sales of conforming saleable loans from current production. This was partially offset by lower credit card income related to the sale of our MyBankoh Rewards Credit Card portfolio. The increase in net interest income was primarily due to higher earnings credits on the segment’s deposit portfolio and higher average balances in the segment’s loan portfolio. This was partially offset by lower average rates in the segment’s loan portfolio. The decrease in the Provision was primarily related to lower net charge-offs due to the aforementioned sale of our MyBankoh Rewards Credit Card portfolio, as well as lower net charge-offs in our auto loan, small business loan, and residential loan portfolios. This was partially offset by higher net charge-offs in our installment loan portfolio. The decrease in noninterest expense was primarily related to a $2.0 million increase in legal reserves recorded in the first quarter of 2018, lower salaries expense and lower credit card expenses related to a decreasethe aforementioned sale of our MyBankoh Rewards Credit Card portfolio. This was partially offset by higher allocated administrative, technology, and operations expense. The provision for income taxes increased due to higher pretax book income.


Commercial Banking

Net income increased by $0.5 million or 2% in the second quarter of 2019 compared to the same period in 2018 primarily due to increases in net interest income and noninterest income. This was partially offset by an increase in net interest income.noninterest expense and provision for taxes. The increase in the Provisionnet interest income was primarily due to higher earnings credits on the recoverysegment’s deposit portfolio and growth in 2016 of a commercial and industrialthe segment’s loan previously charged offportfolio. The increase in noninterest income was mainly due to higher fees related to one commercial clientour customer interest rate swap derivative program. The increase in Guamprovision for income taxes was primarily due to higher pretax book income coupled with a higher effective tax rate in the firstsecond quarter of 2016.2019 as compared to the same period in 2018 due to second quarter 2018 tax rate offset by a tax benefit from an early buyout of leveraged leases. The increase in noninterest expense was primarily due to higher allocated expenses, largely attributed to the gain on sale of real estate property in Guam in the first quarter of 2016. The decrease in noninterest income was primarily due to lower net gains on sale of equipment leases, lower fees related to our customer interest rate swap derivative program, and to lower non-recurring loan fees. Partially offsetting the decrease in net income was an increase in net interest income primarily due to higher average balances in both the lending and deposit portfolios.other charge-offs expenses.



Investment Services and Private Banking


Net income increased by $0.6$4.9 million or 17% in11% for the third quarterfirst six months of 20172019 compared to the same period in 20162018 primarily due to an increase in net interest income partially offset by an increase inand noninterest expenses. The increase in net interest incomeincome. This was primarily due to higher volume resulting from the transfer of deposits from the Retail banking segment and slightly higher earnings credit on the segment’s deposit portfolio.  The increase in noninterest expense was primarily due to higher salaries expense. 

Net income increased by $0.6 million or 6% for the first nine months of 2017 compared to the same period in 2016 primarily due to an increase in net interest income, partially offset by an increase in noninterest expense. The increase in net interest income was primarily due to growth in the segment’s loan portfolio, higher earnings credits on the segment’s deposit portfolio. The increase in noninterest income was mainly due to higher fees related to our customer interest rate swap derivative program. The increase in noninterest expense was primarily due to higher allocated and operating expenses.

Investment Services and Private Banking

Net income decreased by $0.5 million or 7% in the second quarter of 2019 compared to the same period in 2018 primarily due to a decrease in net interest income and an increase in noninterest expense. This was partially offset by higher noninterest income.  The decrease in net interest income was primarily driven by the transfer of deposits from the Retail Banking segment and growth oflower earnings credits on the segment’s deposit portfolio. The increase in noninterest expense was primarily due todriven by higher salariesallocated expenses.  The increase in noninterest revenue was primarily driven by shareholder servicing fees and benefits expense and an operational recovery in the second quarter of 2016.investment advisory fees. 

Treasury and Other


Net income decreased by $0.7$1.1 million or 52%9% in the third quarterfirst six months of 20172019 compared to the same period in 2016 primarily due to an increase in noninterest expense and the Provision, partially offset by an increase in net interest income. The increase in noninterest expense was due to higher separation expenses. The Provision in this business segment represents the residual provision for credit losses to arrive at the total Provision for the Company. The increase in net interest income was primarily due to an increase in funding income related to lending activities and an increase in interest income related to investment securities, partially offset by higher deposit funding costs. 

Net income decreased by $4.3 million or 30% for the first nine months of 2017 compared to the same period in 20162018 primarily due to a decrease in net interest income and increases in noninterest expense and the Provision.  This was partially offset by a reduction in the provision for income taxes and an increase in noninterest income.expense. The decrease in net interest income was primarily due to higherdriven by lower earnings credits on the segment’s deposit funding costs,portfolio and lower yields on the loan portfolio. The decrease in noninterest income was primarily driven by lower trust fees, partially offset by an increase in funding income related to lending activities.increased annuity, shareholder servicing, and investment advisory fees. The increase in noninterest expense was primarily driven by higher allocated expenses.

Treasury and Other

Net income decreased by $0.9 million or 34% in the second quarter of 2019 compared to the same period in 2018 primarily due to higher separation expenses.an increase in the Provision offset by a lower tax benefit allocated to this segment and increase in non-interest income.  The Provisionincrease in non-interest income was primarily due to lower investment losses.  The provision for income taxes and losses in this business segment represents the residual provision for credit lossesamount to arrive at the total ProvisionProvisions for the Company. 
Net income decreased by $5.4 million or 51% for the first six months of 2019 compared to the same period in 2018 primarily due to a decrease in non-interest income. There was also a decrease in the tax benefit allocated to this segment. The provisiondecrease in non-interest income was due to low income housing distributions in the first quarter of 2018. The Provision for income taxes in this business segment represents the residual amount to arrive at the total tax expenseProvision for the Company.  The increase in noninterest income was due to higher net gains on the sale of Visa class B shares in the first quarter of 2017. The overall effective tax rate decreased to 30.54% for the nine months of 2017 compared to 30.62% for the same period in 2016.


Other organizational units (Technology, Operations, Marketing, Human Resources, Finance, Credit and Risk Management, and Corporate and Regulatory Administration) included in Treasury and Other provide a wide range of support to the Company’sCompany's other income earning segments. Expenses incurred by these support units are charged to the business segments through an internal cost allocation process.


Corporate Risk Profile


Credit Risk


As of SeptemberJune 30, 2017,2019, our overall credit risk profile reflects a healthy Hawaii economy as our levels of non-performing assets and credit losses remain well controlled. The underlying risk profile of our lending portfolio continued to remain strong during the first ninesix months of 2017.2019.


We actively manage exposures with deteriorating asset quality to reduce levels of potential loss exposure and closely monitor our reserves and capital to address both anticipated and unforeseen issues.  Risk management activities include detailed analysis of portfolio segments and stress tests of certain segments to ensure that reserve and capital levels are appropriate.  We perform frequent loan and lease-level risk monitoring and risk rating reviews, which provide opportunities for early interventions to allow for credit exits or restructuring, loan and lease sales, and voluntary workouts and liquidations.





Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More


Table 16 presents information on non-performing assets (“NPAs”) and accruing loans and leases past due 90 days or more.
Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More  Table 16
  Table 16
(dollars in thousands)September 30,
2017
 December 31,
2016
June 30,
2019
 December 31,
2018
Non-Performing Assets 
  
 
  
Non-Accrual Loans and Leases 
  
 
  
Commercial 
  
 
  
Commercial and Industrial$901
 $151
$552
 $542
Commercial Mortgage1,425
 997
11,310
 2,040
Total Commercial2,326
 1,148
11,862
 2,582
Consumer      
Residential Mortgage9,188
 13,780
4,697
 5,321
Home Equity4,128
 3,147
2,486
 3,671
Total Consumer13,316
 16,927
7,183
 8,992
Total Non-Accrual Loans and Leases15,642
 18,075
19,045
 11,574
Foreclosed Real Estate1,393
 1,686
2,737
 1,356
Total Non-Performing Assets$17,035
 $19,761
$21,782
 $12,930
      
Accruing Loans and Leases Past Due 90 Days or More      
Commercial      
Commercial and Industrial$5
 $—
$—
 $10
Total Commercial5
 —
—
 10
Consumer      
Residential Mortgage2,933
 3,127
$1,859
 $2,446
Home Equity1,392
 1,457
2,981
 2,684
Automobile806
 894
607
 513
Other 1
1,528
 1,592
963
 914
Total Consumer6,659
 7,070
6,410
 6,557
Total Accruing Loans and Leases Past Due 90 Days or More$6,664
 $7,070
$6,410
 $6,567
Restructured Loans on Accrual Status and Not Past Due 90 Days or More$55,038
 $52,208
$48,563
 $48,731
Total Loans and Leases$9,573,956
 $8,949,785
$10,759,129
 $10,448,774
Ratio of Non-Accrual Loans and Leases to Total Loans and Leases0.16% 0.20%0.18% 0.11%
Ratio of Non-Performing Assets to Total Loans and Leases and Foreclosed Real Estate0.18% 0.22%0.20% 0.12%
Ratio of Commercial Non-Performing Assets to Total Commercial Loans and Leases
and Commercial Foreclosed Real Estate
0.06% 0.03%0.29% 0.06%
Ratio of Consumer Non-Performing Assets to Total Consumer Loans and Leases
and Consumer Foreclosed Real Estate
0.25% 0.35%0.15% 0.16%
Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days
or More to Total Loans and Leases and Foreclosed Real Estate
0.25% 0.30%0.26% 0.19%
Changes in Non-Performing Assets 
  
   
Balance as of December 31, 2016$19,761
  
Balance as of December 31, 2018$12,930
  
Additions5,005
  
14,403
  
Reductions   
   
Payments(1,713)  
(1,430)  
Return to Accrual Status(2,320)  
(1,660)  
Sales of Foreclosed Real Estate(2,834)  
(374)  
Charge-offs/Write-downs(864)  
(2,087)  
Total Reductions(7,731)  
(5,551)  
Balance as of September 30, 2017$17,035
  
Balance as of June 30, 2019$21,782
  
1 
Comprised of other revolving credit, installment, and lease financing.

NPAs consist of non-accrual loans and leases, and foreclosed real estate.  Changes in the level of non-accrual loans and leases typically represent increases for loans and leases that reach a specified past due status, offset by reductions for loans and leases that are charged-off, paid down, sold, transferred to foreclosed real estate, or are no longer classified as non-accrual because they have returned to accrual status.


Total NPAs were $17.0$21.8 million as of SeptemberJune 30, 2017, a decrease2019, an increase of $2.7$8.9 million or 14%68% from December 31, 2016.  The decrease was experienced in our consumer lending portfolio.2018.  The ratio of our NPAs to total loans and leases and foreclosed real estate was 0.18%0.20% as of SeptemberJune 30, 20172019 and 0.22%0.12% as of December 31, 2016.2018.

Commercial and industrial non-accrual loans increased by $0.8 million from December 31, 2016 primarily due to the addition of one borrower. We have evaluated this borrower for impairment and recorded a $0.3 million partial charge-off in the third quarter of 2017.


Commercial mortgage non-accrual loans were $1.4$11.3 million as of SeptemberJune 30, 2017,2019, an increase of $0.4$9.3 million or 43%454% from December 31, 2016,2018 due to the addition of a loan from December 31, 2016.two additional loans. We have individually evaluated the four commercial mortgage non-accrual loans for impairment and have recorded no partial charge-offs.a cumulative charge-off of $1.6 million on one of the loans.

The largest component of our NPAs continues to be residential mortgage loans. Residential mortgage non-accrual loans decreased by $4.6 million or 33% from December 31, 2016 primarily due to transfers to foreclosed real estate and from loans returning to accrual status.  Residential mortgage non-accrual loans remain at elevated levels due mainly to the lengthy judicial foreclosure process as well as residential mortgage loan modifications the Bank entered into to assist borrowers wishing to remain in their residences despite having financial challenges.  As of September 30, 2017, our residential mortgage non-accrual loans were comprised of 30 loans with a weighted average current LTV ratio of 60%.


Foreclosed real estate represents property acquired as the result of borrower defaults on loans.  Foreclosed real estate is recorded at fair value, less estimated selling costs, at the time of foreclosure.  On an ongoing basis, properties are appraised as required by market conditions and applicable regulations.  Foreclosed real estate decreasedincreased by $0.3$1.4 million or 17%102% from December 31, 20162018 due to the sale of one residential property, offset by the addition of one commercial property.three residential properties.


Loans and Leases Past Due 90 Days or More and Still Accruing Interest


Loans and leases in this category are 90 days or more past due, as to principal or interest, and are still accruing interest because they are well secured and in the process of collection.  Loans and leases past due 90 days or more and still accruing interest were $6.7$6.4 million as of SeptemberJune 30, 2017,2019, a $0.4$0.2 million or 6%2% decrease from December 31, 2016.2018. The decrease was primarily in residential mortgage loans, which was partially offset by an increase in the home equity portfolio.


Impaired Loans


Impaired loans are defined as loans for which we believe it is probable we will not collect all amounts due according to the contractual terms of the loan agreement.  Included in impaired loans are all classes of commercial non-accruing loans (except lease financing and small business loans), all loans modified in a TDR (including accruing TDRs), and other loans where we believe that we will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Impaired loans exclude lease financing and smaller balance homogeneous loans (consumer and small business non-accruing loans) that are collectively evaluated for impairment.  Impaired loans were $61.1$62.8 million as of SeptemberJune 30, 20172019 and $60.7$54.6 million as of December 31, 2016,2018, and had a related Allowance of $3.9 million and $3.6$4.0 million as of SeptemberJune 30, 20172019 and December 31, 2016, respectively.2018.  As of SeptemberJune 30, 2017,2019, we have recorded cumulative charge-offs of $15.6$9.2 million related to our total impaired loans.  Our impaired loans are considered in management’s assessment of the overall adequacy of the Allowance.



Table 17 presents information on loans with terms that have been modified in a TDR.
Loans Modified in a Troubled Debt Restructuring  Table 17
  Table 17
(dollars in thousands)September 30,
2017
 December 31,
2016
June 30,
2019
 December 31,
2018
Commercial      
Commercial and Industrial$8,722
 $10,170
$6,287
 $6,198
Commercial Mortgage9,628
 9,157
7,131
 4,144
Construction1,441
 1,513
1,267
 1,321
Total Commercial19,791
 20,840
14,685
 11,663
Consumer      
Residential Mortgage21,401
 25,625
19,045
 19,753
Home Equity1,810
 1,516
3,495
 3,359
Automobile13,612
 9,660
17,626
 17,117
Other 1
2,562
 2,326
1,805
 2,098
Total Consumer39,385
 39,127
41,971
 42,327
Total$59,176
 $59,967
$56,656
 $53,990
 
1 
Comprised of other revolving credit, installment, and lease financing.


Loans modified in a TDR decreasedincreased by $0.8$2.7 million or 1%5% from December 31, 2016.2018. The increase was primarily due to one commercial mortgage loan modified in a TDR during the first quarter of 2019. Residential mortgage loans remain our largest TDR loan class.

Reserve for Credit Losses


Table 18 presents the activity in our reserve for credit losses.
Reserve for Credit Losses      Table 18
      Table 18
Three Months Ended Nine Months EndedThree Months Ended Six Months Ended
September 30, September 30,June 30, June 30,
(dollars in thousands)2017
 2016
 2017
 2016
2019
 2018
 2019
 2018
Balance at Beginning of Period$113,175
 $110,504
 $110,845
 $108,952
$112,845
 $114,760
 $113,515
 $114,168
Loans and Leases Charged-Off              
Commercial              
Commercial and Industrial(611) (209) (909) (670)(206) (485) (576) (691)
Commercial Mortgage—
 —
 (1,616) —
Consumer              
Residential Mortgage(36) (104) (725) (388)(51) (3) (55) (100)
Home Equity(129) (222) (774) (848)(145) (44) (440) (135)
Automobile(1,921) (1,703) (5,723) (4,635)(1,691) (1,515) (3,444) (3,769)
Other 1
(3,521) (2,678) (9,278) (7,017)(3,036) (3,614) (5,826) (6,954)
Total Loans and Leases Charged-Off(6,218) (4,916) (17,409) (13,558)(5,129) (5,661) (11,957) (11,649)
Recoveries on Loans and Leases Previously Charged-Off 
  
  
  
 
  
  
  
Commercial 
  
  
  
 
  
  
  
Commercial and Industrial597
 282
 1,198
 7,552
401
 366
 902
 694
Commercial Mortgage—
 14
 —
 42
Construction—
 —
 —
 23
Lease Financing1
 —
 2
 2
Consumer              
Residential Mortgage89
 517
 457
 997
95
 214
 579
 434
Home Equity837
 618
 2,183
 1,453
746
 451
 1,334
 1,076
Automobile692
 615
 1,919
 1,748
908
 738
 1,789
 1,337
Other 1
530
 471
 1,608
 1,394
628
 642
 1,332
 1,325
Total Recoveries on Loans and Leases Previously Charged-Off2,746
 2,517
 7,367
 13,211
2,778
 2,411
 5,936
 4,866
Net Loans and Leases Charged-Off(3,472) (2,399) (10,042) (347)(2,351) (3,250) (6,021) (6,783)
Provision for Credit Losses4,000
 2,500
 12,650
 1,500
4,000
 3,500
 7,000
 7,625
Provision for Unfunded Commitments—
 —
 250
 500
Balance at End of Period 2
$113,703
 $110,605
 $113,703
 $110,605
$114,494
 $115,010
 $114,494
 $115,010
              
Components 
  
  
  
 
  
  
  
Allowance for Loan and Lease Losses$106,881
 $104,033
 $106,881
 $104,033
$107,672
 $108,188
 $107,672
 $108,188
Reserve for Unfunded Commitments6,822
 6,572
 6,822
 6,572
6,822
 6,822
 6,822
 6,822
Total Reserve for Credit Losses$113,703
 $110,605
 $113,703
 $110,605
$114,494
 $115,010
 $114,494
 $115,010
              
Average Loans and Leases Outstanding$9,451,972
 $8,483,588
 $9,231,615
 $8,210,596
$10,631,558
 $9,962,860
 $10,549,893
 $9,883,746
              
Ratio of Net Loans and Leases Charged-Off to
Average Loans and Leases Outstanding (annualized)
0.15% 0.11% 0.15% 0.01%0.09% 0.13% 0.12% 0.14%
Ratio of Allowance for Loan and Lease Losses to
Loans and Leases Outstanding
1.12% 1.20% 1.12% 1.20%1.00% 1.08% 1.00% 1.08%
1 
Comprised of other revolving credit, installment, and lease financing.
2 
Included in this analysis is activity related to the Company’s reserve for unfunded commitments, which is separately recorded in other liabilities in the consolidated statements of condition.


We maintain a reserve for credit losses that consists of two components, the Allowance and a reserve for unfunded commitments (the “Unfunded Reserve”).  The reserve for credit losses provides for the risk of credit losses inherent in the loan and lease portfolio and is based on loss estimates derived from a comprehensive quarterly evaluation.  The evaluation reflects analyses of individual borrowers and historical loss experience, supplemented as necessary by credit judgment that considers observable trends, conditions, and other relevant environmental and economic factors.  The level of the Allowance is adjusted by recording an expense or recovery through the Provision.  The level of the Unfunded Reserve is adjusted by recording an expense or recovery in other noninterest expense.



Allowance for Loan and Lease Losses


As of SeptemberJune 30, 2017,2019, the Allowance was $106.9$107.7 million or 1.12%1.00% of total loans and leases outstanding, compared with an Allowance of $104.3$106.7 million or 1.17%1.02% of total loans and leases outstanding as of December 31, 2016.2018.  The decrease in the ratio of Allowance to loans and leases outstanding was commensurate with the Company’s credit risk profile, loan growth, and a healthy Hawaii economy.


Net charge-offs on loans and leases were $3.5$2.4 million or 0.15%0.09% of total average loans and leases, on an annualized basis, in the thirdsecond quarter of 20172019 compared to net charge-offs of $2.4$3.3 million or 0.11%0.13% of total average loans and leases, on an annualized basis, in the thirdsecond quarter of 2016.2018. Net charge-offs on loans and leases were $10.0$6.0 million or 0.15%0.12% of total average loans and leases, on an annualized basis for the first ninesix months of 20172019, compared to $0.3net charge-offs of $6.8 million or 0.01% for the same period in 2016. Net recoveries in our commercial portfolios were $0.3 million for the first nine months0.14% of 2017 compared to $6.9 million for the same period in 2016. Commercial recoveriestotal average loans and leases, on an annualized basis, in the first ninesix months of 2016 were primarily due to the recovery of one commercial and industrial loan.2018. Net charge-offs in our consumer portfolios were $10.3$4.7 million for the first ninesix months of 20172019 compared to $7.3$6.8 million for the same period in 2016. The higher net2018. Net charge-offs duringin our commercial portfolios were $1.3 million for the first ninesix months of 2017 were primarily2019 compared to less than $0.1 million net recoveries for the same period in our automobile and installment loan portfolios.2018.


Although we determine the amount of each component of the Allowance separately, the Allowance as a whole was considered appropriate by management as of SeptemberJune 30, 2017,2019, based on our ongoing analysis of estimated probable credit losses, credit risk profiles, economic conditions, coverage ratios, and other relevant factors.


The Reserve for Unfunded Commitments


The Unfunded Reserve was $6.8 million as of SeptemberJune 30, 2017, an increase of $0.3 million2019, unchanged from December 31, 2016.2018. The process used to determine the Unfunded Reserve is consistent with the process for determining the Allowance, as adjusted for estimated funding probabilities.

Market Risk
 
Market risk is the potential of loss arising from adverse changes in interest rates and prices.  We are exposed to market risk as a consequence of the normal course of conducting our business activities.  Our market risk management process involves measuring, monitoring, controlling, and mitigating risks that can significantly impact our statements of income and condition.  In this management process, market risks are balanced with expected returns in an effort to enhance earnings performance, while limiting volatility.


Our primary market risk exposure is interest rate risk.


Interest Rate Risk


The objective of our interest rate risk management process is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity. The potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates.  This interest rate risk arises primarily from our core business activities of extending loans and accepting deposits. Our investment securities portfolio is also subject to significant interest rate risk.


Many factors affect our exposure to changes in interest rates such as general economic and financial conditions, customer preferences, historical pricing relationships, and repricing characteristics of financial instruments. Our earnings are affected not only by general economic conditions but also by the monetary and fiscal policies of the U.S. and its agencies, particularly the Federal Reserve Bank (the “FRB”).  The monetary policies of the FRB can influence the overall growth of loans, investment securities, and deposits and the level of interest rates earned on assets and paid for liabilities.


In managing interest rate risk, we, through the Asset/Liability Management Committee (“ALCO”), measure short and long-term sensitivities to changes in interest rates.  The ALCO, which is comprised of members of executive management, utilizes several techniques to manage interest rate risk, which include:


adjusting the balance sheet mix or altering the interest rate characteristics of assets and liabilities;
changing product pricing strategies;
modifying characteristics of the investment securities portfolio; and
using derivative financial instruments.


Our use of derivative financial instruments, as detailed in Note 1112 to the Consolidated Financial Statements, has generally been limited.  This is due to natural on-balance sheet hedges arising out of offsetting interest rate exposures from loans and investment securities with deposits and other interest-bearing liabilities.  In particular, the investment securities portfolio is utilized to manage the interest rate exposure and sensitivity to within the guidelines and limits established by the ALCO.  We utilize natural and offsetting economic hedges in an effort to reduce the need to employ off-balance sheet derivative financial instruments to hedge interest rate risk exposures.  Expected movements in interest rates are also considered in managing interest rate risk.  Thus, as interest rates change, we may use different techniques to manage interest rate risk.


A key element in our ongoing process to measure and monitor interest rate risk is the utilization of an asset/liability simulation model that attempts to capture the dynamic nature of the statement of condition.  The model is used to estimate and measure the statement of condition sensitivity to changes in interest rates.  These estimates are based on assumptions about the behavior of loan and deposit pricing, repayment rates on mortgage-based assets, and principal amortization and maturities on other financial instruments.  The model’s analytics include the effects of standard prepayment options on mortgages and customer withdrawal options for deposits.  While such assumptions are inherently uncertain, we believe that our assumptions are reasonable. 



We utilize net interest income simulations to analyze short-term income sensitivities to changes in interest rates.  Table 19
presents, for the twelve months subsequent to SeptemberJune 30, 20172019 and December 31, 2016,2018, an estimate of the change in net interest income that would result from a gradual and immediate change in interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario.  The base case scenario assumes the statement of condition and interest rates are generally unchanged.  Based on our net interest income simulation as of SeptemberJune 30, 2017,2019, net interest income is expected to increase as interest rates rise. This is due in part to our strategy to maintain a relatively short investment portfolio duration. In addition, rising interest rates would drive higher rates on loans and investment securities, as well as induce a slower pace of premium amortization on certain securities within our investment portfolio. However, lower interest rates would likely cause a decline in net interest income as lower rates would lead to lower yields on loans and investment securities, as well as drive higher premium amortization on existing investment securities. Since deposit costs are already at low levels, we believe that lower interest rates are unlikely to significantly impact our funding costs. Based on our net interest income simulation as of SeptemberJune 30, 2017,2019, net interest income sensitivity to changes in interest rates for the twelve months subsequent to SeptemberJune 30, 20172019 was relatively lessslightly more sensitive in comparison to the sensitivity profile for the twelve months subsequent to December 31, 2016.2018.
Net Interest Income Sensitivity ProfileNet Interest Income Sensitivity Profile   Table 19
Net Interest Income Sensitivity Profile   Table 19
Impact on Future Annual Net Interest IncomeImpact on Future Annual Net Interest Income
(dollars in thousands)September 30, 2017 December 31, 2016June 30, 2019 December 31, 2018
Gradual Change in Interest Rates (basis points)       
   
    
+200$14,990
 3.2 % $17,752
 4.1 %$15,990
 3.1 % $11,014
 2.2 %
+1007,675
 1.6
 8,524
 1.9
8,178
 1.6
 5,673
 1.1
-100(8,612) (1.8) (10,810) (2.5)(8,571) (1.7) (6,289) (1.2)
              
Immediate Change in Interest Rates (basis points)              
+200$36,654
 7.8 % $45,372
 10.4 %$35,202
 6.9 % $23,309
 4.6 %
+10019,345
 4.1
 22,090
 5.0
20,311
 4.0
 12,517
 2.5
-100(27,560) (5.9) (27,888) (6.4)(26,687) (5.2) (17,665) (3.5)


To analyze the impact of changes in interest rates in a more realistic manner, non-parallel interest rate scenarios are also simulated.  These non-parallel interest rate scenarios indicate that net interest income may decrease from the base case scenario should the yield curve flatten or become inverted for a period of time.  Conversely, if the yield curve shouldwere to steepen, net interest income may increase.


Other Market Risks


In addition to interest rate risk, we are exposed to other forms of market risk in our normal business transactions.  Foreign currency and foreign exchange contracts expose us to a small degree of foreign currency risk.  These transactions are primarily executed on behalf of customers.  Our trust and asset management income are at risk to fluctuations in the market values of underlying assets, particularly debt and equity securities.  Also, our share-based compensation expense is dependent on the fair value of our stock options, restricted stock units, and restricted stock at the date of grant.  The fair value of stock options, restricted stock units, and restricted stock is impacted by the market price of the Parent’s common stock on the date of grant and is at risk to changes in equity markets, general economic conditions, and other factors.



Liquidity Risk Management


The objective of our liquidity risk management process is to manage cash flow and liquidity in an effort to provide continuous access to sufficient, reasonably priced funds.  Funding requirements are impacted by loan originations and refinancings, deposit balance changes, liability issuances and settlements, and off-balance sheet funding commitments.  We consider and comply with various regulatory guidelines regarding required liquidity levels and periodically monitor our liquidity position in light of the changing economic environment and customer activity.  Based on periodic liquidity assessments, we may alter our asset, liability, and off-balance sheet positions.  The ALCO monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change.  This process, combined with our ability to raise funds in money and capital markets and through private placements, provides flexibility in managing the exposure to liquidity risk.


In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities. We have access to immediate liquid resources in the form of cash which is primarily on deposit with the FRB. Potential sources of liquidity also include investment securities in our available-for-sale securities portfolio, our ability to sell loans in the secondary market, and to secure borrowings from the FRB and FHLB. Our held-to-maturity securities, while not intended for sale, may also be utilized in

repurchase agreements to obtain funding. Our core deposits have historically provided us with a long-term source of stable and relatively lower cost source of funding. Additional funding is available through the issuance of long-term debt or equity.


Maturities and payments on outstanding loans and maturing investment securities also provide a steady flow of funds. Liquidity is further enhanced by our ability to pledge loans to access secured borrowings from the FHLB and FRB. As of SeptemberJune 30, 2017,2019, we had additional borrowing capacity of $2.0$2.3 billion from the FHLB and $676.5$567.4 million from the FRB based on the amount of collateral pledged.


We continued our focus on maintaining a strong liquidity position throughout the first ninesix months of 2017.2019.  As of SeptemberJune 30, 2017,2019, cash and cash equivalents were $761.5$490.4 million, the carrying value of our available-for-sale investment securities was $2.3$2.6 billion, and total deposits were $15.0$15.5 billion.  As of SeptemberJune 30, 2017,2019, our available-for-sale investment securities portfolio was comprised of securities with an average base duration of approximately 2.212.8 years.


Capital Management


We actively manage capital, commensurate with our risk profile, to enhance shareholder value. We also seek to maintain capital levels for the Company and the Bank at amounts in excess of the regulatory “well-capitalized” thresholds. Periodically, we may respond to market conditions by implementing changes to our overall balance sheet positioning to manage our capital position.


The Company and the Bank are each subject to regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements could cause certain mandatory and discretionary actions by regulators that, if undertaken, would likely have a material effect on our financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures.  These measures were established by regulation intended to ensure capital adequacy.  As of SeptemberJune 30, 2017,2019, the Company and the Bank were considered “well capitalized” under this regulatory framework.  The Company’s regulatory capital ratios are presented in Table 20 below.  There have been no conditions or events since SeptemberJune 30, 20172019 that management believes have changed either the Company’s or the Bank’s capital classifications.


As of SeptemberJune 30, 2017,2019, shareholders’ equity was $1.2$1.3 billion, an increase of $66.4 million or 6%relatively unchanged from December 31, 2016.2018. For the first ninesix months of 2017,2019, net income of $141.7$115.7 million, common stock issuances of $11.7$4.3 million, share-based compensation of $5.3$4.4 million, and other comprehensive income of $8.9$23.6 million were partially offset by cash dividends paid of $64.9$52.2 million and common stock repurchased of $36.4$78.2 million. In the first ninesix months of 2017, included in the amount of common stock2019, we repurchased were 420,566946,826 shares repurchased under our share repurchase program. These shares were repurchased at an average cost per share of $81.70$79.03 and a total cost of $34.4$74.8 million. From the beginning of our share repurchase program in July 2001 through SeptemberJune 30, 2017,2019, we repurchased a total of 54.156.2 million shares of common stock and returned a total of $2.06$2.2 billion to our shareholders at an average cost of $38.19$39.81 per share. As of September 30, 2017, remaining buyback authority under our share repurchase program was $30.6 million.

From OctoberJuly 1, 20172019 through October 17, 2017,July 16, 2019, the Parent repurchased an additional 35,50066,000 shares of common stock at an average cost of $83.93$81.78 per share for a total of $3.0$5.4 million. Remaining buyback authority under our share repurchase program was $27.7$81.5 million as of October 17, 2017. On October 20, 2017, the Parent’s Board of Directors increased the authorization under the share repurchase program by an additional $100.0 million.July 16, 2019. The actual amount and timing of future share repurchases, if any, will depend on market and economic conditions, regulatory rules, applicable SEC rules, and various other factors.


In October 2017,July 2019, the Parent’s Board of Directors declared a quarterly cash dividend of $0.52$0.65 per share on the Parent’s outstanding shares.  The dividend will be payable on December 14, 2017September 16, 2019 to shareholders of record at the close of business on NovemberAugust 30, 2017.2019.


The final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks became effective for the Company on January 1, 2015, with full compliance with all of the final rule’s requirements phased in over a multi-year schedule, to bewhich was fully phased-in byphased in on January 1, 2019. As of SeptemberJune 30, 2017,2019, the Company’s capital levels remained characterized as “well-capitalized” under the new rules. See the “Regulatory Initiatives Affecting the Banking Industry” section below for further discussion on Basel III.



Table 20 presents our regulatory capital and ratios as of SeptemberJune 30, 20172019 and December 31, 2016.2018.
Regulatory Capital and RatiosRegulatory Capital and Ratios  Table 20Regulatory Capital and Ratios Table 20
(dollars in thousands)(dollars in thousands)September 30,
2017
 December 31,
2016
 (dollars in thousands)June 30,
2019
 December 31,
2018
 
Regulatory CapitalRegulatory Capital    Regulatory Capital    
Shareholders’ EquityShareholders’ Equity$1,227,893
 $1,161,537
 Shareholders’ Equity$1,285,948
 $1,268,200
 
Less:
Goodwill 1
27,413
 27,413
 
Goodwill 1
28,718
 28,718
 
Postretirement Benefit Liability Adjustments(28,453) (28,892) Postretirement Benefit Liability Adjustments(35,519) (36,010) 
Net Unrealized Gains (Losses) on Investment Securities 2
3,431
 (5,014) 
Net Unrealized Gains (Losses) on Investment Securities 2
8,095
 (15,033) 
Other(198) (198) Other(198) (198) 
Common Equity Tier 1 CapitalCommon Equity Tier 1 Capital1,225,700
 1,168,228
 Common Equity Tier 1 Capital1,284,852
 1,290,723
 
         
Tier 1 CapitalTier 1 Capital1,225,700
 1,168,228
 Tier 1 Capital1,284,852
 1,290,723
 
Allowable Reserve for Credit LossesAllowable Reserve for Credit Losses113,703
 110,300
 Allowable Reserve for Credit Losses114,494
 113,515
 
Total Regulatory CapitalTotal Regulatory Capital$1,339,403
 $1,278,528
 Total Regulatory Capital$1,399,346
 $1,404,238
 
         
Risk-Weighted AssetsRisk-Weighted Assets$9,233,969
 $8,823,485
 Risk-Weighted Assets$10,309,085
 $9,878,904
 
         
Key Regulatory Capital RatiosKey Regulatory Capital Ratios 
  
 Key Regulatory Capital Ratios 
  
 
Common Equity Tier 1 Capital RatioCommon Equity Tier 1 Capital Ratio13.27
%13.24
%Common Equity Tier 1 Capital Ratio12.46
%13.07
%
Tier 1 Capital RatioTier 1 Capital Ratio13.27
 13.24
 Tier 1 Capital Ratio12.46
 13.07
 
Total Capital RatioTotal Capital Ratio14.51
 14.49
 Total Capital Ratio13.57
 14.21
 
Tier 1 Leverage RatioTier 1 Leverage Ratio7.24
 7.21
 Tier 1 Leverage Ratio7.36
 7.60
 
1 Calculated net of deferred tax liabilities.
2 Includes unrealized gains and losses related to the Company’s reclassification of available-for-sale investment securities to the held-to-maturity category.





Regulatory Initiatives Affecting the Banking Industry


Basel III


TheUnder final FRB and the FDIC approved the final rules implementing the Basel Committee on Banking Supervision’s (“BCBS”) capital guidelines for U.S. banks. Under the final rules,banks minimum requirements increased for both the quantity and quality of capital held by the Company. The rules include a new common equity Tier 1Basel III capital standards substantially revised the risk based capital requirements applicable to risk-weighted assets minimum ratio of 4.5%, raisebank holding companies and their depository institution subsidiaries, including the minimum ratiodefinitions and the components of Tier 1 capital toand Total Capital, the method of evaluating risk-weighted assets, from 4.0% to 6.0%, requireinstitutions of a minimum ratio of Total Capital to risk-weighted assets of 8.0%, and require a minimum Tier 1 leverage ratio of 4.0%. A new capital conservation buffer, comprised of common equity Tier 1and other matters affecting regulatory capital was also established above the regulatory minimum capital requirements. This capital conservation buffer began phasing in beginning January 1, 2016 at 0.625% of risk-weighted assets and will increase each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019.ratios. Strict eligibility criteria for regulatory capital instruments were also implemented under the final rules. The final rules also revised the definition and calculation of Tier 1 capital, Total Capital, and risk-weighted assets.


The phase-in period for the final rules became effective for the Company on January 1, 2015, with full compliance with all of the final rules’ requirements phased in over a multi-year schedule, to bewhich was fully implemented byphased in on January 1, 2019. As of SeptemberJune 30, 2017,2019, the Company’s capital levels remained characterized as “well-capitalized” under the new rules.


Management continues to monitor regulatory developments and their potential impact to the Company’s liquidity requirements.


Stress Testing


TheEnactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act in May 2018 significantly altered several provisions of the Dodd-Frank Act, required federal banking agencies to issue regulations that obligate banksincluding how stress tests are run.  Bank holding companies with total consolidated assets of moreless than $10.0$100 billion, to conduct and publish company-run annual stress tests to assess the potential impact of different scenarios on the consolidated earnings and capital of each bank and certain related items over a nine-quarter forward-looking planning horizon, taking into account all relevant exposures and activities. On October 9, 2012, the FRB published final rules implementing the stress testing requirements for banks, such as the Company, with total consolidated assets of more than $10.0 billion but less than $50.0 billion.  These rules set forth the timing and type of stress test activities, as well as rules governing controls, oversight and disclosure.

In March 2014, the FRB, OCC, and FDIC issued final supervisory guidance for these stress tests. This joint final supervisory guidance discusses supervisory expectations for stress test practices, provides examples of practices that would be consistent with those expectations, and offers additional details about stress test methodologies. It also emphasizes the importance ofare no longer subject to company-run stress testing requirements in section 165(i)(2) of the Dodd-Frank Act, including publishing a summary of results.  At this time, the Company continues to run internal stress tests as an ongoinga component of our comprehensive risk management practice.and capital planning process.


We submitted our latest stress testing results to the FRB on July 28, 2017 and we will disclose the results to the public in October 2017.

Deposit Insurance Fund (“DIF”) Assessment

In March 2016, the FDIC approved a final rule that imposes on banks with at least $10 billion in assets, such as the Company, a surcharge of 4.5 cents per $100 of their assessment base, after making certain adjustments. The surcharge became effective for the third quarter of 2016 and the FDIC estimates the surcharge will be imposed for approximately two years. The surcharge took effect at the same time that the regular FDIC insurance assessment rates for all banks declined under a rule adopted by the FDIC in 2011. The net effect of the FDIC assessment changes noted above reduced our FDIC insurance expense by approximately $0.3 million and $0.7 million for the three and nine months ended September 30, 2017, respectively.


Operational Risk


Operational risk represents the risk of loss resulting from our operations, including, but not limited to, the risk of fraud by employees or persons outside the Company, errors relating to transaction processing and technology, failure to adhere to compliance requirements, and the risk of cyber attacks.  We are also exposed to operational risk through our outsourcing arrangements, and the effect that changes in circumstances or capabilities of our outsourcing vendors can have on our ability to continue to perform operational functions necessary to our business.  The risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. Operational risk is inherent in all business activities, and management of this risk is important to the achievement of Company goals and objectives.


Our Operating Risk Committee (the “ORC”) provides oversight and assesses the most significant operational risks facing the Company.  We have developed a framework that provides for a centralized operating risk management function through the ORC, supplemented by business unit responsibility for managing operational risks specific to their business units. Our internal audit department also validates the system of internal controls through ongoing risk-based audit procedures and reports on the effectiveness of internal controls to executive management and the Audit and Risk Committee of the Board of Directors.


We continuously strive to strengthen our system of internal controls to improve the oversight of operational risk.  While our internal controls have been designed to minimize operational risks, there is no assurance that business disruption or operational losses will not occur.  On an ongoing basis, management reassesses operational risks, implements appropriate process changes, and invests in enhancements to our systems of internal controls. 


Off-Balance Sheet Arrangements, Credit Commitments, and Contractual Obligations


Off-Balance Sheet Arrangements


We hold interests in several unconsolidated variable interest entities (“VIEs”).VIEs.  These unconsolidated VIEs are primarily low-income housing partnerships and solar energy partnerships.  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 VIE.  We have determined that the Company is not the primary beneficiary of these entities.  As a result, we do not consolidate these VIEs.


Credit Commitments and Contractual Obligations


Our credit commitments and contractual obligations have not changed materially since previously reported in our Annual Report on Form 10-K for the year ended December 31, 2016.2018.



Item 3. Quantitative and Qualitative Disclosures About Market Risk


See “Market Risk” of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.


Item 4. Controls and Procedures


Disclosure Controls and Procedures


The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of SeptemberJune 30, 2017.2019.  The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of SeptemberJune 30, 2017.2019.


Changes in Internal Control over Financial Reporting


There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended SeptemberJune 30, 20172019 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.



Part II - Other Information


Item 1A. Risk Factors


There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in ourthe Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018, except as described below.


Uncertainty About the Continuing Availability of LIBOR May Adversely Affect Our Business
On July 27, 2017, the United Kingdom’s Financial Conduct Authority, which regulates the LIBOR announced that after December 31, 2021 it would no longer compel banks to submit the rates required to calculate LIBOR.  With this announcement there is uncertainty about the continued availability of LIBOR after 2021.  If LIBOR ceases to be available or the methods of calculating LIBOR change from the current methods, financial products with interest rates tied to LIBOR may be adversely affected.  Even if LIBOR remains available it is uncertain whether it will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments.  We have loans, derivative contracts, and other financial instruments with rates that are either directly or indirectly tied to LIBOR.  If any of the foregoing were to occur, the interest rates on these instruments, as well as the revenue and expenses associated with the same, may be adversely affected.  Furthermore, failure to adequately manage this transition process with our customers could adversely impact our reputation.

The Company has begun its implementation efforts by establishing a Company-wide implementation team. The implementation team meets periodically to discuss the latest developments and ensure progress is being made.

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


The Parent’s repurchases of its common stock during the thirdsecond quarter of 20172019 were as follows:
Issuer Purchases of Equity SecuritiesIssuer Purchases of Equity Securities    
  
Issuer Purchases of Equity Securities    
  
Period
Total Number of Shares Purchased 1

 Average Price Paid Per Share
 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value
 of Shares that May Yet Be
 Purchased Under the
 Plans or Programs 2
 
Total Number of Shares Purchased 1

 Average Price Paid Per Share
 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Approximate Dollar Value
 of Shares that May Yet Be
 Purchased Under the
 Plans or Programs 2
 
July 1 - 31, 201759,800
 $82.81
 56,922
 $40,774,780
August 1 - 31, 201767,000
 80.98
 67,000
 35,348,935
September 1 - 30, 201759,578
 78.97
 59,578
 30,643,801
April 1 - 30, 2019167,067
 $81.20
 165,000
 $108,387,900
May 1 - 31, 2019159,000
 80.38
 159,000
 95,608,109
June 1 - 30, 2019109,432
 79.57
 109,432
 86,900,914
Total186,378
 $80.93
 183,500
  435,499
 $80.49
 433,432
  
1 
During the thirdsecond quarter of 2017, 2,8782019, 2,067 shares were acquired from employees in connection with stock swaps, income tax withholdings related to the vesting of restricted stock and acquired by the trustee of a trust established pursuant to the Bank of Hawaii Corporation Director Deferred Compensation Plan (the “DDCP”) directly from the Parent in satisfaction of the Company’s obligations to participants under the DDCP. The issuance of these shares was made in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) by Section 4(a)(2) thereof. The trustee under the trust and the participants under the DDCP are accredited investors,“Accredited Investors”, as defined in Rule 501(a) under the Securities Act. These transactions did not involve a public offering and occurred without general solicitation or advertising. The shares were purchased at the closing price of the Parent’s common stock on the dates of purchase.
2 
The share repurchase program was first announced in July 2001.  The program has no set expiration or termination date. The actual amount and timing of future share repurchases, if any, will depend on market and economic conditions, regulatory rules, applicable SEC rules, and various other factors.


Item 6. Exhibits


A list of exhibits to this Form 10-Q is set forth on the Exhibit Index and is incorporated herein by reference.



Signatures


Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date:October 23, 2017July 22, 2019 Bank of Hawaii Corporation
    
  By:/s/ Peter S. Ho
   Peter S. Ho
   Chairman of the Board,
   Chief Executive Officer, and
   President
    
  By:/s/ Dean Y. Shigemura
   Dean Y. Shigemura
   Chief Financial Officer



Exhibit Index
Exhibit  Number 
  
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Amended, Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
  
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Amended, Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
  
32
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
101101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

101.SCHXBRL Taxonomy Extension Schema Document
101.CALXBRL Taxonomy Extension Calculation Linkbase Document
101.DEFXBRL Taxonomy Extension Definition Linkbase Document
101.LABXBRL Taxonomy Extension Label Linkbase Document
101.PREXBRL Taxonomy Extension Presentation Linkbase Document




8490