What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2020-08-04 compared with 2020-05-08 · 589 added, 338 removed, 923 unchanged (50% of the section changed)

47 unchanged sentences

our likelihood of success in, and the impact of, litigation or regulatory actions;

our ability to continue to pay dividends on our common stock;

contingent liabilities and

unexpected tax liabilities that may be applicable to us as a result of the Reorganization Transactions;

our ability to continue to pay dividends on our common stock or take other capital actions, which must comply with requirements under law or those imposed by our regulators and could

impact our ability to return capital to stockholders;

contingent liabilities and unexpected tax liabilities that may be applicable to us as a result of the Reorganization Transactions;

and damage to our reputation from any of the factors described above.

The foregoing factors should not be considered an exhaustive list and should be read together with the other cautionary statements included in our Annual Report on Form 10-K for the year ended December 31, 2019.

The foregoing factors should not be considered an exhaustive list and should be read together with the risk factors and other cautionary statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.

16 unchanged sentences

Recent Developments regarding COVID-19 and the Hawaii and Global Economy

The Coronavirus Disease (“COVID-19”) has officially been designated a pandemic by the World Health Organization.

The spread of COVID-19 in the U.S., Europe and other regions continues to evolve.

Several European countries, namely Italy, the United Kingdom, Spain and France have been particularly hard hit by COVID-19.

However, the U.S.

leads the world in the number of cases and deaths reported as a result of COVID-19.

The effect of COVID-19 to the global and U.S.

economy remains uncertain and the timing of a subsequent recovery remains uncertain as well.

The spread of COVID-19 across the globe has resulted in sharp market corrections and fears of a global recession.

In many parts of the U.S., employees are working from home and nonessential businesses are temporarily closed.

Workers in the retail, restaurant, travel and leisure industries have been particularly hard hit by layoffs as large parts of the U.S.

remain on lockdown.

The national unemployment rate increased from 3.5% in February 2020 to 4.4% in March 2020.

The increase in the national unemployment rate accelerated into the March 2020 month-end and reflects the early stage effects of COVID-19 and efforts to contain it.

We expect to see a more pronounced increase in the national unemployment rate in the second quarter of 2020.

We also expect a significant decrease in the U.S.

gross domestic product in the second quarter of 2020 with a potential for improvement in the third quarter of 2020.

The Coronavirus Disease (“COVID-19”) has spread throughout the world and has been declared a pandemic by the World Health Organization and continues to evolve.

Several countries, namely the U.S.

and Brazil, have been particularly hard hit by COVID-19.

Europe and other regions have also been significantly impacted by the pandemic.

Through July 2020, the U.S.

leads the world in the number of confirmed cases and deaths reported as a result of COVID-19.

Despite efforts to control the spread of COVID-19, the U.S.

has recently seen a surge in the number of confirmed COVID-19 cases.

The global and U.S.

economies have entered into a pandemic-driven recession.

The future impact of COVID-19 on the global and U.S.

economies, and the timing and robustness of any related recovery, continues to remain uncertain.

As a result of the COVID-19 outbreak and related response, the U.S.

economy has deteriorated.

Beginning in March 2020, in many parts of the U.S., employees began working from home and businesses deemed nonessential were temporarily closed.

Workers in the retail, restaurant, travel and leisure industries were particularly hard hit by layoffs as large parts of the U.S.

remained on lockdown for more than a month.

According to the Federal Reserve’s May 2020 Beige Book, declines in consumer spending were “especially severe in the leisure and hospitality sector, with very little activity at travel and tourism businesses.” The national seasonally-adjusted unemployment rate increased from 4.4% in March 2020 to 14.7% in April 2020.

In May 2020, state-by-state decisions began to be made on the pace and extent of reopening local businesses.

While the phased reopening of the U.S.

economy brought the national seasonally-adjusted unemployment rate down to 11.1% in June 2020, new claims for unemployment insurance have remained above one million per week through July 2020.

In addition, as noted above, the U.S.

has recently experienced, and continues to experience, a surge in the number of confirmed COVID-19 cases, which has already stalled the reopening strategy in a number of states and may continue to impact the pace of economic recovery going forward.

real gross domestic product decreased by 5.0% in the first quarter of 2020.

Hawaii Economy

While Hawaii’s economy was off to a strong start in 2020, it has been meaningfully impacted by COVID-19 and the responses to it.

Hawaii’s economy continues to be meaningfully impacted by COVID-19 and the responses to it.

Hawaii’s economy began to suffer in February 2020 with flight cancellations to Hawaii due to the global COVID-19 pandemic.

On March 5, 2020, the Governor of the State of Hawaii issued an emergency proclamation declaring a state of emergency in Hawaii.

On March 21, 2020, the Governor of the State of Hawaii issued another emergency proclamation ordering all individuals, both residents and visitors, arriving or returning to the State of Hawaii to a mandatory 14-day self-quarantine.

On March 21, 2020, the Governor of the State of Hawaii issued a supplementary emergency proclamation ordering all individuals, both residents and visitors, arriving or returning to the State of Hawaii to a mandatory 14-day self-quarantine.

The mandate, which was the first such action in the nation, essentially brought the Hawaii tourism industry to a halt.

Subsequently, on March 23, 2020, the Governor of the State of Hawaii issued a third supplemental emergency proclamation that ordered all residents to stay-at-home, except for essential workers.

As an economy that is heavily dependent on tourism, we expect to see a significant increase in unemployment rates in the second quarter of 2020, as well as decreases to real personal income and gross domestic product.

The State of Hawaii is expected to receive at least $4.0 billion in federal aid from the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

We expect that the majority of this federal aid will be used to help fund state and county government response efforts and to provide for unemployment assistance.

We continue to monitor the length and severity of the shut-down of our tourism industry and stay-at-home orders.

Once these measures are relaxed, we expect that local consumption of goods and services will begin to resume over an extended period of time.

Additionally, the timing and significance of any return of air travel and the Hawaii tourism industry is highly uncertain and is dependent upon the number of cases declining around the globe and the widespread availability of a vaccine or testing and tracing capabilities.

For the three months ended March 31, 2020, the economic data for Hawaii was mixed as surveys broadly reflect some of the early effects of the COVID-19 pandemic on the local economy.

Visitor arrivals for the first three months of 2020 decreased by 16.4% compared to the same period in 2019, while total visitor spending for the first three months of 2020 decreased by 14.1% compared to the same period in 2019, according to the Hawaii Tourism Authority.

We expect this downward trend in our tourism industry to continue well into the second quarter of 2020.

The statewide seasonally-adjusted unemployment rate was 2.6% in March 2020 compared to 2.8% in March 2019, according to the Bureau of Labor Statistics of the U.S.

Department of Labor.

The national seasonally-adjusted unemployment rate was 4.4% in March 2020 compared to 3.8% in March 2019.

We expect unemployment rates to increase significantly both in Hawaii and nationally in the second quarter of 2020 as the March 2020 survey reference periods predated many COVID-19-related business and school closures in the second half of the month.

With regards to reports of home sales on Oahu, the majority of closed sales were already in escrow for at least 30 days prior to stay-at-home orders that were issued by local government officials on March 23, 2020 as a result of COVID-19.

Thus, new listings decreased significantly in March 2020 as compared to February 2020 and are likely early indicators of the economic uncertainty and shift in market activity due to the impacts of COVID-19 in Hawaii.

For the three months ended March 31, 2020, the volume of single-family home sales increased by 11.6%, while condominium sales decreased by 0.8% compared to the same period in 2019 according to the Honolulu Board of Realtors.

The median price of single-family home sales and condominium sales on Oahu was $780,000 and $430,000, respectively, or unchanged and an increase of 4.6%, respectively, for the three months ended March 31, 2020 as compared to the same period in 2019.

As of March 31, 2020, months of inventory of single-family homes and condominiums on Oahu remained low at approximately 2.6 and 3.6 months, respectively.

Lastly, state general excise and use tax revenues increased by 6.0% for the first two months of 2020 as compared to the same period in 2019, according to the Hawaii Department of Taxation.

We expect tax revenues for the state to be significantly lower in the second quarter of 2020.

Thus far, the spread of COVID-19 has been relatively well controlled in Hawaii with quickly instituted stay-at-home orders and the implementation of the mandatory 14-day self-quarantine for residents and visitors arriving or returning to the State of Hawaii.

As a result, as of July 15, 2020, Hawaii has the lowest fatality and case rates per capita in the U.S as reported by the Centers for Disease Control and Prevention.

On May 5, 2020, the Governor of the State of Hawaii issued a seventh supplemental emergency proclamation which effectively ended stay-at-home orders and allowed for the reopening of certain businesses deemed to be of lower risk for COVID-19 transmissions.

Subsequently, on May 18, 2020, the Governor of the State of Hawaii issued an eighth supplemental emergency proclamation which outlined a four-phase reopening strategy for Hawaii’s economy and allowing for a gradual reopening of medium-risk businesses in June 2020.

Following the Governor’s issuance of a ninth supplemental emergency proclamation on June 24, 2020, which removed the 14-day self-quarantine mandate for interisland travel, the Governor of the State of Hawaii announced a program, effective September 1, 2020, that would allow passengers from the U.S.

mainland with an approved negative COVID-19 test within 72 hours prior to arrival in the State of Hawaii to bypass the state’s mandatory 14-day self-quarantine requirement.

For an economy that is heavily dependent on tourism, the combination of various response measures to the COVID-19 pandemic, including the stay-at-home orders for local residents and the mandatory 14-day self-quarantine for visitors resulted in an unprecedented increase in Hawaii unemployment.

The statewide seasonally-adjusted unemployment rate was 13.9% in June 2020 compared to 2.7% in June 2019, according to the State of Hawaii Department of Labor and Industrial Relations, while the national seasonally-adjusted unemployment rate was 11.1% in June 2020 compared to 3.7% in June 2019.

Visitor arrivals for the first five months of 2020 decreased by 49.5% compared to the same period in 2019, according to the Hawaii Tourism Authority.

Statistics on visitor spending were not available for 2020 due to insufficient data.

While we may see a gradual improvement in unemployment as local businesses and the Hawaii tourism industry slowly reopen, the timing and significance of the return of air travel and the recovery of the Hawaii tourism industry is highly uncertain and beyond our control.

With regards to reports of home sales on Oahu, although volume has decreased year-over-year due to stay-at-home orders that were in place earlier in the year, prices have remained stable.

For the six months ended June 30, 2020, the volume of single-family home sales decreased by 4.8%, while condominium sales decreased by 22.0% compared to the same period in 2019, according to the Honolulu Board of Realtors.

The median price of single-family home sales and condominium sales on Oahu was $785,000 and $428,000, respectively, or an increase of 1.3% and 2.1%, respectively, for the six months ended June 30, 2020 as compared to the same period in 2019.

As of June 30, 2020, months of inventory of single-family homes and condominiums on Oahu remained low at approximately 2.5 and 4.1 months, respectively.

Lastly, state general excise and use tax revenues decreased by 8.0% for the first five months of 2020 as compared to the same period in 2019, according to the Hawaii Department of Business, Economic Development & Tourism.

We expect tax revenues for the state to continue to be significantly lower when reported for the remainder of 2020.

Legislative and Regulatory Developments

1 unchanged sentence

These actions are further discussed below.

In response to current market conditions, the Federal Reserve has taken a number of proactive measures, including cutting its target for the federal funds rate by a total of 1.50%, bringing it down to a range of 0.00% to 0.25%.

In response to market conditions resulting from the COVID-19 pandemic, the Federal Reserve has taken a number of proactive measures, including cutting its target for the federal funds rate by a total of 1.50%, bringing it down to a range of 0.00% to 0.25%.

We expect that interest rates will remain at record low levels for the foreseeable future.

2 unchanged sentences

● establishing a temporary repurchase agreement facility for foreign and international monetary authorities;

● re-committing to quantitative easing through large-scale asset-purchase programs;

● committing to quantitative easing through large-scale asset-purchase programs;

● lowering the rate charged on its discount window and extending the length of the loans offered;

2 unchanged sentences

● introducing a number of additional facilities, such as the Main Street Lending Facility, which is designed to enhance support for small and mid-sized businesses that were in good financial standing before the crisis.

government has also enacted certain fiscal stimulus measures in several phases to counteract the economic disruption caused by the COVID-19.

government has also enacted certain fiscal stimulus measures in several phases to counteract the economic disruption caused by COVID-19.

The CARES Act, enacted on March 27, 2020, is an approximately $2 trillion emergency economic stimulus package in response to the COVID-19 outbreak.

Among other provisions, the CARES Act (i) authorizes the Secretary of the Treasury to make loans, loan guarantees and other investments, up to $500 billion, for assistance to eligible businesses, States and municipalities with limited, targeted relief for passenger air carriers, cargo air carriers, and businesses critical to maintaining national security, (ii) creates a $349 billion loan program (the “Paycheck Protection Program” or the “PPP”) for fully guaranteed loans (which may then be forgiven) to small businesses for, among other things, payroll, group health care benefit costs and qualifying mortgage, rent and utility payments, (iii) provides certain credits against the 2020 personal income tax for eligible individuals and their dependents, (iv) expands eligibility for unemployment insurance and provides eligible recipients with an additional $600 per week on top of the unemployment amount determined by each State and (v) sets a 60-day foreclosure moratorium beginning on March 18, 2020 for federally backed mortgage loans.

We continue to evaluate the potential impact of the CARES Act on our consolidated financial position, results of operations, and cash flows.

Among other provisions, the CARES Act (i) authorized the Secretary of the Treasury to make loans, loan guarantees and other investments, up to $500 billion, for assistance to eligible businesses, States and municipalities with limited, targeted relief for passenger air carriers, cargo air carriers, and businesses critical to maintaining national security, (ii) created a $670 billion loan program (the “Paycheck Protection Program” or the “PPP”) for fully guaranteed loans (which may then be forgiven) to small businesses for, among other things, payroll, group health care benefit costs and qualifying mortgage, rent and utility payments (program dollar amount includes amount approved under the original program in March 2020 and a second tranche which was approved in April 2020), (iii) provides certain credits against the 2020 personal income tax for eligible individuals and their dependents, (iv) expanded eligibility for unemployment insurance and provides eligible recipients with an additional $600 per week on top of the unemployment amount determined by each State and (v) set a 60-day foreclosure moratorium beginning on March 18, 2020 for federally backed mortgage loans (the Federal Housing Administration has subsequently announced a second extension of the foreclosure and eviction moratorium through August 31, 2020).

The Paycheck Protection Program Flexibility Act of 2020 (the “PPPF Act”) was enacted on June 5, 2020 and modified the PPP as follows:

(i) established a minimum maturity of five years for all loans made after the enactment of the PPPF Act and permits an extension of the maturity of existing loans to five years if the borrower and lender agree;

(ii) extended the “covered period” of the CARES Act from June 30, 2020, to December 31, 2020;

(iii) extended the eight-week “covered period” for expenditures that qualify for forgiveness to the earlier of 24 weeks following loan origination and December 31, 2020;

(iv) extended the deferral period for payment of principal, interest and fees to the date on which the forgiveness amount is remitted to the lender by the SBA;

(v) required the borrower to use at least 60% (down from 75%) of the proceeds of the loan for payroll costs, and up to 40% (up from 25%), for other permitted purposes, as a condition to obtaining forgiveness of the loan;

(vi) delayed from June 30, 2020 to December 31, 2020, the date by which employees must be rehired to avoid a reduction in the amount of forgiveness of a loan, and creates a “rehiring safe harbor” that allows businesses to remain eligible for loan forgiveness if they make a good faith attempt to rehire employees or hire similarly qualified employees, but are unable to do so, or are able to document an inability to return to pre-COVID-19 levels of business activity due to compliance with social distancing measures;

and (vii) allowed borrowers to receive both loan forgiveness under the PPP and the payroll tax deferral permitted under the CARES Act, rather than having to choose the more advantageous option.

In July 2020, the CARES Act was amended to extend, through August 8, 2020, the SBA’s authority to make commitments under the PPP.

The SBA’s existing authority had previously expired on June 30, 2020.

We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S.

The State of Hawaii is expected to receive at least $1.25 billion in federal aid from the CARES Act.

We expect that the majority of this federal aid will be used to help fund state and county government response efforts to COVID-19.

Additional federal funding is expected to provide for unemployment assistance, direct cash payments to Hawaii residents and funding to support local schools and colleges.

Impact to our Operations

As noted above, on March 23, 2020, the Governor of the State of Hawaii issued a third supplemental emergency proclamation that ordered all residents to stay-at-home, except for essential workers.

This stay-at-home order has been extended to May 31, 2020.

While the Bank is an essential business in Hawaii, we have seen a significant decrease in customer traffic in our branches.

As a result, we have strategically closed 26 of our branch locations on a temporary basis.

While we consolidated our branch locations, we continue to provide service to all customers and operate our businesses on all islands of Hawaii, Guam and Saipan.

Additionally, as part of our contingency plans, we have established a redundant operations center for our administrative operations and a significant number of our administrative employees are working remotely.

This stay-at-home order was in place until May 5, 2020.

While the Bank is an essential business in Hawaii, we saw a significant decrease in customer traffic in our branches.

As a result, we strategically closed 26 of our branch locations on a temporary basis.

On June 1, 2020, we reopened seven of these branch locations in connection with the reopening of our local businesses.

We continue to provide service to all customers and operate our businesses on all islands of Hawaii, Guam and Saipan.

Additionally, as part of our contingency plans, we have established a redundant operations center for our administrative operations, and about 30% of our employees are working remotely.

Impact on our Financial Position and Results of Operations

Due to the widespread impact that COVID-19 is having on Hawaii’s economy, we expect that adverse economic conditions will continue.

As noted above, once the mandatory stay-at-home measures are relaxed, we expect that local consumption of goods and services will begin to resume over an extended period of time.

Additionally the timing and significance of any return of air travel and the Hawaii tourism industry is highly uncertain and is dependent upon the number of cases declining around the globe and the widespread availability of a vaccine or testing and tracing capabilities.

During this time of uncertainty, we remain committed to helping our customers recover from financial difficulties due to COVID-19.

We are working with our impacted customers through offering payment deferrals and forbearance on certain loan products.

We will continue to closely monitor the impact that COVID-19 and the slowing Hawaii economy has on our customers and will adjust the means by which we assist our customers during this period of financial hardship.

The shut-down of our tourism industry, stay-at-home measures, an inevitable recession in Hawaii and record low interest rates have, and we expect will, negatively affect our financial position and results of operations.

Decreasing interest rates are expected to reduce our net interest margin, as, currently, our interest rate profile is such that we project net interest income will benefit from higher interest rates as our assets would reprice faster and to a greater degree than our liabilities, while in the case of lower interest rates, our assets would reprice downward and to a greater degree than our liabilities.

As Hawaii’s economy begins to reopen, we expect that local consumption of goods and services will begin to resume over an extended period of time.

Additionally, the timing and significance of the return of air travel and the Hawaii tourism industry is highly uncertain and is dependent upon, among other things, the number of cases declining around the globe, in the United States and, in particular, in Hawaii, visitor receptiveness to Hawaii’s new pre-travel COVID-19 testing requirements, an extended period in which there is no subsequent “wave” of infections and the widespread availability of a vaccine, treatment or testing, tracking and tracing capabilities.

During this time of uncertainty, we remain committed to servicing our customers, caring for our employees and supporting the community.

We are working with our customers impacted by COVID-19 through offering payment deferrals and forbearance on certain loan products.

We will continue to closely monitor the impact that COVID-19 and the recession in Hawaii has on our customers and will adjust the means by which we assist our customers during this period of financial hardship.

We are continuing to care for our employees by enabling over 50% of our employees to work from home, and for those employees who are deemed essential and unable to work from home, we continue to emphasize the importance of practicing social distancing and good hygiene practices in the workplace.

We also launched an initiative to support local restaurants and, through our foundation, to donate up to $1 million to support non-profit organizations with food supply and health and human service programs for those impacted by COVID-19.

The shut-down of our tourism industry, stay-at-home measures, the recession in Hawaii and record low interest rates have and we expect will continue to have a negative impact on our financial position and results of operations.

A continued decrease in interest rates, or sustained period of interest rates, would be expected to reduce our net interest margin, as, currently, our interest rate profile is such that we project net interest income will benefit from higher interest rates as our assets would reprice faster and to a greater degree than our liabilities, while in the case of lower interest rates, our assets would reprice downward and to a greater degree than our liabilities.

Our net interest margin also may be reduced as a result of our participation in the PPP, with loans made thereunder that are not forgiven carrying an interest rate of 1%.

Our credit risk profile will also be adversely impacted during this period of financial hardship for our customers.

We also expect that we will see temporary decreases in non-interest income, as we have taken certain measures to assist customers during the COVID-19 pandemic, including waiving non-customer ATM fees and penalties for early withdrawal of certificates of deposit.

We expect that these decreases will be offset, in whole or in part, by fees we receive through our participation in the PPP.

We also expect that we will see temporary decreases in non-interest income, as we have taken certain measures to assist customers during the COVID-19 pandemic, including waiving non-customer ATM fees (up to June 30, 2020) and penalties for early withdrawal of certificates of deposit.

Moreover, we have seen increased draws by some of our customers on lines of credit as they have sought to improve their liquidity positions.

2 unchanged sentences

In light of volatility in the capital markets and economic disruptions, we continue to carefully monitor our capital and liquidity positions.

At March 31, 2020, the Company was “well-capitalized” and met all applicable regulatory capital requirements, including with Common Equity Tier 1 capital ratios of 11.65%, compared to the minimum requirement of 4.50%.

As of June 30, 2020, the Company was “well-capitalized” and met all applicable regulatory capital requirements, including a Common Equity Tier 1 capital ratio of 11.86%, compared to the minimum requirement of 4.50%.

We continue to anticipate that we will have sufficient capital levels to meet all of these requirements.

Additionally, we continue to access our routine short-term funding sources, such as borrowings and repurchase agreements, and to assess longer-term funding sources.

For additional discussions surrounding our capital and liquidity positions and related risks, refer to the sections titled “Liquidity” and “Capital” in this MD&A.

For additional discussions regarding our capital and liquidity positions and related risks, refer to the sections titled “Liquidity” and “Capital” in this MD&A.

Selected Financial Data

2 unchanged sentences

For the Three Months Ended

For the Six Months Ended

(dollars in thousands, except per share data)

69 unchanged sentences

For the Three Months Ended

For the Six Months Ended

(dollars in thousands, except per share data)

2 unchanged sentences

Noninterest income

(Gain) loss on sale of securities

Losses (gains) on sale of securities

Core noninterest income (non-GAAP)

Noninterest expense

One-time items (d)

One-time items (a)

Core noninterest expense (non-GAAP)

Loss (gain) on sale of securities

One-time noninterest expense items (d)

Tax adjustments (e)

Losses (gains) on sale of securities

One-time noninterest expense items (a)

Tax adjustments (b)

Total core adjustments

8 unchanged sentences

(b) Represents the adjustments to net income, tax effected at the Company’s effective tax rate for the respective period.

(2) Except for the efficiency ratio and the core efficiency ratio, amounts are annualized for the three months ended March 31, 2020 and 2019.

(2) Except for the efficiency ratio and the core efficiency ratio, amounts are annualized for the three and six months ended June 30, 2020 and 2019.

(3) Core net interest margin is a non-GAAP financial measure.

19 unchanged sentences

For a reconciliation to the most directly comparable GAAP financial measure for core noninterest expense, see Table 2, GAAP to Non-GAAP Reconciliation.

(10) Net charge-offs / average total loans and leases are annualized for the three months ended March 31, 2020.

(10) Net charge-offs / average total loans and leases are annualized for the six months ended June 30, 2020.

(11) Return on average tangible assets, return on average tangible stockholders’ equity, tangible book value per share and tangible stockholders’ equity to tangible assets are non-GAAP financial measures.

8 unchanged sentences

For the Three Months Ended

For the Six Months Ended

(dollars in thousands, except per share data)

28 unchanged sentences

Tangible book value per share (non-GAAP)

(a) Annualized for the three months ended March 31, 2020 and 2019.

(a) Annualized for the three and six months ended June 30, 2020 and 2019.

Financial Highlights

Net income was $38.9 million for the three months ended March 31, 2020, a decrease of $31.1 million or 44% as compared to the same period in 2019.

Basic and diluted earnings per share were $0.30 per share for the three months ended March 31, 2020, a decrease of $0.22 per share or 42% as compared to the same period in 2019.

The decrease in net income was primarily due to a $35.5 million increase in the provision for credit losses (the “Provision”), a $6.4 million decrease in net interest income and a $3.8 million increase in noninterest expense, partially offset by a $12.6 million decrease in the provision for income taxes and a $2.2 million increase in noninterest income for the three months ended March 31, 2020.

Our return on average total assets was 0.77% for the three months ended March 31, 2020, a decrease of 61 basis points from the same period in 2019, and our return on average total stockholders’ equity was 5.87% for the three months ended March 31, 2020, a decrease of 529 basis points.

Our return on average tangible assets was 0.81% for the three months ended March 31, 2020, a decrease of 64 basis points from the same period in 2019, and our return on average tangible stockholders’ equity was 9.39% for the three months ended March 31, 2020, a decrease of 896 basis points from the same period in 2019.

Our efficiency ratio was 51.33% for the three months ended March 31, 2020 compared to 48.20% for the same period in 2019.

The increase in the efficiency ratio during the three months ended March 31, 2020 was primarily due to the loss of expense reimbursements from BNP Paribas (“BNPP”) as well as increased expenditures related to information technology initiatives.

Our results for the three months ended March 31, 2020 were highlighted by the following:

● Net interest income was $138.7 million for the three months ended March 31, 2020, a decrease of $6.4 million or 4% as compared to the same period in 2019.

Our net interest margin was 3.12% for the three months ended March 31, 2020, a decrease of 11 basis points as compared to the same period in 2019.

The decrease in net interest income, on a fully taxable-equivalent basis, was primarily due to lower yields in most loan categories and lower average balances in our investment securities portfolio, partially offset by lower deposit funding costs.

● The Provision was $41.2 million for the three months ended March 31, 2020, an increase of $35.5 million as compared to the same period in 2019.

Net income was $20.0 million for the three months ended June 30, 2020, a decrease of $52.4 million or 72% as compared to the same period in 2019.

Basic and diluted earnings per share were both $0.15 per share for the three months ended June 30, 2020, a decrease of $0.39 per share or 72% as compared to the same period in 2019.

The decrease in net income was primarily due to a $51.6 million increase in the provision for credit losses (the “Provision”), a $17.8 million decrease in net interest income and a $3.1 million decrease in noninterest income, partially offset by an $18.3 million decrease in the provision for income taxes and a $1.8 million decrease in noninterest expense for the three months ended June 30, 2020.

Our return on average total assets was 0.36% for the three months ended June 30, 2020, a decrease of 106 basis points from the same period in 2019, and our return on average total stockholders’ equity was 2.99% for the three months ended June 30, 2020, a decrease of 814 basis points from the same period in 2019.

Our return on average tangible assets was 0.38% for the three months ended June 30, 2020, a decrease of 112 basis points from the same period in 2019, and our return on average tangible stockholders’ equity was 4.74% for the three months ended June 30, 2020, down from 17.99% for the same period in 2019.

We continued to prudently manage our expenses, as our efficiency ratio was 52.70% for the three months ended June 30, 2020 compared to 47.99% for the same period in 2019.

Our results for the three months ended June 30, 2020 were highlighted by the following:

● Net interest income was $127.8 million for the three months ended June 30, 2020, a decrease of $17.8 million or 12% as compared to the same period in 2019.

Our net interest margin was 2.58% for the three months ended June 30, 2020, a decrease of 67 basis points as compared to the same period in 2019.

The decrease in net interest income was primarily due to lower yields in all loan categories and lower yields in our investment securities portfolio, partially offset by lower deposit funding costs during the three months ended June 30, 2020.

● The Provision was $55.4 million for the three months ended June 30, 2020, an increase of $51.6 million, as compared to the same period in 2019.

This increase was primarily due to higher expected credit losses as a result of COVID-19 and its impact on Hawaii’s economy, key industries, businesses and our customers.

The Provision is recorded to maintain the Allowance for Credit Losses (“ACL”) at levels deemed adequate to absorb lifetime expected credit losses in our loan and lease portfolio as of the balance sheet date.

● Noninterest income was $49.2 million for the three months ended March 31, 2020, an increase of $2.2 million or 5% as compared to the same period in 2019.

The increase was primarily due to a $2.6 million net loss on the sale of available-for-sale debt securities recorded during the three months ended March 31, 2019.

The increase also stemmed from a $1.4 million increase in other noninterest income, a $1.0 million increase in trust and investment services income and a $0.9 million increase in service charges on deposit accounts, partially offset by a $1.7

million decrease in credit and debit card fees, a $1.6 million decrease in bank-owned life insurance (“BOLI”) income and a $0.6 million decrease in other service charges and fees for the three months ended March 31, 2020.

● Noninterest expense was $96.5 million for the three months ended March 31, 2020, an increase of $3.8 million or 4% as compared to the same period in 2019.

The increase in noninterest expense was primarily due to a $2.4 million increase in contracted services and professional fees, a $0.5 million increase in regulatory assessment and fees, a $0.4 million increase in equipment expense, a $0.3 million increase in card rewards program expense and a $0.3 million increase in occupancy expense.

During the beginning of 2020, we continued to benefit from a steady Hawaii economy, as reflected in the continued growth in our commercial and industrial loan portfolio.

However, by the end of the first quarter, Hawaii’s economy began to be impacted by COVID-19 and our responses to it.

As such, we increased our Provision in order to maintain adequate reserves for expected credit losses.

We also continued to maintain high levels of liquidity and remained well-capitalized as of March 31, 2020.

● Total loans and leases were $13.4 billion as of March 31, 2020, an increase of $168.6 million or 1% from December 31, 2019.

The increase was primarily due to growth in commercial and industrial loans during the three months ended March 31, 2020 due to an increase in lines drawn upon.

This was partially offset by decreases in our residential real estate and consumer portfolios.

● The ACL was $166.0 million as of March 31, 2020, an increase of $35.5 million or 27% from December 31, 2019.

● Noninterest income was $45.7 million for the three months ended June 30, 2020, a decrease of $3.1 million or 6% as compared to the same period in 2019.

The decrease was primarily due to a $5.8 million decrease in credit and debit card fees, a $2.2 million decrease in service charges on deposit accounts and a $1.5 million decrease in other service charges and fees, partially offset by a $5.8 million increase in other noninterest income and a $1.0 million increase in bank-owned life insurance (“BOLI”) income.

● Noninterest expense was $91.5 million for the three months ended June 30, 2020, a decrease of $1.8 million or 2% compared to the same period in 2019.

The decrease in noninterest expense was primarily due to a $2.5 million decrease in card rewards program expense, a $0.8 million decrease in other expenses and a $0.6 million decrease in advertising and marketing expense, partially offset by a $1.2 million increase in contracted services and professional fees and a $0.7 million increase in equipment expense.

Net income was $58.9 million for the six months ended June 30, 2020, a decrease of $83.4 million or 59% as compared to the same period in 2019.

Basic and diluted earnings per share were both $0.45 per share for the six months ended June 30, 2020, a decrease of $0.61 per share or 58% as compared to the same period in 2019.

The decrease in net income was primarily due to a $87.1 million increase in the Provision, a $24.2 million decrease in net interest income, a $2.0 million increase in noninterest expense and a $1.0 million decrease in noninterest income, partially offset by a $30.8 million decrease in the provision for income taxes for the six months ended June 30, 2020.

Our return on average total assets was 0.56% for the six months ended June 30, 2020, a decrease of 84 basis points from the same period in 2019, and our return on average total stockholders’ equity was 4.42% for the six months ended June 30, 2020, a decrease of 673 basis points from the same period in 2019.

Our return on average tangible assets was 0.58% for the six months ended June 30, 2020, a decrease of 90 basis points from the same period in 2019, and our return on average tangible stockholders’ equity was 7.04% for the six months ended June 30, 2020, down from 18.17% for the same period in 2019.

Our efficiency ratio was 51.99% for the six months ended June 30, 2020 compared to 48.09% for the same period in 2019.

Our results for the six months ended June 30, 2020 were highlighted by the following:

● Net interest income was $266.5 million for the six months ended June 30, 2020, a decrease of $24.2 million or 8% as compared to the same period in 2019.

Our net interest margin was 2.84% for the six months ended June 30, 2020, a decrease of 40 basis points as compared to the same period in 2019.

The decrease in net interest income was primarily due to lower yields in most loan categories and lower yields in our investment securities portfolio.

This was partially offset by lower deposit funding costs.

● The Provision was $96.6 million for the six months ended June 30, 2020, an increase of $87.1 million as compared to the same period in 2019.

This increase was primarily due to higher expected credit losses as a result of COVID-19 and its impact on Hawaii’s economy, key industries, businesses and our customers.

The Provision is recorded to maintain the ACL at levels deemed adequate to absorb lifetime expected credit losses in our loan and lease portfolio as of the balance sheet date.

● Noninterest income was $94.9 million for the six months ended June 30, 2020, a decrease of $1.0 million or 1% as compared to the same period in 2019.

The decrease was primarily due to a $7.5 million decrease in credit and debit card fees, a $2.1 million decrease in other service charges and fees, a $1.3 million decrease on service charges on deposit accounts and a $0.5 million decrease in BOLI income, partially offset by a $7.2 million increase in other income, a $2.5 million decrease in losses from the sale of available for sale investment securities and a $0.7 million increase in trust and investment services income.

● Noninterest expense was $187.9 million for the six months ended June 30, 2020, an increase of $2.0 million or 1% as compared to the same period in 2019.

The increase in noninterest expense was primarily due to a $3.6 million increase in contracted services and professional fees and a $1.1 million increase in equipment expense, partially offset by a $2.2 million decrease in card rewards program expense, a $0.7 million decrease in advertising and marketing expense and a $0.6 million decrease in other noninterest expense.

Hawaii’s economy continues to be meaningfully impacted by COVID-19 and the responses to it.

These responses included stay-at-home orders for businesses deemed nonessential, from the end of March 2020 to June 2020, and the implementation of the mandatory 14-day self-quarantine for residents and visitors arriving or returning to the State of Hawaii.

For an economy that is heavily dependent on tourism, the combination of these various response measures to the COVID-19 pandemic resulted in an unprecedented increase in Hawaii unemployment.

As such, we increased our Provision in order to maintain adequate reserves for expected losses.

We also continued to maintain high levels of liquidity and remained well-capitalized as of June 30, 2020.

● Total loans and leases were $13.8 billion as of June 30, 2020, an increase of $552.4 million or 4% from December 31, 2019.

The increase was primarily due to growth in commercial and industrial loans stemming from PPP loans totaling $916.4 million, partially offset by decreases in our Shared National Credits and dealer flooring portfolios during the six months ended June 30, 2020.

The increase in loans was partially offset by decreases in our consumer portfolio, primarily due to decreases in credit card balances and indirect automobile loans.

● The ACL was $192.1 million as of June 30, 2020, an increase of $61.6 million or 47% from December 31, 2019.

This increase was primarily due to the aforementioned higher expected credit losses as a result of COVID-19 and its impact on Hawaii’s economy, key industries, businesses and our customers.

The ratio of our ACL to total loans and leases outstanding was 1.24% as of March 31, 2020, an increase of 25 basis points compared to December 31, 2019.

The total fair value of our investment securities portfolio was $4.1 billion as of March 31, 2020, a decrease of $17.2 million compared to December 31, 2019.

This decrease was primarily due to paydowns and proceeds from calls, partially offset by purchases in this portfolio.

● Total deposits were $17.0 billion as of March 31, 2020, an increase of $575.0 million or 3% as compared to December 31, 2019.

The increase in total deposits was primarily due to a $424.9 million increase in public time deposit balances, a $214.5 million increase in savings deposit balances and a $92.9 million increase in money market deposit balances, partially offset by a $134.5 million decrease in demand deposit balances.

● Total stockholders’ equity was $2.7 billion as March 31, 2020, an increase of $24.4 million or 1% from December 31, 2019.

The increase in stockholders’ equity was primarily due to earnings for the period of $38.9 million and a net change in the fair value of our investment securities of $36.0 million.

This was partially offset by dividends declared and paid to the Company’s stockholders of $33.8 million, the cumulative effect adjustment of a change in an accounting principle of $12.5 million and common stock repurchased of $5.0 million during the three months ended March 31, 2020.

The ratio of our ACL to total loans and leases outstanding was 1.40% as of June 30, 2020, an increase of 41 basis points compared to December 31, 2019.

● We continued to invest in high-grade investment securities, primarily collateralized mortgage obligations issued by the Government National Mortgage Association (“Ginnie Mae”), the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”).

The total fair value of our investment securities portfolio was $5.1 billion as of June 30, 2020, an increase of $1.1 billion compared to December 31, 2019.

The increase was primarily due to purchases in this portfolio as we invested excess liquidity into securities.

● Total deposits were $19.4 billion as of June 30, 2020, an increase of $2.9 billion or 18% as compared to December 31, 2019.

The increase in total deposits was primarily due to a $1.0 billion increase in public time deposit balances, a $1.0 billion increase in demand deposit balances and a $728.4 million increase in savings deposit balances.

Deposits were increased in anticipation of a surge in funding needs due to our participation in the PPP and other additional liquidity needs.

● Total stockholders’ equity was $2.7 billion as of June 30, 2020, an increase of $61.6 million or 2% from December 31, 2019.

The increase in stockholders’ equity was primarily due to a net gain in the fair value of our investment securities of $84.6 million and earnings for the period of $58.9 million.

This was partially offset by dividends declared and paid to the Company’s stockholders of $67.5 million, the cumulative effect adjustment of a change in an accounting principle of $12.5 million and common stock repurchased of $5.0 million during the six months ended June 30, 2020.

Analysis of Results of Operations

Net Interest Income

For the three months ended March 31, 2020 and 2019, average balances, related income and expenses, on a fully taxable-equivalent basis, and resulting yields and rates are presented in Table 4.

For the three months ended June 30, 2020 and 2019, average balances, related income and expenses, on a fully taxable-equivalent basis, and resulting yields and rates are presented in Table 4.

An analysis of the change in net interest income, on a fully taxable-equivalent basis, is presented in Table 5.

2 unchanged sentences

Three Months Ended

March 31, 2020

March 31, 2019

June 30, 2020

June 30, 2019

(dollars in millions)

28 unchanged sentences

Income, if any, on such loans and leases is recognized on a cash basis.

(2) For the three months ended March 31, 2020 and 2019, the taxable-equivalent basis adjustments made to the table above were not material.

(2) Interest income includes taxable-equivalent basis adjustments of $0.1 million and nil for the three months ended June 30, 2020 and 2019, respectively.

Analysis of Change in Net Interest Income

Three Months Ended March 31, 2020

Compared to March 31, 2019

Three Months Ended June 30, 2020

Compared to June 30, 2019

(dollars in millions)

20 unchanged sentences

(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.

Net interest income, on a fully taxable-equivalent basis, was $138.7 million for the three months ended March 31, 2020, a decrease of $6.4 million or 4% compared to the same period in 2019.

Our net interest margin was 3.12% for the three months ended March 31, 2020, a decrease of 11 basis points from the same period in 2019.

Yields on our loans and leases were 4.11% for the three months ended March 31, 2020, a decrease of 35 basis points as compared to the same period in 2019.

We experienced a decrease in our yields from total loans primarily due to decreases in adjustable rate commercial real estate and commercial and industrial loans, which are typically based on the LIBOR.

The average balance of our investment securities portfolio was $4.0 billion for the three months ended March 31, 2020, a decrease of $384.6 million or 9% from the same period in 2019.

Deposit funding costs were $15.6 million for the three months ended March 31, 2020, a decrease of $7.6 million or 33% compared to the same period in 2019.

Rates paid on our interest-bearing deposits were 59 basis points for the three months ended March 31, 2020, a decrease of 26 basis points compared to the same period in 2019.

Net interest income, on a fully taxable-equivalent basis, was $127.9 million for the three months ended June 30, 2020, a decrease of $17.7 million or 12% compared to the same period in 2019.

Our net interest margin was 2.58% for the three months ended June 30, 2020, a decrease of 67 basis points from the same period in 2019.

The decrease in net interest income, on a fully taxable-equivalent basis, was primarily due to lower yields in all loan categories and lower yields in our investment securities portfolio, partially offset by lower deposit funding costs during the three months ended June 30, 2020.

Yields on our loans and leases were 3.52% for the three months ended June 30, 2020, a decrease of 94 basis points as compared to the same period in 2019.

We experienced a decrease in our yields from total loans primarily due to decreases in adjustable rate commercial and industrial and commercial real estate loans, which are typically based on the LIBOR.

Decreases in the yield on commercial and industrial loans also stemmed from our participation in the PPP, as these loans have a fixed interest rate of one percent per annum.

Interest income earned on PPP loans was $5.4 million for the three months ended June 30, 2020.

The yield in our investment securities portfolio was 1.60% for the three months ended June 30, 2020, a decrease of 63 basis points from the same period in 2019.

Deposit funding costs were $8.6 million for the three months ended June 30, 2020, a decrease of $15.1 million or 64% compared to the same period in 2019.

Rates paid on our interest-bearing deposits were 29 basis points for the three months ended June 30, 2020, a decrease of 58 basis points compared to the same period in 2019.

For the six months ended June 30, 2020 and 2019, average balances, related income and expenses, on a fully taxable-equivalent basis, and resulting yields and rates are presented in Table 6.

An analysis of the change in net interest income, on a fully taxable-equivalent basis, is presented in Table 7.

Average Balances and Interest Rates

Six Months Ended

June 30, 2020

June 30, 2019

(dollars in millions)

Earning Assets

Interest-Bearing Deposits in Other Banks

Available-for-Sale Investment Securities

Loans Held for Sale

Loans and Leases (1)

Commercial and industrial

Commercial real estate

Residential mortgage

Home equity line

Lease financing

Total Loans and Leases

Other Earning Assets

Total Earning Assets (2)

Cash and Due from Banks

Interest-Bearing Liabilities

Interest-Bearing Deposits

Total Interest-Bearing Deposits

Short-Term Borrowings

Long-Term Borrowings

Total Interest-Bearing Liabilities

Net Interest Income

Interest Rate Spread

Net Interest Margin

Noninterest-Bearing Demand Deposits

Other Liabilities

Stockholders' Equity

Total Liabilities and Stockholders' Equity

(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) Interest income includes taxable-equivalent basis adjustments of $0.1 million and nil for the six months ended June 30, 2020 and 2019, respectively.

Analysis of Change in Net Interest Income

Six Months Ended June 30, 2020

Compared to June 30, 2019

(dollars in millions)

Change in Interest Income:

Interest-Bearing Deposits in Other Banks

Available-for-Sale Investment Securities

Loans Held for Sale

Loans and Leases

Commercial and industrial

Commercial real estate

Residential mortgage

Home equity line

Lease financing

Total Loans and Leases

Other Earning Assets

Total Change in Interest Income

Change in Interest Expense:

Interest-Bearing Deposits

Total Interest-Bearing Deposits

Short-Term Borrowings

Long-Term Borrowings

Total Change in Interest Expense

Change in Net Interest Income

(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.

Net interest income, on a fully taxable-equivalent basis, was $266.6 million for the six months ended June 30, 2020, a decrease of $24.1 million or 8% compared to the same period in 2019.

Our net interest margin was 2.84% for the six months ended June 30, 2020, a decrease of 40 basis points from the same period in 2019.

The decrease in net interest income, on a fully taxable-equivalent basis, was primarily due to lower yields in most loan categories and lower yields in our investment securities portfolio.

This was partially offset by lower deposit funding costs.

Yields on our loans and leases were 3.80% for the six months ended June 30, 2020, a decrease of 66 basis points as compared to the same period in 2019.

We experienced a decrease in our yield from total loans primarily due to decreases in adjustable rate commercial and industrial and commercial real estate loans, which are typically based on LIBOR.

Decreases in the yield on commercial and industrial loans also stemmed from our participation in the PPP, as these loans have a fixed interest rate of one percent per annum.

Interest income earned on PPP loans was $5.4 million for the six months ended June 30, 2020.

For the six months ended June 30, 2020, the yield in our investment securities portfolio was 1.84%, a decrease of 39 basis points compared to the same period in 2019.

Deposit funding costs were $24.2 million for the six months ended June 30, 2020, a decrease of $22.7 million or 48% compared to the same period in 2019.

Rates paid on our interest-bearing deposits were 43 basis points for the six months ended June 30, 2020, a decrease of 43 basis points compared to the same period in 2019.

The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions.

Our loan portfolio is affected by changes in the prime interest rate.

The prime rate began 2019 at 5.50% and decreased 50 basis points during the third quarter of 2019 (25 basis points in each of August and September) and 25 basis points in October 2019 to end the year at 4.75%.

During 2020, the prime rate decreased 150 basis points in March to end the first quarter at 3.25%.

The prime rate began in 2019 at 5.50% and decreased 50 basis points during the third quarter of 2019 (25 basis points in each of August and September) and 25 basis points in October 2019 to end the year at 4.75%.

During 2020, the prime rate decreased 150 basis points in March to end the first quarter at 3.25%, where it remained as at the end of the second quarter of 2020.

As noted above, our loan portfolio is also impacted by changes in the LIBOR.

At March 31, 2020, the one-month and three-month U.S.

dollar LIBOR interest rates were 0.99% and 1.45%, respectively, while a March 31, 2019, the one-month and three-month U.S.

At June 30, 2020, the one-month and three-month U.S.

dollar LIBOR interest rates were 0.16% and 0.30%, respectively, while at June 30, 2019, the one-month and three-month U.S.

dollar LIBOR interest rates were 2.40% and 2.32%, respectively.

1 unchanged sentence

During 2020, the target range for the federal funds rate decreased 150 basis points in March to end the first quarter at 0.00% to 0.25%,

The decrease in the

target range for the federal funds rate in March 2020 was largely an emergency measure by the Federal Reserve aimed at mitigating the economic impact of COVID-19.

where it remained as at the end of the second quarter of 2020.

In June 2020, the Federal Reserve indicated that it expects to maintain the targeted federal funds rate at current levels through 2022.

The decrease in the target range for the federal funds rate in 2020 was largely an emergency measure by the Federal Reserve aimed at mitigating the economic impact of COVID-19.

Provision for Credit Losses

The Provision was $41.2 million for the three months ended March 31, 2020, which represented an increase of $35.5 million compared to the same period in 2019.

The Provision was $55.4 million for the three months ended June 30, 2020, which represented an increase of $51.6 million compared to the same period in 2019.

We recorded net charge-offs of loans and leases of $23.4 million and $6.9 million for the three months ended June 30, 2020 and 2019, respectively.

This represented charge-offs of 0.67% and 0.21% of average loans and leases, on an annualized basis, for the three months ended June 30, 2020 and 2019, respectively.

The Provision was $96.6 million for the six months ended June 30, 2020, which represented an increase of $87.1 million compared to the same period in 2019.

This increase was primarily due to an adjustment related to COVID-19 and the impact we expect it to have on our customers.

We recorded net charge-offs of loans and leases of $6.1 million and $5.9 million for the three months ended March 31, 2020 and 2019, respectively.

This represented net charge-offs of 0.19% and 0.18% of average loans and leases, on an annualized basis, for the three months ended March 31, 2020 and 2019, respectively.

The ACL was $166.0 million as of March 31, 2020, an increase of $35.5 million or 27% from December 31, 2019 and represented 1.24% of total outstanding loans and leases as of March 31, 2020 compared to 0.99% of total outstanding loans and leases as of December 31, 2019.

We recorded net charge-offs of loans and leases of $29.5 million and $12.7 million for the six months ended June 30, 2020 and 2019, respectively.

This represented net charge-offs of 0.44% and 0.20% of average loans and leases, on an annualized basis, for the six months ended June 30, 2020 and 2019, respectively.

The ACL was $192.1 million as of June 30, 2020, an increase of $61.6 million or 47% from December 31, 2019 and represented 1.40% of total outstanding loans and leases as of June 30, 2020 compared to 0.99% of total outstanding loans and leases as of December 31, 2019.

The Provision is recorded to maintain the ACL at levels deemed adequate by management based on the factors noted in the “Risk Governance and Quantitative and Qualitative Disclosures About Market Risk — Credit Risk” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

Noninterest Income

Table 6 presents the major components of noninterest income for the three months ended March 31, 2020 and 2019:

Table 8 presents the major components of noninterest income for the three months ended June 30, 2020 and 2019 and Table 9 presents the major components of noninterest income for the six months ended June 30, 2020 and 2019:

Noninterest Income

6 unchanged sentences

Bank-owned life insurance

Investment securities gains (losses), net

Investment securities (losses) gains, net

Total noninterest income

n/m – Denotes a variance that is not a meaningful metric to inform the change in noninterest income for the three months ended March 31, 2020 to the same period in 2019.

Total noninterest income was $49.2 million for the three months ended March 31, 2020, an increase of $2.2 million or 5% as compared to the same period in 2019.

Service charges on deposit accounts were $9.0 million for the three months ended March 31, 2020, an increase of $0.9 million or 11% as compared to the same period in 2019.

This increase was primarily due to a $0.6 million increase in account analysis service charges and a $0.2 million increase in checking account service fees.

Credit and debit card fees were $14.9 million for the three months ended March 31, 2020, a decrease of $1.7 million or 10% as compared to the same period in 2019.

This decrease was primarily due to a $1.0 million decrease in merchant service revenues and a $0.4 million decrease in interchange settlement fees.

Other service charges and fees were $8.5 million for the three months ended March 31, 2020, a decrease of $0.6 million or 6% as compared to the same period in 2019.

This decrease was primarily due to a $0.5 million decrease in insurance income.

Trust and investment services income was $9.6 million for the three months ended March 31, 2020, an increase of $1.0 million or 11% as compared to the same period in 2019.

This increase was primarily due to a $0.6 million increase in investment management fees and a $0.4 million increase in trust service fees.

BOLI income was $2.3 million for the three months ended March 31, 2020, a decrease of $1.6 million or 41% as compared to the same period in 2019.

This decrease was due to a $1.1 million decrease in BOLI earnings and a $0.4 million decrease in death benefit proceeds from life insurance policies.

Net gains on the sale of investment securities were $0.1 million for the three months ended March 31, 2020, an increase of $2.7 million as compared to the same period in 2019.

The increase of $2.7 million was primarily due to a loss of $2.6 million for the three months ended March 31, 2019 stemming from our investment portfolio restructuring and sale of 48 investment securities in January 2019.

Other noninterest income was $4.9 million for the three months ended March 31, 2020, an increase of $1.4 million or 42% as compared to the same period in 2019.

The increase was primarily due to a $1.1 million gain on the sale of loans sold and a $1.0 million increase in customer-related interest rate swap fees.

This was partially offset by a $0.3 million tax refund received during the three months ended March 31, 2019 and a $0.1 million decrease in volume-based incentives.

n/m – Denotes a variance that is not a meaningful metric to inform the change in noninterest income for the three months ended June 30, 2020 to the same period in 2019.

Noninterest Income

Six Months Ended

(dollars in thousands)

Service charges on deposit accounts

Credit and debit card fees

Other service charges and fees

Trust and investment services income

Bank-owned life insurance

Investment securities losses, net

Total noninterest income

n/m – Denotes a variance that is not a meaningful metric to inform the change in noninterest income for the six months ended June 30, 2020 to the same period in 2019.

Total noninterest income was $45.7 million for the three months ended June 30, 2020, a decrease of $3.1 million or 6% as compared to the same period in 2019.

Total noninterest income was $94.9 million for the six months ended June 30, 2020, a decrease of $1.0 million or 1% as compared to the same period in 2019.

Service charges on deposit accounts were $5.9 million for the three months ended June 30, 2020, a decrease of $2.2 million or 27% as compared to the same period in 2019.

This decrease was primarily due to a $2.0 million decrease in overdraft and checking account fees and a $0.5 million decrease in ATM interchange fees from customers.

Service charges on deposit accounts were $14.9 million for the six months ended June 30, 2020, a decrease of $1.3 million or 8% as compared to the same period in 2019.

This decrease was primarily due to a $1.9 million decrease in overdraft and checking account fees, partially offset by a $0.8 million increase in account analysis service charges.

Credit and debit card fees were $10.9 million for the three months ended June 30, 2020, a decrease of $5.8 million or 35% as compared to the same period in 2019.

This decrease was primarily due to a $3.3 million decrease in interchange settlement fees from credit and debit cards, a $2.7 million decrease in merchant service revenues and a $1.3 million decrease in ATM surcharge fees.

This was partially offset by a $1.9 million decrease in network association dues.

Credit and debit card fees were $25.8 million for the six months ended June 30, 2020 a decrease of $7.5 million or 22% as compared to the same period in 2019.

This decrease was primarily due to a $3.8 million decrease in interchange settlement fees from credit and debit cards, a $3.7 million decrease in merchant service revenues and a $1.4 million decrease in ATM surcharge fees.

This was partially offset by a $1.8 million decrease in network association dues.

Other service charges and fees were $7.9 million for the three months ended June 30, 2020, a decrease of $1.5 million or 16% as compared to the same period in 2019.

This decrease was primarily due to a $0.5 million decrease in service fees related to participation loans, a $0.2 million decrease in foreign exchange processing fees, a $0.2 million decrease in online banking fees and a $0.2 million decrease in fees from annuities and securities.

Other service charges and fees were $16.5 million for the six months ended June 30, 2020, a decrease of $2.1 million or 11% as compared to the same period in 2019.

This decrease was primarily due to a $0.6 million decrease in service fees related to participation loans, a $0.5 million decrease in insurance income, a $0.3 million decrease in online banking fees and a $0.2 million decrease in foreign exchange processing fees.

Trust and investment services income was $8.7 million for the three months ended June 30, 2020, a decrease of $0.3 million or 3% as compared to the same period in 2019.

Trust and investment services income was $18.3 million for the six months ended June 30, 2020, an increase of $0.7 million or 4% as compared to the same period in 2019.

This increase was primarily due to a $0.9 million increase in investment management fees.

BOLI income was $4.4 million for the three months ended June 30, 2020, an increase of $1.0 million or 31% as compared to the same period in 2019.

This increase was due to a $0.7 million increase in death benefit proceeds from life insurance policies and a $0.3 million increase in BOLI earnings.

BOLI income was $6.7 million for the six months ended June 30, 2020, a decrease of $0.5 million or 7% as compared to the same period in 2019.

This decrease was due to a $0.8 million decrease in BOLI earnings, partially offset by a $0.3 million increase in death benefit proceeds from life insurance policies.

Net losses on the sale of investment securities were $0.2 million and nil for the three months ended June 30, 2020 and 2019, respectively.

Net losses on the sale of investment securities were $0.1 million and $2.6 million for the six months ended June 30, 2020 and 2019, respectively.

The decrease in losses of $2.5 million was primarily due to our investment portfolio restructuring and sale of 48 investment securities in January 2019, which contributed to the $2.6 million loss for the six months ended June 30, 2019.

Other noninterest income was $8.1 million for the three months ended June 30, 2020, an increase of $5.8 million as compared to the same period in 2019.

This increase was primarily due to a $3.5 million increase in customer-related interest rate swap fees, a $1.3 million increase in gains on the sale of residential mortgage loans and a $0.9 million increase in volume-based incentives.

Other noninterest income was $12.9 million for the six months ended June 30, 2020, an increase of $7.2 million as compared to the same period in 2019.

This increase was primarily due to a $4.6 million increase in customer-related interest rate swap fees, a $2.5 million increase in gains on the sale of residential mortgage loans and a $0.8 million increase in volume-based incentives.

Noninterest Expense

Table 7 presents the major components of noninterest expense for the three months ended March 31, 2020 and 2019:

Table 10 presents the major components of noninterest expense for the three months ended June 30, 2020 and 2019 and Table 11 presents the major components of noninterest expense for the six months ended June 30, 2020 and 2019:

Noninterest Expense

7 unchanged sentences

Total noninterest expense

Total noninterest expense was $96.5 million for the three months ended March 31, 2020, an increase of $3.8 million or 4% as compared to the same period in 2019.

Salaries and employee benefits expense was $44.8 million for the three months ended March 31, 2020, a minimal change as compared to the same period in 2019.

Contracted services and professional fees were $16.1 million for the three months ended March 31, 2020, an increase of $2.4 million or 18% as compared to the same period in 2019.

Noninterest Expense

Six Months Ended

(dollars in thousands)

Salaries and employee benefits

Contracted services and professional fees

Regulatory assessment and fees

Advertising and marketing

Card rewards program

Total noninterest expense

Total noninterest expense was $91.5 million for the three months ended June 30, 2020, a decrease of $1.8 million or 2% as compared to the same period in 2019.

Total noninterest expense was $187.9 million for the six months ended June 30, 2020, an increase of $2.0 million or 1% as compared to the same period in 2019.

Salaries and employee benefits expense was $42.4 million for the three months ended June 30, 2020, an increase of $0.2 million or 1% as compared to the same period in 2019.

Salaries and employee benefits expense was $87.2 million for the six months ended June 30, 2020, an increase of $0.2 million or less than 1% as compared to the same period in 2019.

Contracted services and professional fees were $15.5 million for the three months ended June 30, 2020, an increase of $1.2 million or 8% as compared to the same period in 2019.

This increase was primarily due to a $1.0 million increase in contracted data processing expenses, primarily related to system upgrades and product enhancements.

Contracted services and professional fees were $31.5 million for the six months ended June 30, 2020, an increase of $3.6 million or 13% as compared to the same period in 2019.

This increase was primarily due to a $2.1 million increase in contracted data processing expenses, primarily related to system upgrades and product enhancements, a $1.0 million increase in outside services, primarily attributable to marketing and new customer services, and a $0.6 million increase in audit, legal and consultant fees.

Occupancy expense was $7.2 million for the three months ended March 31, 2020, an increase of $0.3 million or 4% as compared to the same period in 2019.

Equipment expense was $4.7 million for the three months ended March 31, 2020, an increase of $0.4 million or 10% as compared to the same period in 2019.

Regulatory assessment and fees were $1.9 million for the three months ended March 31, 2020, an increase of $0.5 million or 34% as compared to the same period in 2019.

This increase was primarily due to a $0.5 million increase in the FDIC insurance assessment rate.

Advertising and marketing expense was $1.8 million for the three months ended March 31, 2020, a decrease of $0.1 million or 7% as compared to the same period in 2019.

Card rewards program expense was $7.0 million for the three months ended March 31, 2020, an increase of $0.3 million or 4% as compared to the same period in 2019.

Other noninterest expense was $12.8 million for the three months ended March 31, 2020, increase of $0.1 million or 1% as compared to the same period in 2019.

Occupancy expense was $7.3 million for three months ended June 30, 2020, a minimal change as compared to the same period in 2019.

Occupancy expense was $14.5 million for the six months ended June 30, 2020, an increase of $0.3 million or 2% as compared to the same period in 2019.

Equipment expense was $5.2 million for the three months ended June 30, 2020, an increase of $0.7 million or 15% as compared to the same period in 2019.

This increase was primarily due to a $0.6 million increase in furniture and equipment depreciation expense.

Equipment expense was $9.9 million for the six months ended June 30, 2020, an increase of $1.1 million or 12% as compared to the same period in 2019.

This increase was primarily due to a $0.6 million increase in furniture and equipment depreciation expense and a $0.3 million increase in technology-related license and maintenance fees.

Regulatory assessment and fees were $2.1 million for the three months ended June 30, 2020, a minimal change as compared to the same period in 2019.

Regulatory assessment and fees were $4.0 million for the six months ended June 30, 2020, an increase of $0.5 million or 13% as compared to the same period in 2019.

Advertising and marketing expense was $1.4 million for the three months ended June 30, 2020, a decrease of $0.6 million or 29% as compared to the same period in 2019.

This decrease was primarily due to a $0.3 million decrease due to higher vendor reimbursements and a $0.3 million decrease in advertising costs.

Advertising and marketing expense was $3.2 million for the six months ended June 30, 2020, a decrease of $0.7 million or 18% as compared to the same period in 2019.

This decrease was primarily due to a $0.5 million decrease in advertising costs and a $0.2 million decrease due to higher vendor reimbursements.

Card rewards program expense was $5.2 million for the three months ended June 30, 2020, a decrease of $2.5 million or 33% as compared to the same period in 2019.

This decrease was primarily due to a $1.4 million decrease in priority rewards card redemptions, a $0.7 million decrease in interchange fees paid to our credit card partners and a $0.3 million decrease in credit card cash reward redemptions.

Card rewards program expense was $12.2 million for the six months ended June 30, 2020, a decrease of $2.2 million or 15% as compared to the same period in 2019.

This decrease was primarily due to a $1.4 million decrease in priority rewards card redemptions, a $0.5 million decrease in credit card cash reward redemptions and a $0.3 million decrease in interchange fees paid to our credit card partners.

Other noninterest expense was $12.4 million for the three months ended June 30, 2020, a decrease of $0.8 million or 6% as compared to the same period in 2019.

This decrease was primarily due to a $0.5 million decrease in net periodic benefit costs.

Other noninterest expense was $25.2 million for the six months ended June 30, 2020, a decrease of $0.7 million or 3% as compared to the same period in 2019.

This decrease was primarily due to a $0.9 million decrease in net periodic benefit costs.

Provision for Income Taxes

The provision for income taxes was $11.4 million (an effective tax rate of 22.65%) for the three months ended March 31, 2020, compared with the provision for income taxes of $23.9 million (an effective tax rate of 25.50%) for the same period in 2019.

The decrease in the effective tax rate was primarily due to state tax settlement with BNP Paribas USA, Inc.

The provision for income taxes was $6.5 million (an effective tax rate of 24.58%) for the three months ended June 30, 2020, compared with the provision for income taxes of $24.8 million (an effective tax rate of 25.50%) for the same period in 2019.

The provision for income taxes was $17.9 million (an effective tax rate of 23.32%) for the six months ended June 30, 2020, compared with the provision for income taxes of $48.7 million (an effective tax rate of 25.50%) for the same period in 2019.

The reduction in the effective tax rates for the three and six months ended June 30, 2020, compared to the same periods in 2019, was primarily due to the reduction of pretax income, which resulted in the tax credits, tax-exempt income and other tax benefit items to have proportionately higher impacts on the effective tax rates.

In addition, the reduction in the effective tax rate for the six months ended June 30, 2020 also stemmed from a state tax settlement with BNP Paribas USA, Inc.

related to periods during which the Company was included in the state combined returns of BNP Paribas USA, Inc.

1 unchanged sentence

Our business segments are Retail Banking, Commercial Banking and Treasury and Other.

Table 8 summarizes net income from our business segments for the three months ended March 31, 2020 and 2019.

Table 12 summarizes net income from our business segments for the three and six months ended June 30, 2020 and 2019.

Additional information about operating segment performance is presented in “Note 18.

4 unchanged sentences

The reallocation of select deposit balances affected net interest income, net interest income after provision for credit losses, noninterest income, provision for income taxes and net income.

The Company has reported its selected financial information using the new deposit balance alignments for the three months ended March 31, 2020.

The Company has restated the selected financial information for the three months ended March 31, 2019 in order to conform with the current presentation.

The Company has reported its selected financial information using the new deposit balance

alignments for the three and six months ended June 30, 2020.

The Company has restated the selected financial information for the three and six months ended June 30, 2019 in order to conform with the current presentation.

Additionally, during the fourth quarter of 2019, the Company changed its assumptions embedded in allocating deposit costs to business segments.

1 unchanged sentence

Business Segment Net Income

Three Months Ended

Six Months Ended

(dollars in thousands)

7 unchanged sentences

Our Retail Banking segment also includes our wealth management services.

Net income for the Retail Banking segment was $27.0 million for the three months ended March 31, 2020, a decrease of $26.3 million or 49% as compared to the same period in 2019.

Net income for the Retail Banking segment was $27.0 million for the three months ended June 30, 2020, a decrease of $25.1 million or 48% as compared to the same period in 2019.

The decrease in net income for the Retail Banking segment was primarily due to a $22.6 million increase in the Provision, an $11.6 million decrease in net interest income and a $1.2 million decrease in noninterest income, partially offset by a $8.3 million decrease in the provision for income taxes and a $1.9 million decrease in noninterest expense.

The increase in the Provision was primarily due to the adjustment related to COVID-19 and the impact that we expect it to have on our customers.

The decrease in net interest income was primarily due to a decrease in transfer pricing credits on interest expenses from deposits as a result of lower yields on our deposit portfolio.

The decrease in noninterest income was primarily due to decreases in overdraft and checking account fees and other services charges and fees, partially offset by higher gains on the sale of residential mortgage loans.

The decrease in the provision for income tax was primarily due to lower pretax income.

The decrease in noninterest expense was primarily due to a decrease in salaries and employee benefits expense.

Net income for the Retail Banking segment was $54.1 million for the six months ended June 30, 2020, a decrease of $51.4 million or 49% as compared to the same period in 2019.

The decrease in net income for the Retail Banking segment was primarily due to a $40.1 million increase in the Provision, a $28.9 million decrease in net interest income and a $2.6 million increase in noninterest expense, partially offset by a $18.9 million decrease in the provision for income taxes and a $1.3 million increase in noninterest income.

The increase in the Provision was primarily due to the adjustment related to COVID-19 and the impact that we expect it to have on our customers.

The decrease in net interest income was primarily due to lower spreads on our deposit and loan portfolios.

The increase in noninterest expense was primarily due to higher overall expenses that were allocated to the Retail Banking segment and an increase in contracted services and professional fees.

The decrease in the provision for income taxes was primarily due to the decrease in net income.

The increase in noninterest income was primarily due to higher gain on the sale of loans sold and an increase in trust and investment services income.

The decrease in net interest income was primarily due to a decrease in transfer pricing credits on interest expenses from deposits as a result of lower yields on our deposit portfolio, as well as higher transfer pricing charges related to the residential loans portfolio.

The increase in noninterest expense was primarily due to higher overall expenses that were allocated to the Retail Banking segment and an increase in contracted services and professional fees, partially offset by a decrease in salaries and benefits expense.

The decrease in the provision for income taxes was primarily due to the decrease in pretax income.

The increase in noninterest income was primarily due to higher gains on the sale of residential mortgage loans and an increase in trust and investment services income, partially offset by decreases in other service charges and fees and overdraft and checking account fees.

The increase in total assets for the Retail Banking segment was primarily due to PPP loans during the six months ended June 30, 2020.

Commercial Banking.

Our Commercial Banking segment includes our corporate banking, residential and commercial real estate loans, commercial lease financing, automobile loans and auto dealer financing, business deposit products and credit cards that we provide primarily to middle market and large companies in Hawaii, Guam, Saipan and California.

Net income for the Commercial Banking segment was $7.3 million for the three months ended March 31, 2020, a decrease of $15.3 million or 68% as compared to the same period in 2019.

The decrease in net income for the Commercial Banking segment was primarily due to a $17.7 million increase in the Provision and a $2.0 million increase in noninterest expense, partially offset by a $5.3 million decrease in the provision for income taxes.

Net income for the Commercial Banking segment was $4.3 million for the three months ended June 30, 2020, a decrease of $19.3 million or 82% as compared to the same period in 2019.

The decrease in net income for the Commercial Banking segment was primarily due to a $23.1 million increase in the Provision and a $1.9 million decrease in net interest income,

partially offset by a $7.1 million decrease in the provision for income taxes.

The increase in the Provision was primarily due to the adjustment related to COVID-19 and the expected impact that it will have on our customers.

The increase in noninterest expense was primarily due an increase in salaries and benefits expense, contracted services and professional fees and higher overall expenses that were allocated to the Commercial Banking segment.

The decrease in the provision for income taxes was primarily due to the decrease in net income.

The decrease in net interest income was primarily due to a decrease in transfer pricing credits on interest expenses from deposits as a result of lower yields on our deposit portfolio.

The decrease in the provision for income taxes was primarily due to the decrease in pretax income.

Net income for the Commercial Banking segment was $11.6 million for the six months ended June 30, 2020, a decrease of $34.5 million or 75% as compared to the same period in 2019.

The decrease in net income for the Commercial Banking segment was primarily due to a $40.7 million increase in the Provision, a $2.7 million increase in noninterest expense, a $2.1 million decrease in net interest income and a $1.3 million decrease in noninterest income, partially offset by a $12.4 million decrease in the provision for income taxes.

The increase in the Provision was primarily due to the adjustment related to COVID-19 and the expected impact that it will have on our customers.

The increase in noninterest expense was primarily due to increases in contracted services and professional fees, salaries and benefits expense, other taxes and higher overall expenses that were allocated to the Commercial Banking segment, partially offset by a decrease in card reward expenses.

The decrease in net interest income was primarily due to a decrease in transfer pricing credits on interest expenses from deposits as a result of lower yields on our deposit portfolio.

The decrease in noninterest income was primarily due to a decrease in credit and debit card fees, partially offset by an increase in customer-related swap fees.

The decrease in the provision for income taxes was primarily due to the decrease in pretax income.

The decrease in total assets for the Commercial Banking segment was primarily due to decreases in our Shared National Credits and dealer flooring portfolios, partially offset by higher draws on lines by existing customers and PPP loans during the six months ended June 30, 2020.

Treasury and Other.

5 unchanged sentences

Expenses incurred by these support units are charged to the applicable business segments through an internal cost allocation process.

Net income for the Treasury and Other segment was $4.6 million for the three months ended March 31, 2020, an increase in income of $10.5 million as compared to the same period in 2019.

The increase in net income was primarily due to a $11.2 million increase in net interest income and a $2.7 million decrease in noninterest expense, partially offset by a $3.2 million increase in the provision for income taxes.

The increase in net interest income was primarily due to lower expense charges on our deposit portfolio, partially offset by lower earnings credits as a result of lower yields in our loan portfolio and lower average balances in our investment securities portfolio.

The decrease in noninterest expense was primarily due to lower overall expenses that were allocated to the Treasury and Other segment, partially offset by an increase in salaries and employee benefits expense and contracted services and professional fees.

The increase in the provision for income taxes was primarily due to the increase in net income.

Net loss for the Treasury and Other segment was $11.3 million for the three months ended June 30, 2020, an increase in loss of $8.0 million as compared to the same period in 2019.

The increase in the net loss was primarily due to a $6.0 million increase in the Provision, a $4.3 million increase in net interest expense and a $1.2 million decrease in noninterest income, partially offset by a $2.8 million increase in the benefit for income taxes.

The increase in the Provision was primarily due to the adjustment related to COVID-19 and the expected impact that it will have on our customers.

The increase in net interest expense was primarily due to lower earnings credits as a result of lower average yields in our loan portfolio and lower average yields in our investment securities portfolio, partially offset by a decrease in transfer pricing charges as a result of lower yields on our deposit portfolio.

The decrease in noninterest income was primarily due to decreases in credit and debit card fees and overdraft and checking account fees, partially offset by an increase in BOLI income.

The increase in the benefit for income taxes was primarily due to the increase in pretax loss.

Net loss for the Treasury and Other segment was $6.8 million for the six months ended June 30, 2020, a decrease in loss of $2.5 million or 27% as compared to the same period in 2019.

The decrease in net loss was primarily due to a $6.9 million increase in net interest income and a $3.3 million decrease in noninterest expense, partially offset by a $6.3 million increase in the Provision and a $1.0 million decrease in noninterest income.

The increase in net interest income was primarily due to a decrease in transfer pricing charges as a result of lower yields on our deposit portfolio, partially offset by lower earnings credits as a result of lower average yields in our loan portfolio and lower average yields in our investment securities portfolio.

The decrease in noninterest expense was primarily due to higher overall expenses that led to a larger credit allocation to the Treasury and Other segment, as well as lower other taxes and pension-related expenses, partially offset by an increase in salaries and employee benefits expense and equipment expenses.

The increase in the Provision was primarily due to the

adjustment related to COVID-19 and the expected impact that it will have on our customers.

The decrease in noninterest income was primarily due to decreases in credit and debit card fees, overdraft and checking account fees, BOLI income, customer-related rate swap fees and market adjustments for foreign exchange transactions, partially offset by a decrease in net losses on the sale of investment securities as a result of the investment portfolio restructuring and sale of 48 investment securities in January 2019.

The increase in total assets for the Treasury and Other segment was primarily due to increases in interest-bearing deposits in other banks and investment securities portfolio during the six months ended June 30, 2020.

Analysis of Financial Condition

9 unchanged sentences

Immediate liquid resources are available in cash, which is primarily on deposit with the Federal Reserve Bank of San Francisco (the “FRB”).

As of March 31, 2020 and December 31, 2019, cash and cash equivalents were $1.1 billion and $0.7 billion, respectively.

As of June 30, 2020 and December 31, 2019, cash and cash equivalents were $1.9 billion and $0.7 billion, respectively.

Potential sources of liquidity also include investment securities in our available-for-sale portfolio.

The estimated fair value of our available-for-sale investment securities were $4.1 billion as of both March 31, 2020 and December 31, 2019.

As of March 31, 2020 and December 31, 2019, we maintained our excess liquidity primarily in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac.

As of March 31, 2020, our available-for-sale investment securities portfolio was comprised of securities with a weighted average life of approximately 3.5 years.

The estimated fair value of our available-for-sale investment securities were $5.1 billion and $4.1 billion as of June 30, 2020 and December 31, 2019, respectively.

As of June 30, 2020 and December 31, 2019, we maintained our excess liquidity primarily in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac.

As of June 30, 2020, our available-for-sale investment securities portfolio was comprised of securities with a weighted average life of approximately 4.2 years.

These funds offer substantial resources to meet either new loan demand or to help offset reductions in our deposit funding base.

Liquidity is further enhanced by our ability to pledge loans to access secured borrowings from the FHLB and the FRB.

As of March 31, 2020, we have borrowing capacity of $1.8 billion from the FHLB and $737.8 million from the FRB based on the amount of collateral pledged.

As of June 30, 2020, we had borrowing capacity of $1.9 billion from the FHLB and $982.0 million from the FRB based on the amount of collateral pledged.

As of December 31, 2019, we had borrowing capacity of $1.7 billion from the FHLB and $596.8 million from the FRB based on the amount of collateral pledged.

Our core deposits have historically provided us with a long-term source of stable and relatively lower cost of funding.

Our core deposits, defined as all deposits exclusive of time deposits exceeding $250,000, totaled $15.2 billion and $15.1 billion as of March 31, 2020 and December 31, 2019, which represented 90% and 92%, respectively, of our total deposits.

Our core deposits, defined as all deposits exclusive of time deposits exceeding $250,000, totaled $17.0 billion and $15.1 billion as of June 30, 2020 and December 31, 2019, which represented 88% and 92%, respectively, of our total deposits.

These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company, however, deposit levels could decrease if interest rates increase significantly or if corporate customers increase investing activities and reduce deposit balances

2 unchanged sentences

Additional sources of liquidity available to us include selling residential real estate loans in the secondary market, short- and long-term borrowings and the issuance of long-term debt and equity securities.

As of March 31, 2020, we increased our liquidity position through additional public time deposits in anticipation of a surge in funding needs due to our participation in the PPP and other additional liquidity needs.

At the start of the pandemic, we increased our liquidity position through additional public time deposits in anticipation of a surge in funding needs due to our participation in the PPP and other additional liquidity needs.

As of June 30, 2020, we maintained these higher levels of liquidity.

Investment Securities

Table 9 presents the estimated fair value of our available-for-sale investment securities portfolio as of March 31, 2020 and December 31, 2019:

Table 13 presents the estimated fair value of our available-for-sale investment securities portfolio as of June 30, 2020 and December 31, 2019:

Investment Securities

(dollars in thousands)

Treasury securities

Treasury and government agency debt securities

Government-sponsored enterprises debt securities

2 unchanged sentences

Residential - Government-sponsored enterprises

Commercial - Government agency

Commercial - Government-sponsored enterprises

3 unchanged sentences

Total available-for-sale securities

Table 10 presents the maturity distribution at amortized cost and weighted-average yield to maturity of our available-for-sale investment securities portfolio as of March 31, 2020:

Table 14 presents the maturity distribution at amortized cost and weighted-average yield to maturity of our available-for-sale investment securities portfolio as of June 30, 2020:

Maturities and Weighted-Average Yield on Securities (1)

4 unchanged sentences

(dollars in millions)

As of March 31, 2020

As of June 30, 2020

Available-for-sale securities

Treasury securities

Government-sponsored enterprises debt securities (3)

Treasury and government agency debt securities

Mortgage-backed securities (2) :

1 unchanged sentence

Residential - Government-sponsored enterprises

Commercial - Government agency

Commercial - Government-sponsored enterprises

2 unchanged sentences

Government-sponsored enterprises

Total available-for-sale securities as of March 31, 2020

Total available-for-sale securities as of June 30, 2020

(1) Weighted-average yields were computed on a fully taxable-equivalent basis.

(2) Maturities for mortgage-backed securities and collateralized mortgage obligations anticipate future prepayments.

(3) Maturities for government-sponsored enterprises debt securities purchased at a premium are categorized by their first call date.

The fair value of our available-for-sale investment securities portfolio was $4.1 billion as of March 31, 2020, a decrease of $17.2 million compared to December 31, 2019.

The fair value of our available-for-sale investment securities portfolio was $5.1 billion as of June 30, 2020, an increase of $1.1 billion or 26% compared to December 31, 2019.

Our available-for-sale investment securities are carried at fair value with changes in fair value reflected in other comprehensive income or through the Provision.

As of March 31, 2020, we maintained all of our investment securities in the available-for-sale category recorded at fair value in the unaudited interim consolidated balance sheets, with $3.1 billion invested in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac.

Our available-for-sale portfolio also included $883.4 million in mortgage-backed securities issued by Ginnie Mae, Freddie Mac and Fannie Mae, $30.9 million in U.S.

Treasury securities and $26.7 million in debt securities issued by government-sponsored enterprises (Federal Farm Credit Banks Funding Corporation callable bonds).

As of June 30, 2020, we maintained all of our investment securities in the available-for-sale category recorded at fair value in the unaudited interim consolidated balance sheets, with $3.5 billion invested in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac.

Our available-for-sale portfolio also included $1.6 billion in mortgage-backed securities issued by Ginnie Mae, Freddie Mac, Fannie Mae and a municipal housing authority and $94.9 million in debt securities issued by the U.S Treasury and government agencies (US International Development Finance Corporation bonds).

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.

2 unchanged sentences

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and the ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis.

If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and the ACL is recorded for the credit loss, limited by the amount that the

fair value is less than the amortized cost basis.

Any impairment that has not been recorded through the ACL is recognized in other comprehensive income.

For the three months ended March 31, 2020, we did not record any credit losses related to our investment securities portfolio.

Gross unrealized gains in our investment securities portfolio were $54.5 million and $19.0 million as of March 31, 2020 and December 31, 2019, respectively.

Gross unrealized losses in our investment securities portfolio were $10.4 million and $24.0 million as of March 31, 2020 and December 31, 2019, respectively.

The increase in unrealized gains in our investment securities portfolio was primarily due to lower market interest rates as of March 31, 2020, relative to December 31, 2019, resulting in a higher valuation.

For the three and six months ended June 30, 2020, we did not record any credit losses related to our investment securities portfolio.

Gross unrealized gains in our investment securities portfolio were $111.9 million and $19.0 million as of June 30, 2020 and December 31, 2019, respectively.

Gross unrealized losses in our investment securities portfolio were $1.6 million and $24.0 million as of June 30, 2020 and December 31, 2019, respectively.

The increase in unrealized gains in our investment securities portfolio was primarily due to lower market interest rates as of June 30, 2020, relative to December 31, 2019, resulting in a higher valuation.

The increase in unrealized gain positions was primarily related to our mortgage-backed securities and collateralized mortgage obligations, the fair values of which are sensitive to changes in market interest rates.

1 unchanged sentence

Our FHLB stock is accounted for at cost, which equals par or redemption value.

As of both March 31, 2020 and December 31, 2019, we held $34.1 million in FHLB stock, which is recorded as a component of other assets in our unaudited interim consolidated balance sheets.

As of June 30, 2020 and December 31, 2019, we held FHLB stock of $26.1 million and $34.1 million, respectively, which is recorded as a component of other assets in our unaudited interim consolidated balance sheets.

Investment Securities” contained in our unaudited interim consolidated financial statements for more information on our investment securities portfolio.

Loans and Leases

Table 11 presents the composition of our loan and lease portfolio by major categories as of March 31, 2020 and December 31, 2019:

Table 15 presents the composition of our loan and lease portfolio by major categories as of June 30, 2020 and December 31, 2019:

Loans and Leases

7 unchanged sentences

Total loans and leases

Total loans and leases were $13.4 billion as of March 31, 2020, an increase of $168.6 million or 1% from December 31, 2019 with increases in commercial and industrial loans, construction loans and lease financing.

It is possible that the effects of COVID-19 could result in less demand for our loan products.

Total loans and leases were $13.8 billion as of June 30, 2020, an increase of $552.4 million or 4% from December 31, 2019 with increases in commercial and industrial loans, construction loans and lease financing.

The increase in total loans and leases was primarily due to our participation in the PPP which had a total amortized cost basis of $916.4 million as of June 30, 2020.

While we have not experienced declines in our loan portfolio in the second quarter, it is possible that the effects of COVID-19 on the economy could result in less demand for our loan products.

Commercial and industrial loans are made primarily to corporations, middle market and small businesses for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes.

We also offer a variety of automobile dealer flooring lines to our customers in Hawaii and California to assist with the financing of their inventory.

Commercial and industrial loans were $3.0 billion as of March 31, 2020, an increase of $282.1 million or 10% from December 31, 2019.

This increase was primarily due to higher draws on lines by existing customers.

Commercial and industrial loans were $3.4 billion as of June 30, 2020, an increase of $680.5 million or 25% from December 31, 2019.

This increase was primarily due to PPP loans totaling $916.4 million, offset by decreases in our Shared National Credits and dealer flooring portfolios during the six months ended June 30, 2020.

Commercial real estate loans are secured by first mortgages on commercial real estate at loan to value (“LTV”) ratios generally not exceeding 75% and a minimum debt service coverage ratio of 1.20 to 1.

1 unchanged sentence

The primary source of repayment for investor property is cash flow from the property and for owner occupied property is the operating cash flow from the business.

Commercial real estate loans were $3.4 billion as of March 31, 2020, a decrease of $50.9 million or 2% from December 31, 2019.

This decrease was primarily due to a payoff of a commercial real estate loan totaling $50 million during the three months ended March 31, 2020.

Commercial real estate loans were $3.4 billion as of June 30, 2020, a decrease of $40.5 million or 1% from December 31, 2019.

This decrease was primarily due to a payoff of a commercial real estate loan totaling $50.0 million during the six months ended June 30, 2020.

Construction loans are for the purchase or construction of a property for which repayment will be generated by the property.

1 unchanged sentence

We classify loans as construction until the completion of the construction phase.

Following construction, if a loan is retained by the Bank, the loan is reclassified to the commercial real estate or residential real estate classes of loans.

Construction loans were $572.1 million as of March 31, 2020, an increase of $52.8 million or 10% from December 31, 2019.

The increase in construction loans stemmed from various disbursements of project loans during the three months ended March 31, 2020.

Following completion of the construction phase, if a loan is retained by the Bank, the loan is reclassified to the commercial real estate or residential real estate classes of loans.

Construction loans were $617.9 million as of June 30, 2020, an increase of $98.7 million or 19% from December 31, 2019.

The increase in construction loans stemmed from various disbursements of project loans during the six months ended June 30, 2020.

Residential real estate loans are generally secured by 1-4 unit residential properties and are underwritten using traditional underwriting systems to assess the credit risks and financial capacity and repayment ability of the consumer.

4 unchanged sentences

We generally do not offer interest-only, payment-option facilities, Alt-A loans or any product with negative amortization.

Residential real estate loans were $4.6 billion as of March 31, 2020, a decrease of $97.0 million or 2% from December 31, 2019.

Our portfolio of residential real estate loans declined due to the sale of $132.0 million in residential mortgages.

Residential real estate loans were $4.6 billion as of June 30, 2020, a decrease of $93.7 million or 2% from December 31, 2019.

Our portfolio of residential real estate loans declined due to the sale of $132.0 million in residential mortgages during the six months ended June 30, 2020.

Consumer loans consist primarily of open- and closed-end direct and indirect credit facilities for personal, automobile and household purchases as well as credit card loans.

We seek to maintain reasonable levels of risk in consumer lending by following prudent underwriting guidelines, which include an evaluation of personal credit history, cash flow and collateral values based on existing market conditions.

Consumer loans were $1.6 billion as of March 31, 2020, a decrease of $52.5 million or 3% from December 31, 2019.

The decrease in consumer loans was primarily due to lower credit card balances.

Consumer loans were $1.5 billion as of June 30, 2020, a decrease of $128.4 million or 8% from December 31, 2019.

The decrease in consumer loans was primarily due to decreases in credit card balances and indirect automobile loans.

Lease financing consists of commercial single investor leases and leveraged leases.

1 unchanged sentence

No new leveraged leases are being added to the portfolio and all remaining leveraged leases are running off.

Lease financing was $236.6 million as of March 31, 2020, an increase of $34.1 million or 17% from December 31, 2019.

Lease financing was $238.3 million as of June 30, 2020, an increase of $35.8 million or 18% from December 31, 2019.

The increase in lease financing was due to portfolio growth in our commercial single investor leases.

2 unchanged sentences

The Company’s loan and lease portfolio includes adjustable-rate loans, primarily tied to Prime and LIBOR, hybrid-rate loans, for which the initial rate is fixed for a period from one year to as much as ten years, and fixed rate loans, for which the interest rate does not change through the life of the loan.

Table 12 presents the recorded investment in our loan and lease portfolio as of March 31, 2020 by rate type:

Table 16 presents the recorded investment in our loan and lease portfolio as of June 30, 2020 by rate type:

Loans and Leases by Rate Type

March 31, 2020

June 30, 2020

Adjustable Rate

7 unchanged sentences

Total loans and leases

% by rate type at March 31, 2020

Tables 13 and 14 present the geographic distribution of our loan and lease portfolio as of March 31, 2020 and December 31, 2019:

% by rate type at June 30, 2020

Tables 17 and 18 present the geographic distribution of our loan and lease portfolio as of June 30, 2020 and December 31, 2019:

Geographic Distribution of Loan and Lease Portfolio

March 31, 2020

June 30, 2020

(dollars in thousands)

32 unchanged sentences

Our lease financing portfolio includes commercial leveraged and single investor lease financing activities both in Hawaii and on the U.S.

However, no new leveraged leases are being added to the portfolio.

However, no new leveraged leases are being added to the portfolio and all remaining leveraged leases are running off.

Our consumer lending activities are concentrated primarily in Hawaii and, to a smaller extent, in Guam and Saipan.

Table 15 presents certain contractual loan maturity categories and sensitivities of those loans to changes in interest rates as of March 31, 2020:

Table 19 presents certain contractual loan maturity categories and sensitivities of those loans to changes in interest rates as of June 30, 2020:

Maturities for Selected Loan Categories (1)

March 31, 2020

June 30, 2020

Due After One

18 unchanged sentences

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

Table 16 presents information on our non-performing assets and accruing loans and leases past due 90 days or more as of March 31, 2020 and December 31, 2019:

Table 20 presents information on our non-performing assets and accruing loans and leases past due 90 days or more as of June 30, 2020 and December 31, 2019:

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

27 unchanged sentences

Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More to Total Loans and Leases and OREO

Table 17 presents the activity in Non-Performing Assets (“NPAs”) for the three months ended March 31, 2020:

Table 21 presents the activity in Non-Performing Assets (“NPAs”) for the six months ended June 30, 2020:

Non-Performing Assets

Three Months Ended March 31,

Six Months Ended June 30,

(dollars in thousands)

2 unchanged sentences

Sales of other real estate owned

Charge-offs/write-downs

Total Reductions

3 unchanged sentences

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 other real estate owned or are no longer classified as non-accrual because they have returned to accrual status as a result of continued performance and an improvement in the borrower’s financial condition and loan repayment capabilities.

Total NPAs were $7.2 million as of March 31, 2020, an increase of $1.4 million or 24% from December 31, 2019.

The ratio of our NPAs to total loans and leases and other real estate owned was 0.05% as of March 31, 2020, an increase of one basis point from December 31, 2019.

The increase in total NPAs was primarily due to a $2.4 million increase in construction non-accrual loans, partially offset by a $0.9 million decrease in residential mortgage non-accrual loans.

The largest component of our NPAs continues to be residential mortgage loans.

The level of these NPAs can remain elevated due to a lengthy judicial foreclosure process in Hawaii.

As of March 31, 2020, residential mortgage non-accrual loans were $4.5 million, a decrease of $0.9 million or 17% from December 31, 2019.

As of March 31, 2020, our residential mortgage non-accrual loans were comprised of 28 loans with a weighted average current LTV ratio of 54%.

As of March 31, 2020, construction non-accrual loans were $2.4 million, an increase of $2.4 million or 100% from December 31, 2019.

This increase was primarily due to the addition of one construction non-accrual loan of $2.2 million.

Total NPAs were $33.3 million as of June 30, 2020, an increase of $27.5 million or 475% from December 31, 2019.

The ratio of our NPAs to total loans and leases and other real estate owned was 0.24% as of June 30, 2020, an increase of 20 basis points from December 31, 2019.

The increase in total NPAs was primarily due to a $13.1 million increase in commercial real estate non-accrual loans, a $11.5 million increase in commercial and industrial non-accrual loans and a $2.0 million increase in construction non-accrual loans.

As of June 30, 2020, commercial real estate non-accrual loans were $13.2 million, an increase of $13.1 million from December 31, 2019.

This increase was primarily due to an addition of a $15.1 million commercial real estate loan, partially offset by a $2.7 million charge-off.

The increase in commercial real estate non-accruals loans was primarily due to the impact of COVID-19 and the shut-down of the tourism industry in Hawaii.

As of June 30, 2020, commercial and industrial non-accrual loans were $11.6 million, an increase of $11.5 million from December 31, 2019.

This increase was primarily due to additions in commercial and industrial loans totaling $27.8 million, partially offset by $13.3 million in charge-offs and $3.0 million in payments.

The increase in commercial and industrial non-accruals loans was primarily due to the impact of COVID-19 and the shut-down of the tourism industry in Hawaii.

As of June 30, 2020, construction non-accrual loans were $2.0 million, an increase of $2.0 million or 100% from December 31, 2019.

This increase was primarily due to the addition of one construction non-accrual loan of $2.2 million, partially offset by a $0.4 million charge-off.

As of June 30, 2020, residential mortgage non-accrual loans were $6.1 million, an increase of $0.7 million or 12% from December 31, 2019.

As of June 30, 2020, our residential mortgage non-accrual loans were comprised of 36 loans with a weighted average current LTV ratio of 51%.

Other real estate owned represents property acquired as the result of borrower defaults on loans.

1 unchanged sentence

On an ongoing basis, properties are appraised as required by market conditions and applicable regulations.

As of March 31, 2020, other real estate owned was $0.2 million which was comprised of one residential real estate property.

As of June 30, 2020, other real estate owned was $0.4 million which was comprised of one residential real estate property.

As of December 31, 2019, other real estate owned was $0.3 million which was comprised of two residential real estate properties.

We experienced a higher level of NPAs as of March 31, 2020 as compared to December 31, 2019.

However, this likely does not reflect the expected higher level of NPAs we may experience due to the economic impact to Hawaii as a result of COVID-19.

We do expect to see higher levels of NPAs in the second quarter of 2020.

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 $10.9 million as of March 31, 2020, a decrease of $1.2 million or 10% as compared to December 31, 2019.

Construction and consumer loans that were past due 90 days or more and still accruing interest decreased by $2.2 million and $0.9 million, respectively, during the three months ended March 31, 2020.

This was partially offset by an increase of $2.6 million in commercial and industrial loans that were past due 90 days or more and still accruing interest during the three months ended March 31, 2020.

Loans and leases past due 90 days or more and still accruing interest were $10.1 million as of June 30, 2020, a decrease of $2.0 million or 17% as compared to December 31, 2019.

Construction and consumer loans that were past due 90 days or more and still accruing interest both decreased by $2.1 million during the six months ended June 30, 2020.

This was partially offset by increases of $1.5 million and $0.9 million in home equity lines and commercial and industrial loans, respectively, that were past due 90 days or more and still accruing interest during the six months ended June 30, 2020.

Impaired Loans.

1 unchanged sentence

For a loan that has been modified in a TDR, the contractual terms of the loan agreement refers to the contractual terms specified by the original loan agreement, not the contractual terms specified by the modified loan agreement.

Impaired loans were $25.4 million and $20.6 million as of March 31, 2020 and December 31, 2019, respectively.

These impaired loans had a related ACL of $2.3 million and $0.2 million as of March 31, 2020 and December 31, 2019, respectively.

The increase in impaired loans during the three months ended March 31, 2020 was primarily due to increases in commercial and industrial loans and construction loans of $3.1 million and $2.2 million, respectively, partially offset by a decrease in residential mortgage loans of $0.5 million.

The impaired loan balance is further decreased by charge-offs and paydowns.

As of both March 31, 2020 and December 31, 2019, we recorded charge-offs of $0.6 million, related to our total impaired loans.

Impaired loans were $44.7 million and $20.6 million as of June 30, 2020 and December 31, 2019, respectively.

These impaired loans had a related ACL of $1.6 million and $0.2 million as of June 30, 2020 and December 31, 2019.

The increase in impaired loans during the six months ended June 30, 2020 was primarily due to increases in commercial real estate, commercial and industrial and construction loans of $13.1 million, $10.2 million and $1.8 million, respectively, partially offset by a decrease in residential mortgage loans of $1.2 million.

The impaired loan balance is further decreased by charge-

offs and paydowns.

As of June 30, 2020 and December 31, 2019, we recorded charge-offs of $17.0 million and $0.6 million, respectively, related to our total impaired loans.

Our impaired loans are considered in management’s assessment of the overall adequacy of the ACL.

If interest due on the balances of all non-accrual loans as of March 31, 2020 and 2019 had been accrued under the original terms, approximately $0.1 million in additional interest income would have been recorded during both the three months ended March 31, 2020 and 2019.

Actual interest income recorded on these loans was nil for the three months ended March 31, 2020 compared to $0.5 million for the same period in 2019.

If interest due on the balances of all non-accrual loans as of June 30, 2020 had been accrued under the original terms, approximately $0.5 million and $0.6 million in additional interest income would have been recorded during the three and six months ended June 30, 2020, respectively, compared to nil and $0.1 million in additional interest income that would have been recorded for the same periods in 2019.

Actual interest income recorded on these loans was $0.1 million for both the three and six months ended June 30, 2020, compared to $0.4 million and $0.9 million, respectively, for the same periods in 2019.

COVID-19 Financial Hardship Relief Programs

Certain borrowers are currently unable to meet their contractual payment obligations because of the adverse effects of COVID-19.

To help mitigate these effects, we have begun to offer various relief programs to assist customers who are experiencing financial hardship due to COVID-19.

For residential mortgage loans, various relief options are available on a case-by-case basis, including mortgage forbearance and deferrals for up to six months.

For PayAnyDay personal loans, automobile loans, and Business First Term loans, loan assistance is being offered in the form of loan deferrals for up to three months, which extends the term of the loan by the number of months deferred.

Interest will continue to accrue on the principal balance.

For certain personal, small business, and home equity lines of credit, waivers of late fees are being offered.

For consumer and business credit cards, deferral of payments with waiver of interest and fees for up to three months is being offered for existing customers.

The short-term modifications (e.g., six months or less) for payment deferrals, fee waivers, extensions of repayment terms, or delays in payment described above that are insignificant and made on a good faith basis in response to borrowers impacted by COVID-19 who were current prior to any relief are not required to be accounted for and disclosed as TDRs under GAAP.

To help mitigate these effects, we have been offering various relief programs to assist customers who are experiencing financial hardship due to COVID-19.

For example, for certain residential mortgage and commercial loans, various relief options are available on a case-by-case basis, including payment deferrals for up to six months.

For certain consumer loans, loan assistance is being offered in the form of payment deferrals for up to three months, which extends the term of the loan by the number of months deferred, and interest will continue to accrue on the principal balance.

The short-term modifications for payment deferrals, extensions of repayment terms, or delays in payment described above that are insignificant and made on a good faith basis in response to borrowers impacted by COVID-19 who were current prior to any relief are not required to be accounted for and disclosed as TDRs under GAAP.

Please see “Note 4.

Allowance for Credit Losses” in the notes to our unaudited consolidated financial statements for further discussion on short-term modifications.

In addition to the relief programs described above, we are also participating in the PPP offered by the U.S.

Allowance for Credit Losses” in the notes to our unaudited interim consolidated financial statements for further discussion on short-term modifications.

Table 22 presents information on our loans and leases that received payment deferrals under our COVID-19 financial hardship relief programs as of June 30, 2020:

Loans and Leases Receiving Payment Deferrals under COVID-19 Financial Hardship Relief Programs

June 30, 2020

Number of Loans

(dollars in thousands)

Loans and Leases Receiving Payment Deferrals under COVID-19 Financial Hardship Relief Programs

Commercial and industrial

Commercial real estate

Lease financing

Residential mortgage

Total Loans and Leases Receiving Payment Deferrals under COVID-19 Financial Hardship Relief Programs

Total Loans and Leases

Ratio of Loans and Leases Receiving Payment Deferrals under COVID-19 Financial Hardship Relief Programs to Total Loans and Leases

In addition to the relief programs described above, we have been also participating in the PPP offered by the U.S.

Small Business Administration (“SBA”).

The PPP is intended to help small businesses impacted by the COVID-19 pandemic by providing “fully forgivable” loans for up to $10 million to cover up to eight weeks of payroll expenses, including employee benefits, and can also be used to make mortgage interest, rent and utility payments.

All PPP loans have a fixed interest rate of one percent per annum and a maturity date of two years, with the ability to prepay the loan in full without penalty.

The first payment is deferred for six months, and interest will continue to accrue during the initial deferment period.

The borrower may apply with the Bank for loan forgiveness of the amount due on the loan in an amount equal to payroll, employee benefits, mortgage interest, rent and utility costs incurred during the eight-week period, subject to limitations, in accordance with the PPP and CARES Act.

Because the purpose of the PPP is to help small businesses keep their workers employed and paid, if the business spends less than 75% of loan proceeds on payroll costs, uses the loan proceeds for non-payroll costs that are not related to mortgage interest, rent or utility payments, or significantly reduces its employee count or compensation levels by the end of the eight-week period, a portion of the loan will not be forgiven, and the business will be required to repay that portion of the loan to the Bank over a period of 18 months.

The PPP is intended to help small businesses impacted by the COVID-19 pandemic by providing “fully forgivable” loans for up to $10 million to cover up to 24 weeks of payroll expenses, including employee benefits, and can also be used to make mortgage interest, rent and utility payments.

PPP loans have a fixed interest rate of one percent per annum and a maturity date of up to five years, with the ability to prepay the loan in full without penalty.

The first payment is deferred for 10 months or until compensation is received for forgiven amounts, and interest will continue to accrue during the initial deferment period.

The borrower may apply with the Bank for loan forgiveness of the amount due on the loan in an amount equal to payroll, employee benefits, mortgage interest, rent and utility costs incurred during the 24-week period, subject to limitations, in accordance with the PPP and CARES Act.

Because the purpose of the PPP is to help small businesses keep their workers employed and paid, if the business spends less than 60% of loan proceeds on payroll costs, uses the loan proceeds for non-payroll costs that are not related to mortgage interest, rent or utility payments, or significantly reduces its employee count or compensation levels without qualifying for other exceptions, a portion of the loan will not be forgiven, and the business will be required to repay that portion of the loan to the Bank over the remaining term of the loan.

Table 23 presents information on our PPP loans outstanding as of June 30, 2020 to borrowers operating in industries greatly impacted by the COVID-19 pandemic (“high impact industries”) and all other industries:

PPP Loans Outstanding to Borrowers by Industry

June 30, 2020

(dollars in thousands)

PPP Loans Outstanding to Borrowers by Industry

High Impact Industries:

Automobile dealers

Hospitality/Hotel

Transportation

Total PPP Loans Outstanding to Borrowers Operating in High Impact Industries

All other industries (1)

Total PPP Loans Outstanding (2)

Total Loans and Leases

Ratio of PPP Loans Outstanding to Borrowers Operating in High Impact Industries to Total Loans and Leases

Ratio of PPP Loans Outstanding to Total Loans and Leases

(1) "All other industries"

represent borrowers that received PPP loans that did not operate in the five high impact industries listed above, which is primarily comprised of the construction, health care, and professional services industries.

(2) Outstanding loan balances are reported net of deferred loan costs and fees of $2.6 million and $27.4 million at June 30, 2020, respectively.

Loans Modified in a Troubled Debt Restructuring

Table 18 presents information on loans whose terms have been modified in a TDR as of March 31, 2020 and December 31, 2019:

Table 24 presents information on loans whose terms have been modified in a TDR as of June 30, 2020 and December 31, 2019:

Loans Modified in a Troubled Debt Restructuring

4 unchanged sentences

Residential mortgage

Loans modified in a TDR were $18.5 million as of March 31, 2020, an increase of $2.4 million or 15% from December 31, 2019.

This increase was primarily due to an increase in commercial and industrial loans of $3.1 million, partially offset by a decrease in residential mortgage loans of $0.7 million.

As of March 31, 2020, $17.8 million or 96% of our loans modified in a TDR were performing in accordance with their modified contractual terms and were on accrual status.

Loans modified in a TDR were $12.1 million as of June 30, 2020, a decrease of $3.9 million or 25% from December 31, 2019.

This decrease was primarily due to decreases in residential mortgage loans of $2.6 million and commercial and industrial loans of $1.3 million.

As of June 30, 2020, $11.2 million or 92% of our loans modified in a TDR were performing in accordance with their modified contractual terms and were on accrual status.

Generally, loans modified in a TDR are returned to accrual status after the borrower has demonstrated performance under the modified terms by making six consecutive timely payments.

5 unchanged sentences

2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments on January 1, 2020.

This guidance changes the accounting for credit losses from an “incurred loss” model, which estimates a loss allowance based on current known and inherent losses within a loan portfolio to an “expected loss” model, which estimates a loss based on losses expected to be recorded over the life of loan portfolio.

Effective January 1, 2020, we recorded a pre-tax cumulative effect adjustment to increase the ACL by $0.8 million and to increase the reserve for unfunded commitments by $16.3 million.

6 unchanged sentences

Allowance for Credit Losses

Three Months Ended March 31,

Three Months Ended June 30,

Six Months Ended June 30,

(dollars in thousands)

5 unchanged sentences

Commercial and industrial

Commercial real estate

Lease financing

1 unchanged sentence

Residential Loans:

Residential mortgage

Home equity line

17 unchanged sentences

Ratio of Allowance for Credit Losses for Loans and Leases to Loans and Leases Outstanding

(1) Annualized for the three months ended March 31, 2020 and 2019.

Tables 20 and 21 present the allocation of the ACL by loan and lease category, in both dollars and as a percentage of total loans and leases outstanding as of March 31, 2020 and December 31, 2019:

(1) Annualized for the three and six months ended June 30, 2020 and 2019.

Tables 26 and 27 present the allocation of the ACL by loan and lease category, in both dollars and as a percentage of total loans and leases outstanding as of June 30, 2020 and December 31, 2019:

Allocation of the Allowance for Credit Losses by Loan and Lease Category

8 unchanged sentences

Total Allowance for Credit Losses for Loans and Leases

Allocation of the Allowance for Credit Losses by Loan and Lease Category (as a percentage of total loans and leases outstanding)

Allocation of the Allowance for Credit Losses by Loan and Lease Category

(as a percentage of total loans

and leases outstanding)

lease category

9 unchanged sentences

Total residential

As of March 31, 2020, the ACL was $166.0 million or 1.24% of total loans and leases outstanding, compared with an ACL of $130.5 million or 0.99% of total loans and leases outstanding as of December 31, 2019.

The level of the ACL was commensurate with the adverse impacts that COVID-19 is starting to have on the Hawaii and global economy.

Net charge-offs of loans and leases were $6.1 million or 0.19% of total average loans and leases, on an annualized basis, for the three months ended March 31, 2020 compared to $5.9 million or 0.18% of total average loans and leases, on an annualized basis, for the three months ended March 31, 2019.

Net recoveries in our commercial lending portfolio were $0.1 million and nil for the three months ended March 31, 2020 and 2019, respectively.

Net recoveries in our residential lending portfolio were $0.2 million and $0.3 million for the three months ended March 31, 2020 and 2019, respectively.

As of June 30, 2020, the ACL was $192.1 million or 1.40% of total loans and leases outstanding, compared with an ACL of $130.5 million or 0.99% of total loans and leases outstanding as of December 31, 2019.

The level of the ACL was commensurate with the adverse impacts that COVID-19 is having on the Hawaii and global economy.

Net charge-offs of loans and leases were $23.4 million, or 0.67% of total average loans and leases on an annualized basis, for the three months ended June 30, 2020 compared to $6.9 million or 0.21% of total average loans and leases, on an annualized basis, for the three months ended June 30, 2019.

Net charge-offs in our commercial lending portfolio were $16.9 million and $1.9 million for the three months ended June 30, 2020 and 2019, respectively.

The increase in net charge-offs in our commercial lending portfolio was primarily due to $16.0 million in charge-offs related to several loans that have been adversely impacted by the shut-down of the tourism industry in Hawaii.

Net recoveries in our residential lending portfolio were nil and $0.2 million for the three months ended June 30, 2020 and 2019, respectively.

Net charge-offs in our consumer lending portfolio were $6.5 million and $5.1 million for the three months ended June 30, 2020 and 2019, respectively.

Net charge-offs in our consumer portfolio segment include those related to credit cards, automobile loans, installment loans and small business lines of credit and reflect the inherent risk associated with these loans.

Net charge-offs of loans and leases were $29.5 million, or 0.44% of total average loans and leases on an annualized basis, for the six months ended June 30, 2020 compared to $12.7 million or 0.20% of total average loans and leases, on an annualized basis, for the six months ended June 30, 2019.

Net charge-offs in our commercial lending portfolio were $16.8 million and $1.9 million for the six months ended June 30, 2020 and 2019, respectively.

Net recoveries in our residential lending portfolio were $0.3 million and $0.4 million for the six months ended June 30, 2020 and 2019, respectively.

Our net recovery position in this portfolio segment is largely attributable to rising real estate prices in Hawaii.

Net charge-offs in our consumer lending portfolio were $6.5 million and $6.1 million for the three months ended March 31, 2020 and 2019, respectively.

Net charge-offs in our consumer lending portfolio were $13.0 million and $11.3 million for the six months ended June 30, 2020 and 2019, respectively.

Net charge-offs in our consumer portfolio segment include those related to credit card, automobile loans, installment loans and small business lines of credit and reflect the inherent risk associated with these loans.

The increase in the ACL during the first quarter of 2020 was primarily due to the adverse economic impact that COVID-19 is having and is expected to continue to have on the global, national and local economies.

The increase in the ACL during the second quarter of 2020 was primarily due to the adverse economic impact that COVID-19 is having and is expected to continue to have on the global, national and local economies.

Business closures and the ripple effect it has had and will continue to have on unemployment filings is expected to impact the ability of our borrowers to continue to remain current on their loans and leases.

As noted earlier, a significant number of our customers (primarily individuals and small businesses) have taken advantage of payment deferral programs in assisting them while they may be temporarily unemployed or where their businesses have closed.

We continue to monitor the length and severity of the shut-down of our tourism industry and stay-at-home orders.

We continue to monitor the length and severity of the shut-down of our tourism industry and the re-opening of the Hawaii economy under new guidelines.

Once these measures are relaxed, we expect that local consumption of goods and services will begin to resume over an extended period of time.

Additionally, the timing and significance of any return of air travel and the Hawaii tourism industry is highly uncertain and is dependent upon the number of cases declining around the globe.

As of March 31, 2020, the higher allocation of our ACL to our commercial and consumer portfolio segments and the lower allocation to our residential portfolio segment (which is secured by real estate), is primarily due to expected credit losses related to COVID-19 and the impact that it will have on the Hawaii economy, local businesses and our customers.

As of June 30, 2020, the higher allocation of our ACL to our commercial and consumer portfolio segments and the lower allocation to our residential portfolio segment (which is secured by real estate), is primarily due to expected credit losses related to COVID-19 and the impact that it will have on the Hawaii economy, local businesses and our customers.

Allowance for Credit Losses” contained in our unaudited interim consolidated financial statements for more information on the ACL.

Goodwill was $995.5 million as of both March 31, 2020 and December 31, 2019.

Goodwill was $995.5 million as of both June 30, 2020 and December 31, 2019.

Our goodwill originated from the acquisition of the Company by BNPP in December of 2001.

2 unchanged sentences

Determining the amount of goodwill impairment, if any, includes assessing the fair value of the reporting unit and comparing it to the carrying amount of the reporting unit.

There was no impairment in our goodwill for the three months ended March 31, 2020.

Future events that could cause a significant decline in our expected future cash flows or a significant adverse change in our business or the business climate may necessitate taking charges in future reporting periods related to the impairment of our goodwill and other intangible assets.

Other assets were $594.4 million as of March 31, 2020, an increase of $103.9 million or 21% from December 31, 2019.

This increase was primarily due to a $95.2 million increase in interest rate swap agreements, a $32.2 million increase in prepaid assets, partially offset by a $10.5 million decrease in current tax receivables and deferred tax assets.

There was no impairment in our goodwill for the three and six months ended June 30, 2020.

Future events, or the continued adverse effect of ongoing events, including the COVID-19 pandemic, that could cause a significant decline in our expected future cash flows or a significant adverse change in our business or the business climate may necessitate taking charges in future reporting periods related to the impairment of our goodwill and other intangible assets.

Other assets were $576.5 million as of June 30, 2020, an increase of $85.9 million or 18% from December 31, 2019.

This increase was primarily due to a $107.0 million increase in interest rate swap agreements and a $31.0 million increase in prepaid assets, partially offset by a $30.6 million decrease in current tax receivables and deferred tax assets.

Deposits are the primary funding source for the Bank and are acquired from a broad base of local markets, including both individual and corporate customers.

We obtain funds from depositors by offering a range of deposit types, including demand, savings, money market and time.

Table 22 presents the composition of our deposits as of March 31, 2020 and December 31, 2019:

Table 28 presents the composition of our deposits as of June 30, 2020 and December 31, 2019:

(dollars in thousands)

Total Deposits (1)

(1) Public deposits were $1.6 billion as of March 31, 2020, an increase of $555.2 million or 55% compared to December 31, 2019.

Total deposits were $17.0 billion as of March 31, 2020, an increase of $575.0 million or 3% from December 31, 2019.

The increase in deposit balances stemmed from a $424.9 million increase in public time deposit balances, a $214.5 million increase in savings deposit balances and a $92.9 million increase in money market deposit balances, partially offset by a $134.5 million decrease in demand deposit balances.

The increase in public time deposits stemmed from the Company increasing its liquidity position in anticipation of a surge in funding needs due to our participation in the PPP and other additional liquidity needs.

(1) Public deposits were $2.4 billion as of June 30, 2020, an increase of $1.4 billion compared to December 31, 2019.

Total deposits were $19.4 billion as of June 30, 2020, an increase of $2.9 billion or 18% from December 31, 2019.

The increase in deposit balances stemmed from a $1.0 billion increase in public time deposit balances, a $1.0 billion increase in demand deposit balances and a $728.4 million increase in savings deposit balances.

We increased our liquidity position in anticipation of a surge in funding needs, primarily due to our participation in the PPP.

Short-term and Long-term Borrowings

Short-term borrowings were $400.0 million as of both March 31, 2020 and December 31, 2019.

These short-term FHLB fixed-rate advances have a weighted average interest rate of 2.84% and maturity dates in 2020.

Long-term borrowings were $200.0 million as of both March 31, 2020 and December 31, 2019.

As of June 30, 2020 and December 31, 2019, short-term borrowings were $200.0 million and $400.0 million, respectively.

These short-term FHLB fixed-rate advances have a weighted average interest rate of 2.88% and 2.84%, respectively.

The remaining short-term FHLB fixed-rate advance (as of June 30, 2020) matured in July 2020.

Long-term borrowings were $200.0 million as of both June 30, 2020 and December 31, 2019.

The Company’s long-term borrowings included $200.0 million in FHLB fixed-rate advances with a weighted average interest rate of 2.73% and maturity dates ranging from 2023 to 2024.

Long-term borrowings mature in excess of one year from the unaudited interim consolidated balance sheet date.

As of March 31, 2020, the available remaining borrowing capacity with the FHLB was $1.8 billion.

The FHLB fixed rate advances and remaining borrowing capacity were secured by residential real estate loan collateral as of March 31, 2020 and December 31, 2019.

As of June 30, 2020 and December 31, 2019, the available remaining borrowing capacity with the FHLB was $1.9 billion and $1.7 billion, respectively.

The FHLB fixed-rate advances and remaining borrowing capacity were secured by residential real estate loan collateral as of June 30, 2020 and December 31, 2019.

Pension and Postretirement Plan Obligations

8 unchanged sentences

and (4) discount rate.

Pension and postretirement benefit plan obligations, net of pension plan assets, were $122.0 million as of March 31, 2020, a nominal increase from December 31, 2019.

This increase was primarily due to net periodic benefit costs for the three months ended March 31, 2020 of $2.2 million, offset by payments of $2.2 million.

Pension and postretirement benefit plan obligations, net of pension plan assets, were $122.1 million as of June 30, 2020, an increase of $0.1 million from December 31, 2019.

This increase was primarily due to net periodic benefit costs for the six months ended June 30, 2020 of $4.3 million, offset by payments of $4.2 million.

See “Note 16.

2 unchanged sentences

Cross-border outstandings are defined as loans (including accrued interest), acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets which are denominated in dollars or other non-local currency.

As of March 31, 2020, aggregate cross-border outstandings in countries which amounted to 0.75% to 1% of our total consolidated assets were approximately $163.5 million to Canada.

As of June 30, 2020, there were no aggregate cross-border outstandings in countries which amounted to 0.75% to 1% of our total consolidated assets.

As of December 31, 2019, aggregate cross-border outstandings in countries which amounted to 0.75% to 1% of our total consolidated assets were approximately $174.7 million to Japan and $162.1 million to Canada.

There were no cross-border outstandings in excess of 1% of our total consolidated assets as of both March 31, 2020 and December 31, 2019.

There were no cross-border outstandings in excess of 1% of our total consolidated assets as of both June 30, 2020 and December 31, 2019.

The bank regulators currently use a combination of risk-based ratios and a leverage ratio to evaluate capital adequacy.

9 unchanged sentences

The capital conservation buffer is composed entirely of CET1, on top of these minimum risk weighted asset ratios, effectively resulting in minimum ratios of (i) 7% CET1 to risk-weighted assets, (ii) 8.5% Tier 1 capital to risk-weighted assets, and (iii) 10.5% total capital to risk-weighted assets.

As of March 31, 2020, the Company’s capital levels remained characterized as “well capitalized” under the Capital Rules.

As of June 30, 2020, the Company’s capital levels remained characterized as “well capitalized” under the Capital Rules.

Our regulatory capital ratios, calculated in accordance with the Capital Rules, are presented in Table 29 below.

There have been no conditions or events since March 31, 2020 that management believes have changed either the Company’s or the Bank’s capital classifications.

There have been no conditions or events since June 30, 2020 that management believes have changed either the Company’s or the Bank’s capital classifications.

Regulatory Capital

3 unchanged sentences

Common Equity Tier 1 Capital and Tier 1 Capital

Allowable Reserve for Loan and Lease Losses and Unfunded Commitments

Qualifying allowance for credit losses and reserve for unfunded commitments

Total Capital

5 unchanged sentences

Tier 1 Leverage Ratio

Total stockholders’ equity was $2.7 billion as of March 31, 2020, an increase of $24.4 million or 1% from December 31, 2019.

The increase in stockholders’ equity was primarily due to earnings for the period of $38.9 million and a net change in the fair value of our investment securities of $36.0 million.

This was partially offset by dividends declared and paid to the Company’s stockholders of $33.8 million, the cumulative effect adjustment of a change in accounting principle of $12.5 million and common stock repurchased of $5.0 million during the three months ended March 31, 2020.

In April 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.26 per share on our outstanding shares.

The dividend will be paid on June 5, 2020 to shareholders of record at the close of business on May 26, 2020.

Total stockholders’ equity was $2.7 billion as of June 30, 2020, an increase of $61.6 million or 2% from December 31, 2019.

The increase in stockholders’ equity was primarily due to a net gain in the fair value of our investment securities of $84.6 million and earnings for the period of $58.9 million.

In July 2020, the Company’s Board of Directors declared a quarterly cash dividend of $0.26 per share on our outstanding shares.

The dividend will be paid on September 4, 2020 to shareholders of record at the close of business on August 24, 2020.

Off-Balance Sheet Arrangements and Guarantees

6 unchanged sentences

As a result, we do not consolidate these VIEs.

We sell residential mortgage loans in the secondary market primarily to Fannie Mae or Freddie Mac.

We sell residential mortgage loans on the secondary market, primarily to Fannie Mae or Freddie Mac.

The agreements under which we sell residential mortgage loans to Fannie Mae or Freddie Mac 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 March 31, 2020 and December 31, 2019, the unpaid principal balance of our portfolio of residential mortgage loans sold was $2.4 billion and $2.3 billion, respectively.

The agreements under which we sell residential mortgage loans require delivery of various documents to the investor or its document custodian.

As of both June 30, 2020 and December 31, 2019, the unpaid principal balance of our portfolio of residential mortgage loans sold was $2.3 billion.

The agreements under which we sell 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, we 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 in the origination of those loans.

2 unchanged sentences

We manage the risk associated with potential repurchases or other forms of settlement through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards.

For the three months

ended March 31, 2020, there was one repurchase of a residential mortgage loan of $0.3 million and there were no pending repurchase requests.

For the six months ended June 30, 2020, there was one repurchase of a residential mortgage loan of $0.3 million and there were no pending repurchase requests.

In addition to servicing loans in our portfolio, substantially all of the loans we sell to investors are sold with servicing rights retained.

11 unchanged sentences

Remedies could include repurchase of an affected loan.

For the three months ended March 31, 2020, we had no repurchase requests related to loan servicing activities, nor were there any pending repurchase requests as of March 31, 2020.

For the six months ended June 30, 2020, we had no repurchase requests related to loan servicing activities, nor were there any pending repurchase requests as of June 30, 2020.

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 March 31, 2020, 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 March 31, 2020, 99% of our residential mortgage loans serviced for investors were current.

However, as of June 30, 2020, 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 June 30, 2020, 97% of our residential mortgage loans serviced for investors were current.

We maintain ongoing communications with investors and continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in loans sold to investors.

2 unchanged sentences

Future Application of Accounting Pronouncements

For a discussion of the expected impact of accounting pronouncements recently issued but not adopted by us as of March 31, 2020, see “Note 1.

For a discussion of the expected impact of accounting pronouncements recently issued but not adopted by us as of June 30, 2020, see “Note 1.

Organization and Basis of Presentation — Recent Accounting Pronouncements” to the unaudited interim consolidated financial statements for more information.

6 unchanged sentences

Written credit policies document underwriting standards, approval levels, exposure limits and other limits or standards deemed necessary and prudent.

Portfolio diversification at the obligor, industry, product, and/or geographic location levels is actively managed to mitigate concentration risk.

Portfolio diversification at the obligor, industry, product, and/or geographic location levels is actively managed to

mitigate concentration risk.

In addition, credit risk management includes an independent credit review process that assesses compliance with commercial, real estate and consumer credit policies, risk ratings and other critical credit information.

41 unchanged sentences

Credit card underwriting decisions are generally based on repayment ability of our borrower via DTI ratios, credit bureau information, including payment history, debt burden and credit scores, such as FICO, and analysis of financial capacity.

Automobile lending activities include loans and leases secured by new or used automobiles.

Automobile lending activities include loans and leases secured by new or

used automobiles.

We originate the majority of our automobile loans and leases on an indirect basis through selected dealerships.

1 unchanged sentence

Although an applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the collateral security to the proposed loan amount.

We require borrowers to maintain full coverage automobile insurance on automobile loans and leases, with the Bank listed as either

the loss payee or additional insured.

We require borrowers to maintain full coverage automobile insurance on automobile loans and leases, with the Bank listed as either the loss payee or additional insured.

Installment loans consist of open and closed end facilities for personal and household purchases.

2 unchanged sentences

While the Bank, our customers and our results of operations could be adversely impacted by events affecting the tourism industry, we also monitor our other industry exposures, including, but not limited to, our exposures in the oil, gas and energy industries.

As of March 31, 2020 and December 31, 2019, we did not have material exposures to customers in the oil, gas and energy industries.

As of June 30, 2020 and December 31, 2019, we did not have material exposures to customers in the oil, gas and energy industries.

Market risk is the potential of loss arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices, including the correlation among these factors and their volatility.

16 unchanged sentences

Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset liability management strategies to manage our interest rate risk.

Table 24 presents, for the twelve months subsequent to March 31, 2020 and December 31, 2019, an estimate of the changes in net interest income that would result from ramps (gradual changes) and shocks (immediate changes) in market interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario.

Table 30 presents, for the twelve months subsequent to June 30, 2020 and December 31, 2019, an estimate of the changes in net interest income that would result from ramps (gradual changes) and shocks (immediate changes) in market interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario.

Ramp scenarios assume interest rates move gradually in parallel across the yield curve relative to the base case scenario.

Shock scenarios assume an immediate and sustained parallel shift in interest rates across the entire yield curve, relative to the base case scenario.

The base case scenario assumes that the balance sheet is generally unchanged.

We evaluate the sensitivity by using a static forecast, where the balance sheets as of March 31, 2020 and December 31, 2019 are held constant.

The base case scenario assumes that the balance sheet and interest rates are generally unchanged.

We evaluate the sensitivity by using a static forecast, where the balance sheets as of June 30, 2020 and December 31, 2019 are held constant.

Net Interest Income Sensitivity Profile - Estimated Percentage Change Over 12 Months

1 unchanged sentence

Static Forecast

March 31, 2020

June 30, 2020

December 31, 2019

3 unchanged sentences

Currently, our interest rate profile is such that we project net interest income will benefit from higher interest rates as our assets would reprice faster and to a greater degree than our liabilities, while in the case of lower interest rates, our assets would reprice downward and to a greater degree than our liabilities.

Under the static balance sheet forecast as of March 31, 2020, our net interest income sensitivity profile is more sensitive in higher interest rate scenarios and generally less sensitive in lower interest rate scenarios as compared to similar forecasts as of December 31, 2019.

The sensitivity impacts described above are primarily due to lower market interest rates as of March 31, 2020 as compared with December 31, 2019, which has the effect of higher prepayments on loans and investment securities and reinvestments which occur at lower rates.

Because market interest rates have been approaching an interest rate floor, this dampens the impact of a lower interest rate scenario of 100 basis points for both ramp and shock scenarios.

Under the static balance sheet forecast as of June 30, 2020, our net interest income sensitivity profile is more sensitive in higher interest rate scenarios and less sensitive in lower interest rate scenarios as compared to similar forecasts as of December 31, 2019.

The sensitivity impacts described above are primarily due to holding a larger federal funds position and market interest rates being lower as of June 30, 2020 as compared with December 31, 2019.

A larger federal funds position has the effect of magnifying the impact of higher interest rate scenarios.

Lower market interest rates have the effect of higher prepayments on loans and investment securities and reinvestments which occur at lower rates.

Because market interest rates have been approaching an interest rate floor, this dampens the impact of the lower interest rate scenarios for both ramp and shock scenarios.

The comparisons above provide insight into the potential effects of changes in interest rates on net interest income.

6 unchanged sentences

The amount of base case measurement and its sensitivity to shifts in the yield curve allow management to measure longer term repricing option risk in the balance sheet.

We also analyze the historical sensitivity of our interest bearing transaction accounts to determine the portion that it classifies as interest rate sensitive versus the portion classified over one year.

This analysis divides interest bearing assets and liabilities into maturity categories and measures the “gap” between maturing assets and liabilities in each category.

Limitations of Market Risk Measures

4 unchanged sentences

Actual results could differ from those projected if we grow assets and liabilities faster or slower than estimated, if we experience a net outflow of deposits or if our mix of assets and liabilities otherwise changes.

For example, while we maintain relatively high levels of liquidity, a

faster than expected withdrawal of deposits out of the bank may cause us to seek higher cost sources of funding.

Actual results could also differ from those projected if we experience substantially different prepayment speeds in our loan portfolio than those assumed in the simulation analyses.

For example, while we maintain relatively high levels of liquidity, a faster than expected withdrawal of deposits out of the bank may cause us to seek higher cost sources of funding.

Actual results could also differ from those projected if we experience substantially different prepayment speeds in our loan portfolio than those assumed in

the simulation analyses.

Finally, these simulation results do not consider all the actions that we may undertake in response to potential or actual changes in interest rates, such as changes to our loan, investment, deposit, funding or hedging strategies.

75 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis