What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-02 compared with 2020-08-04 · 453 added, 409 removed, 1103 unchanged (44% of the section changed)

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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 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.

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 Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 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.

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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.

Several countries, including the U.S., have been particularly hard hit by COVID-19.

Through October 2020, the U.S.

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

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.

continues to experience a significant number of confirmed COVID-19 cases.

The global and U.S.

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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.

economy has deteriorated but is slowly improving.

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.

went into lockdown.

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.

The phased reopening of the U.S.

economy brought the national seasonally adjusted unemployment rate down to 7.9% in September 2020.

The August 2020 Beige Book reports “some improvements in tourism and retail sectors” but that “total spending was still below pre-pandemic levels.” New claims for unemployment insurance decreased to 800,000 per week in early October from above one million per week through July 2020.

real gross domestic product decreased at an annual rate by 5.0% in the first quarter of 2020, followed by a 31.4% decrease in the second quarter.

Hawaii Economy

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

Hawaii’s economy continues to be significantly 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.

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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.

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.

Subsequently, on March 23, 2020, the Governor of the State of Hawaii issued a third supplemental emergency proclamation that required all residents to stay at home, with the exception of certain essential activities associated with identified essential businesses and services.

As a result of these measures, thus far, the spread of COVID-19 has been relatively well controlled in Hawaii.

In May 2020, the Governor of the State of Hawaii issued a seventh and eighth supplemental emergency proclamation which effectively ended stay-at-home orders, allowed for the reopening of certain businesses deemed to be of lower risk for COVID-19 transmissions, and outlined a four-phase reopening strategy for Hawaii’s economy and allowing for a gradual reopening of medium-risk businesses in June 2020.

Subsequently, the Governor issued a ninth, tenth, eleventh, and twelfth supplemental emergency proclamation on June 10, July 17, August 7, and August 20, 2020, respectively, enforcing the 14-day self-quarantine mandate for interisland travel and travel to Hawaii state.

The Honolulu County Mayor also issued Emergency Order 2020-25 and 2020-26, essentially placing the island of Oahu under a second lockdown from August 27 through September 23, 2020.

The Governor of the State of Hawaii issued his thirteenth supplemental emergency proclamation on September 23, 2020, that allows 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, effective October 15.

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.

The statewide seasonally adjusted unemployment rate was 15.1% in September 2020 compared to 2.7% in September 2019, according to the State of Hawaii Department of Labor and Industrial Relations, while the national seasonally adjusted unemployment rate was 7.9% in September 2020 compared to 3.5% in September 2019.

Visitor arrivals for the first nine months of 2020 decreased by 72% 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.

While we may see a gradual improvement in unemployment as local businesses and the Hawaii tourism industry slowly reopen in the fourth quarter of 2020, the timing and extent of the return of air travel and the recovery of the Hawaii tourism industry is highly uncertain and beyond our control.

Although the volume of home sales on Oahu 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 nine months ended September 30, 2020, the volume of single-family home sales decreased by 1.4%, while condominium sales decreased by 18.9% 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 $811,000 and $430,000, respectively, or an increase of 3.3% and 1.2%, respectively, for the nine months ended September 30, 2020 as compared to the same period in 2019.

As of September 30, 2020, months of inventory of single-family homes and condominiums on Oahu remained low at approximately 1.9 and 4 months, respectively.

Lastly, state general excise and use tax revenues decreased by 11% for the first seven 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.

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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.

The Federal Reserve has instituted a number of other measures, including up to $2.3 trillion in lending to support households, employers, financial markets and state and local governments.

Additional actions taken by the Federal Reserve to mitigate the lasting impact from the coronavirus pandemic include the following:

In September 2020, the Federal Reserve indicated that it expects to maintain the targeted federal funds rate at current levels until such time that labor market conditions have reached levels consistent with the Federal Open Market Committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.

This timeframe is currently expected to last through 2023.

The Federal Reserve has instituted a number of other measures, to mitigate the lasting impact from the COVID-19 pandemic, including the following:

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

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(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;

(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 U.S.

Small Business Administration (“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;

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

In August 2020, President Trump signed four executive actions to provide additional COVID-19 relief.

These executive orders seek to (i) allocate $44 billion from the Disaster Relief Fund to provide additional unemployment benefits through the authorization of the Lost Wages Assistance Program, which provides for a $400-per-week payment to those currently receiving more than $100 a week in unemployment benefits due to disruptions caused by COVID-19, (ii) extend the moratorium on payments and interest accrual on student loans held by the government until the end of 2020, (iii) defer collections of certain employee social security payroll taxes, and (iv) identify options to help renters and homeowners avoid evictions and foreclosures.

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

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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 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.

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, with the exception of certain essential activities associated with identified essential businesses and services.

A stay-at-home order was in place until May 31, 2020, and then reinstated from August 27, 2020 through September 23, 2020.

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

As a result, we strategically closed 26 of our branch locations on a temporary basis and have decided to close four of them permanently by November 2020.

From June to early November 2020, we reopened 18 of the temporarily closed branch locations in connection with the reopening of local businesses.

The temporary (or in certain cases, permanent) closures of bank branches and the safety precautions implemented at re-opened branches could result in consumers becoming more comfortable with technology and devaluing face-to-face interaction.

Our business is relationship driven and such changes could necessitate changes to our business practices to accommodate changing consumer behaviors.

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.

Additionally, as part of our contingency plans, we have established a redundant operations center for our administrative operations, and many 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.

While its effects continue to materialize, the COVID-19 pandemic has resulted in a significant decrease in commercial activity throughout the State of Hawaii and nationally.

This decrease in commercial activity has caused and may continue to cause our customers (including affected businesses and individuals), vendors and counterparties to be unable to meet existing payment or other obligations to us.

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.

Additionally, the timing and extent of the return of air travel and the recovery of 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.

The economic pressures and uncertainties arising from the COVID-19 pandemic has resulted in and may continue to result in specific changes in consumer and business spending and borrowing and saving habits, affecting the demand for loans and other products and services we offer.

For example, certain industries may take longer to recover (particularly those that rely on travel or large gatherings) as consumers may be hesitant to travel or return to full social interaction.

We lend to customers operating in such industries including tourism, hotels/lodging, restaurants, entertainment and commercial real estate, among others.

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

We are continuing to care for our employees by enabling more 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.

We have also partnered with the Hawaii Community Foundation by contributing $1 million, through our foundation, to establish the $2 million Stronger Together Hawai’i Scholarship Fund, which provides scholarship opportunities to public high school seniors who graduated amidst the pandemic.

Unlike traditional scholarships that are limited to tuition and college materials, students awarded with the scholarship can use the funds in a variety of ways, with the intent to help students overcome barriers to their education caused by COVID-19.

The shut-down of Hawaii’s tourism industry, stay-at-home measures, the recession in Hawaii and record low interest rates 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 (up to June 30, 2020) and penalties for early withdrawal of certificates of deposit.

Our credit risk profile has also been, and we expect that it will continue to 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, partially driven by certain measures we have taken to assist customers during the COVID-19 pandemic.

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

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

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%.

As of September 30, 2020, the Company was “well-capitalized” and met all applicable regulatory capital requirements, including a Common Equity Tier 1 capital ratio of 12.22%, 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.

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For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

(dollars in thousands, except per share data)

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Core noninterest expense to average assets (non-GAAP) (1),(9)

September 30,

Balance Sheet Data:

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Net charge-offs / average total loans and leases (10)

September 30,

Capital Ratios:

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For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

(dollars in thousands, except per share data)

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Noninterest income

Losses (gains) on sale of securities

(Gains) losses on sale of securities

Core noninterest income (non-GAAP)

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Core noninterest expense (non-GAAP)

Losses (gains) on sale of securities

(Gains) losses on sale of securities

One-time noninterest expense items (a)

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Core efficiency ratio (non-GAAP)

(a) One-time items include nonrecurring offering costs.

(a) One-time items for the three and nine months ended September 30, 2019 included costs related to a nonrecurring payment for a former executive of the Company pursuant to the Bank’s Executive Change-in-Control Retention Plan, nonrecurring offering costs and the loss on our funding swap as a result of a 2019 decrease in the conversion rate of our Visa Class B restricted shares sold in 2016.

(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 and six months ended June 30, 2020 and 2019.

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

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

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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 six months ended June 30, 2020.

(10) Net charge-offs / average total loans and leases is annualized for the nine months ended September 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.

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For the Three Months Ended

For the Six Months Ended

For the Nine Months Ended

September 30,

(dollars in thousands, except per share data)

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Core noninterest expense to average assets (non-GAAP) (a)

September 30,

Balance Sheet Data:

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Tangible book value per share (non-GAAP)

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

(a) Annualized for the three and nine months ended September 30, 2020 and 2019.

Financial Highlights

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.

Net income was $65.1 million for the three months ended September 30, 2020, a decrease of $9.1 million or 12% as compared to the same period in 2019.

Basic and diluted earnings per share were both $0.50 per share for the three months ended September 30, 2020, a decrease of $0.06 per share or 11% as compared to the same period in 2019.

The decrease in net income was primarily due to a $9.1 million decrease in net interest income, a $5.1 million increase in the provision for credit losses (the “Provision”) and a $1.1 million decrease in noninterest income, partially offset by a $4.3 million decrease in the provision for income taxes and a $1.8 million decrease in noninterest expense for the three months ended September 30, 2020.

Our return on average total assets was 1.16% for the three months ended September 30, 2020, a decrease of 29 basis points from the same period in 2019, and our return on average total stockholders’ equity was 9.58% for the three months ended September 30, 2020, a decrease of 154 basis points from the same period in 2019.

Our return on average tangible assets was 1.21% for the three months ended September 30, 2020, a decrease of 31 basis points from the same period in 2019, and our return on average tangible stockholders’ equity was 15.16% for the three months ended September 30, 2020, down from 17.81% for the same period in 2019.

We continued to prudently manage our expenses, as our efficiency ratio was 50.01% for the three months ended September 30, 2020 compared to 48.41% for the same period in 2019.

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

● Net interest income was $134.0 million for the three months ended September 30, 2020, a decrease of $9.1 million or 6% as compared to the same period in 2019.

Our net interest margin was 2.70% for the three months ended September 30, 2020, a decrease of 49 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 and interest-bearing deposits in other banks, partially offset by lower deposit funding costs and higher average balances in our investment securities portfolio during the three months ended September 30, 2020.

● The Provision was $5.1 million for the three months ended September 30, 2020, compared to nil for 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 $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.

● Noninterest income was $48.9 million for the three months ended September 30, 2020, a decrease of $1.1 million or 2% as compared to the same period in 2019.

The decrease was primarily due to a $2.8 million decrease in credit and debit card fees, a $2.0 million decrease in service charges on deposit accounts and a $0.8 million decrease in bank-owned life insurance (“BOLI”) income, partially offset by a $4.5 million increase in other noninterest income.

● Noninterest expense was $91.6 million for the three months ended September 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 $1.9 million decrease in card rewards program expense, a $0.7 million decrease in other expenses and a $0.7 million decrease in salaries and employee benefits, partially offset by a $1.1 million increase in equipment expense.

Net income was $124.0 million for the nine months ended September 30, 2020, a decrease of $92.5 million or 43% as compared to the same period in 2019.

Basic earnings per share was $0.95 per share for the nine months ended September 30, 2020, a decrease of $0.67 per share or 41% as compared to the same period in 2019.

Diluted earnings per share was $0.95 per share for the nine months ended September 30, 2020, a decrease of $0.66 per share or 41% as compared to the same period in 2019.

The decrease in net income was primarily due to a $92.2 million increase in the Provision, a $33.3 million decrease in net interest income and a $2.0 million decrease in noninterest income, partially offset by a $35.1 million decrease in the provision for income taxes for the nine months ended September 30, 2020.

Our return on average total assets was 0.76% for the nine months ended September 30, 2020, a decrease of 66 basis points from the same period in 2019, and our return on average total stockholders’ equity was 6.16% for the nine months ended September 30, 2020, a decrease of 497 basis points from the same period in 2019.

Our return on average tangible assets was 0.80% for the nine months ended September 30, 2020, a decrease of 69 basis points from the same period in 2019, and our return on average tangible stockholders’ equity was 9.79% for the nine months ended September 30, 2020, down from 18.04% for the same period in 2019.

Our efficiency ratio was 51.32% for the nine months ended September 30, 2020 compared to 48.20% for the same period in 2019.

Our results for the nine months ended September 30, 2020 were highlighted by the following:

● Net interest income was $400.5 million for the nine months ended September 30, 2020, a decrease of $33.3 million or 8% as compared to the same period in 2019.

Our net interest margin was 2.79% for the nine months ended September 30, 2020, a decrease of 43 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 and interest-bearing deposits in other banks.

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.

● The Provision was $101.7 million for the nine months ended September 30, 2020, an increase of $92.2 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.

● Noninterest income was $143.8 million for the nine months ended September 30, 2020, a decrease of $2.0 million or 1% as compared to the same period in 2019.

The decrease was primarily due to a $10.3 million decrease in credit and debit card fees, a $3.3 million decrease on service charges on deposit accounts, a $2.0 million decrease in other service charges and fees and a $1.4 million decrease in BOLI income, partially offset by a $11.7 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 $279.5 million for the nine months ended September 30, 2020, an increase of $0.2 million as compared to the same period in 2019.

The increase in noninterest expense was primarily due to a $4.0 million increase in contracted services and professional fees, a $2.2 million increase in equipment expense and a $0.9 million increase in regulatory assessment fees, partially offset by a $4.1 million decrease in card rewards program expense, a $1.3 million decrease in other noninterest expense, a $1.0 million decrease in advertising and marketing expense and a $0.5 million decrease in salaries and employee benefits.

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

These responses included stay-at-home orders for businesses deemed nonessential, from March 23, 2020 to May 31, 2020 and from August 27, 2020 to September 23, 2020.

It also included 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.

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

and beyond our control.

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.

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

● Total loans and leases were $13.5 billion as of September 30, 2020, an increase of $288.3 million or 2% from December 31, 2019.

The increase was primarily due to growth in commercial and industrial loans stemming from PPP loans totaling $920.2 million, partially offset by decreases in our Shared National Credits and dealer flooring portfolios during the nine months ended September 30, 2020.

Additionally, the increase in loans was also due to increases in our construction portfolio, partially offset by decreases in our consumer portfolio, primarily due to decreases in credit card balances and indirect automobile loans, as well as in our residential portfolio.

● The ACL was $195.9 million as of September 30, 2020, an increase of $65.3 million or 50% 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 1.40% as of June 30, 2020, an increase of 41 basis points compared to December 31, 2019.

The ratio of our ACL to total loans and leases outstanding was 1.45% as of September 30, 2020, an increase of 46 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 total fair value of our investment securities portfolio was $5.7 billion as of September 30, 2020, an increase of $1.6 billion or 40% 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.

● Total deposits were $18.9 billion as of September 30, 2020, an increase of $2.5 billion or 15% as compared to December 31, 2019.

The increase in total deposits was primarily due to a $1.0 billion increase in demand deposit balances, a $1.0 billion increase in savings deposit balances, a $324.2 million increase in money market deposit balances and a $104.7 million increase in time 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.

● Total stockholders’ equity was $2.7 billion as of September 30, 2020, an increase of $93.7 million or 4% from December 31, 2019.

The increase in stockholders’ equity was primarily due to earnings for the period of $124.0 million and a net unrealized gain in the fair value of our investment securities of $83.1 million.

This was partially offset by dividends declared and paid to the Company’s stockholders of $101.3 million and the cumulative effect adjustment of a change in an accounting principle of $12.5 million during the nine months ended September 30, 2020.

Analysis of Results of Operations

Net Interest Income

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.

For the three months ended September 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

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

(dollars in millions)

28 unchanged sentences

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 three months ended June 30, 2020 and 2019, respectively.

(2) Interest income includes taxable-equivalent basis adjustments of $0.3 million and nil for the three months ended September 30, 2020 and 2019, respectively.

Analysis of Change in Net Interest Income

Three Months Ended June 30, 2020

Compared to June 30, 2019

Three Months Ended September 30, 2020

Compared to September 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 $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.

Net interest income, on a fully taxable-equivalent basis, was $134.3 million for the three months ended September 30, 2020, a decrease of $8.8 million or 6% compared to the same period in 2019.

Our net interest margin was 2.70% for the three months ended September 30, 2020, a decrease of 49 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 and interest-bearing deposits in other banks, partially offset by lower deposit funding costs and higher average balances in our investment securities portfolio during the three months ended September 30, 2020.

Yields on our loans and leases were 3.56% for the three months ended September 30, 2020, a decrease of 85 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.

The yield in our investment securities portfolio was 1.53% for the three months ended September 30, 2020, a decrease of 54 basis points from the same period in 2019.

Deposit funding costs were $6.2 million for the three months ended September 30, 2020, a decrease of $16.6 million or 73% compared to the same period in 2019.

Rates paid on our interest-bearing deposits were 20 basis points for the three months ended September 30, 2020, a decrease of 63 basis points compared to the same period in 2019.

For the nine months ended September 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

Nine Months Ended

September 30, 2020

September 30, 2019

(dollars in millions)

28 unchanged sentences

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.

(2) Interest income includes taxable-equivalent basis adjustments of $0.4 million and nil for the nine months ended September 30, 2020 and 2019, respectively.

Analysis of Change in Net Interest Income

Six Months Ended June 30, 2020

Compared to June 30, 2019

Nine Months Ended September 30, 2020

Compared to September 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 $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.

Net interest income, on a fully taxable-equivalent basis, was $400.9 million for the nine months ended September 30, 2020, a decrease of $32.9 million or 8% compared to the same period in 2019.

Our net interest margin was 2.79% for the nine months ended September 30, 2020, a decrease of 43 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 and interest-bearing deposits in other banks.

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.

Yields on our loans and leases were 3.72% for the nine months ended September 30, 2020, a decrease of 72 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.

For the nine months ended September 30, 2020, the yield in our investment securities portfolio was 1.72%, a decrease of 46 basis points compared to the same period in 2019.

Deposit funding costs were $30.4 million for the nine months ended September 30, 2020, a decrease of $39.3 million or 56% compared to the same period in 2019.

Rates paid on our interest-bearing deposits were 35 basis points for the nine months ended September 30, 2020, a decrease of 50 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.

1 unchanged sentence

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.

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 third quarter of 2020.

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

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.

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

dollar LIBOR interest rates were 0.15% and 0.23%, respectively, while at September 30, 2019, the one-month and three-month U.S.

dollar LIBOR interest rates were 2.02% and 2.09%, respectively.

The target range for the federal funds rate, which is the cost of immediately available overnight funds, began 2019 at 2.25% to 2.50% 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 1.50 to 1.75%.

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%,

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.

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%, where it remained as at the end of the third quarter of 2020.

In September 2020, the Federal Reserve indicated that it expects to maintain the targeted federal funds rate at current levels through 2023.

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 $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 $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”).

The Provision was $5.1 million for the three months ended September 30, 2020, compared to nil for the same period in 2019.

For the three months ended September 30, 2020, the Provision included $3.7 million in provision for credit losses for loans and leases and $1.4 million in provision for credit losses for the reserve for unfunded commitments.

We recorded net recoveries of loans and leases of $0.1 million for the three months ended September 30, 2020 and net charge-offs of $5.6 million for the three months ended September 30, 2019.

This represented charge-offs of nil and 0.17% of average loans and leases, on an annualized basis, for the three months ended September 30, 2020 and 2019, respectively.

The Provision was $101.7 million for the nine months ended September 30, 2020, which represented an increase of $92.2 million compared to the same period in 2019.

For the nine months ended September 30, 2020, the Provision included $94.0 million in provision for credit losses for loans and leases and $7.7 million in provision for credit losses for the reserve for unfunded commitments.

The increase in the Provision 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 $29.4 million and $18.3 million for the nine months ended September 30, 2020 and 2019, respectively.

This represented net charge-offs of 0.29% and 0.19% of average loans and leases, on an annualized basis, for the nine months ended September 30, 2020 and 2019, respectively.

The ACL was $195.9 million as of September 30, 2020, an increase of $65.3 million or 50% from December 31, 2019 and represented 1.45% of total outstanding loans and leases as of September 30, 2020, compared to 0.99% of total outstanding loans and leases as of December 31, 2019.

The reserve for unfunded commitments was $24.6 million as of September 30, 2020, compared to $0.6 million as of December 31, 2019.

The Provision is recorded to maintain the ACL and the reserve for unfunded commitments 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 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:

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

Noninterest Income

Three Months Ended

September 30,

(dollars in thousands)

4 unchanged sentences

Bank-owned life insurance

Investment securities (losses) gains, net

Investment securities 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 June 30, 2020 to the same period in 2019.

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

Noninterest Income

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

6 unchanged sentences

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.

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

Total noninterest income was $48.9 million for the three months ended September 30, 2020, a decrease of $1.1 million or 2% as compared to the same period in 2019.

Total noninterest income was $143.8 million for the nine months ended September 30, 2020, a decrease of $2.0 million or 1% as compared to the same period in 2019.

Service charges on deposit accounts were $6.5 million for the three months ended September 30, 2020, a decrease of $2.0 million or 24% as compared to the same period in 2019.

This decrease was primarily due to a $1.8 million decrease in overdraft and checking account fees.

Service charges on deposit accounts were $21.4 million for the nine months ended September 30, 2020, a decrease of $3.3 million or 13% as compared to the same period in 2019.

This decrease was primarily due to a $3.7 million decrease in overdraft and checking account fees and a $0.6 million decrease in ATM interchange fees from customers, partially offset by a $0.9 million increase in account analysis service charges.

Credit and debit card fees were $14.0 million for the three months ended September 30, 2020, a decrease of $2.8 million or 17% as compared to the same period in 2019.

This decrease was primarily due to a $2.4 million decrease in interchange settlement fees from credit and debit cards, a $1.9 million decrease in merchant service revenues and a $0.4 million decrease in ATM surcharge fees.

This was partially offset by a $2.1 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.

Credit and debit card fees were $39.9 million for the nine months ended September 30, 2020, a decrease of $10.3 million or 20% as compared to the same period in 2019.

This decrease was primarily due to a $6.2 million decrease in interchange settlement fees from credit and debit cards, a $5.6 million decrease in merchant service revenues and a $1.9 million decrease in ATM surcharge fees.

This was partially offset by a $3.9 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.

Other service charges and fees were $9.0 million for the three months ended September 30, 2020, an increase of $0.1 million or 1% as compared to the same period in 2019.

Other service charges and fees were $25.5 million for the nine months ended September 30, 2020, a decrease of $2.0 million or 7% as compared to the same period in 2019.

This decrease was primarily due to a $0.5 million decrease in insurance income, a $0.5 million decrease in online banking fees, a $0.5 million decrease in service fees related to participation loans, a $0.4 million decrease in foreign exchange processing fees, a $0.2 million decrease in cash management service fees and a $0.2 million decrease in wire transfer fees.

This was partially offset by a $0.7 million increase in fees from annuities and securities.

Trust and investment services income was $8.7 million for the three months ended September 30, 2020, a minimal change as compared to the same period in 2019.

Trust and investment services income was $26.9 million for the nine months ended September 30, 2020, an increase of $0.7 million or 3% as compared to the same period in 2019.

This increase was primarily due to a $1.0 million increase in investment management fees and a $0.5 million increase in money market fund trust account fees, partially offset by a $0.6 million decrease in business cash management fees.

BOLI income was $4.9 million for the three months ended September 30, 2020, a decrease of $0.8 million or 15% as compared to the same period in 2019.

This decrease was due to a $1.4 million decrease in death benefit proceeds from life insurance policies, offset by a $0.6 million increase in BOLI earnings.

BOLI income was $11.6 million for the nine months ended September 30, 2020, a decrease of $1.4 million or 10% as compared to the same period in 2019.

This decrease was due to a $1.1 million decrease in death benefit proceeds from life insurance policies and a $0.3 million decrease in BOLI earnings.

Net gains on the sale of investment securities were approximately nil for both the three months ended September 30, 2020 and 2019.

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

Other noninterest income was $5.7 million for the three months ended September 30, 2020, an increase of $4.5 million as compared to the same period in 2019.

This increase was primarily due to a $3.8 million increase in gains on the sale of residential loans to government-sponsored enterprises.

The Company sold $95.9 million residential loans for the three months ended September 30, 2020.

Increases in other noninterest income also stemmed from a $1.5 million increase in volume-based incentives and a $0.4 million increase in gains recognized in income related to derivative contracts.

This was partially offset by a $1.4 million decrease in customer-related interest rate swap fees.

Other noninterest income was $18.6 million for the nine months ended September 30, 2020, an increase of $11.7 million as compared to the same period in 2019.

This increase was primarily due to a $6.1 million increase in gains on the sale of residential loans to government-sponsored enterprises.

The Company sold $344.3 million residential loans for the nine months ended September 30, 2020.

Increases in other noninterest income also stemmed from a $3.2 million increase in customer-related interest rate swap fees, a $2.3 million increase in volume-based incentives and a $0.8 million increase in mortgage servicing rights, partially offset by a $0.5 million decrease in market adjustments for foreign exchange transactions.

Noninterest Expense

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:

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

Noninterest Expense

Three Months Ended

September 30,

(dollars in thousands)

6 unchanged sentences

Noninterest Expense

Six Months Ended

Nine Months Ended

September 30,

(dollars in thousands)

5 unchanged sentences

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 $7.3 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.

Total noninterest expense was $91.6 million for the three months ended September 30, 2020, a decrease of $1.8 million or 2% as compared to the same period in 2019.

Total noninterest expense was $279.5 million for the nine months ended September 30, 2020, an increase of 0.2 million or less than 1% as compared to the same period in 2019.

Salaries and employee benefits expense was $44.3 million for the three months ended September 30, 2020, a decrease of $0.7 million or 1% as compared to the same period in 2019.

This was primarily due to a $1.4 million decrease in other compensation, primarily related to bonuses resulting from the initial public offering and related stock-based compensation, a $0.6 million increase in deferred loan origination costs, a $0.4 million decrease in group health plan costs and a $0.4 million decrease in incentive compensation.

This was partially offset by a $2.3 million increase in base salaries and related payroll taxes.

Salaries and employee benefits expense was $131.5 million for the nine months ended September 30, 2020, a decrease of $0.5 million or less than 1% as compared to the same period in 2019.

This decrease was primarily due to a $4.8 million increase in deferred loan origination costs and a $2.2 million decrease in other compensation, primarily related to bonuses resulting from the initial public offering and related stock-based compensation.

This was partially offset by a $5.5 million increase in base salaries and related payroll taxes and a $0.9 million increase in incentive compensation.

Contracted services and professional fees were $15.1 million for the three months ended September 30, 2020, an increase of $0.4 million or 3% as compared to the same period in 2019.

This increase was primarily due to a $0.8 million increase in contracted data processing expenses, primarily related to system upgrades and product enhancements, and a $0.3 million increase in outside services, primarily attributable to marketing and new customer services.

This was partially offset by a $0.6 million decrease in audit, legal and consultant fees.

Contracted services and professional fees were $46.6 million for the nine months ended September 30, 2020, an increase of $4.0 million or 9% as compared to the same period in 2019.

This increase was primarily due to a $2.9 million increase in contracted data processing expenses, primarily related to system upgrades and product enhancements, and a $1.3 million increase in outside services, primarily attributable to marketing and new customer services.

Occupancy expense was $6.9 million for the three months ended September 30, 2020, a decrease of $0.3 million or 5% as compared to the same period in 2019.

Occupancy expense was $21.5 million for the nine months ended September 30, 2020, a decrease of $0.1 million or less than 1% as compared to the same period in 2019.

Equipment expense was $5.1 million for the three months ended September 30, 2020, an increase of $1.1 million or 28% as compared to the same period in 2019.

This increase was primarily due to a $0.8 million increase in technology-related license and maintenance fees and a $0.3 million increase in furniture and equipment depreciation expense.

Equipment expense was $15.1 million for the nine months ended September 30, 2020, an increase of $2.2 million or 17% as compared to the same period in 2019.

This increase was primarily due to a $1.1 million increase in technology-related license and maintenance fees and a $0.9 million increase in furniture and equipment depreciation expense.

Regulatory assessment and fees were $2.4 million for the three months ended September 30, 2020, an increase of $0.5 million or 23% as compared to the same period in 2019.

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

Regulatory assessment and fees were $6.5 million for the nine months ended September 30, 2020, an increase of $0.9 million or 16% as compared to the same period in 2019.

This increase was primarily due to a $0.9 million increase in the FDIC insurance assessment.

Advertising and marketing expense was $1.4 million for the three months ended September 30, 2020, a decrease of $0.3 million or 17% as compared to the same period in 2019.

Advertising and marketing expense was $4.6 million for the nine months ended September 30, 2020, a decrease of $1.0 million or 18% as compared to the same period in 2019.

This decrease was primarily due to a $0.8 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.

Card rewards program expense was $5.0 million for the three months ended September 30, 2020, a decrease of $1.9 million or 27% as compared to the same period in 2019.

This decrease was primarily due to a $0.9 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.

Card rewards program expense was $17.2 million for the nine months ended September 30, 2020, a decrease of $4.1 million or 19% as compared to the same period in 2019.

This decrease was primarily due to a $2.3 million decrease in priority rewards card redemptions, a $1.0 million decrease in interchange fees paid to our credit card partners and a $0.8 million decrease in credit card cash reward redemptions.

Other noninterest expense was $11.3 million for the three months ended September 30, 2020, decrease of $0.7 million or 6% as compared to the same period in 2019.

This decrease was primarily due to a $0.5 million decrease in pension-related expenses, a $0.4 million decrease in travel expenses, a $0.3 million decrease in postage expenses and a $0.3 million decrease in shipping and delivery expenses.

This was partially offset by a $1.1 million increase in other tax expense.

Other noninterest expense was $36.6 million for the nine months ended September 30, 2020, a decrease of $1.3 million or 4% as compared to the same period in 2019.

This decrease was primarily due to a $1.4 million decrease in pension-related expenses.

Provision for Income Taxes

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.

The provision for income taxes was $21.1 million (an effective tax rate of 24.48%) for the three months ended September 30, 2020, compared with the provision for income taxes of $25.4 million (an effective tax rate of 25.50%) for the same period in 2019.

The provision for income taxes was $39.0 million (an effective tax rate of 23.93%) for the nine months ended September 30, 2020, compared with the provision for income taxes of $74.1 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 the reduction in pretax income compared to prior periods and a state tax settlement with BNP Paribas USA, Inc.

during the period ended March 31, 2020, related to periods during which the Company was included in the state combined returns of BNP Paribas USA, Inc.

Analysis of Business Segments

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

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

Table 12 summarizes net income from our business segments for the three and nine months ended September 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 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.

The Company has reported its selected financial information using the new deposit balance alignments for the three and nine months ended September 30, 2020.

The Company has restated the selected financial information for the three and nine months ended September 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.

2 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(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 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.

Net income for the Retail Banking segment was $51.0 million for the three months ended September 30, 2020, a decrease of $2.6 million or 5% as compared to the same period in 2019.

The decrease in net income for the Retail Banking segment was primarily due to a $2.2 million decrease in net interest income and a $2.1 million increase in the Provision, partially offset by a $1.2 million decrease in the provision for income taxes.

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

Net income for the Retail Banking segment was $105.0 million for the nine months ended September 30, 2020, a decrease of $54.0 million or 34% as compared to the same period in 2019.

The decrease in net income for the Retail Banking segment was primarily due to a $42.2 million increase in the Provision, a $31.1 million decrease in net interest income and a $2.8 million increase in noninterest expense, offset by a $20.1 million decrease in the provision for income taxes and a $2.0 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 a decrease in transfer pricing credits on interest expenses from deposits as a result of lower yields on our deposit 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.

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

The increase in total assets for the Retail Banking segment was primarily due to PPP loans, partially offset by the sale of residential mortgages during the nine months ended September 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 $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.

Net income for the Commercial Banking segment was $21.6 million for the three months ended September 30, 2020, a decrease of $3.1 million or 12% as compared to the same period in 2019.

The decrease in net income for the Commercial Banking segment was primarily due to a $3.2 million decrease in net interest income and a $1.5 million increase in the Provision, partially offset by a $1.9 million decrease in the provision for income taxes.

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 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 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.

Net income for the Commercial Banking segment was $33.2 million for the nine months ended September 30, 2020, a decrease of $37.6 million or 53% as compared to the same period in 2019.

The decrease in net income for the Commercial Banking segment was primarily due to a $42.3 million increase in the Provision, a $5.3 million decrease in net interest income, a $2.2 million increase in noninterest expense and a $2.0 million decrease in noninterest income, partially offset by a $14.3 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 increase in noninterest expense was primarily due to increases in salaries and benefits expense, contracted services and professional fees, higher overall expenses that were allocated to the Commercial Banking segment, and an increase in other tax expense, partially offset by a decrease in card reward expenses.

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, an increase in volume-based incentives and the loss on the sale of our commercial and industrial loans in 2019.

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.

The decrease in total assets for the Commercial Banking segment was primarily due to decreases in our Shared National

Credits, dealer flooring portfolios, indirect automobile loans and credit card balances, partially offset by higher draws on lines by existing customers and PPP loans during the nine months ended September 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 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.

Net loss for the Treasury and Other segment was $7.5 million for the three months ended September 30, 2020, an increase in loss of $3.4 million or 86% as compared to the same period in 2019.

The increase in the net loss was primarily due to a $3.8 million increase in net interest expense, a $1.4 million increase in the Provision and a $1.0 million decrease in noninterest income, partially offset by a $1.5 million decrease in noninterest expense and a $1.2 million increase in the benefit for income taxes.

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 interest-bearing deposits in other banks and investment securities portfolio, partially offset by a decrease in transfer pricing charges as a result of lower yields on our deposit portfolio.

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 decrease in noninterest income was primarily due to a decrease in BOLI income.

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

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.

Net loss for the Treasury and Other segment was $14.2 million for the nine months ended September 30, 2020, an increase in loss of $1.0 million or 7% as compared to the same period in 2019.

The increase in net loss was primarily due to a $7.7 million increase in the Provision and a $2.0 million decrease in noninterest income, partially offset by a $4.9 million decrease in noninterest expense and a $3.1 million increase in net interest income.

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 ATM surcharge fees, BOLI income, ATM interchange from customers and other service charges and fees, 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 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 decreases in pension-related expenses and advertising and marketing expenses, partially offset by an increase in equipment expenses.

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

Analysis of Financial Condition

4 unchanged sentences

Funding requirements are impacted by loan originations and refinancings, deposit balance changes, liability issuances and settlements and off-balance sheet funding commitments.

We consider and comply with various regulatory and internal guidelines regarding required liquidity levels and periodically monitor our liquidity position in light of the changing economic environment and customer activity.

We consider and comply with various regulatory and internal guidelines regarding required liquidity levels and periodically monitor our liquidity

position in light of the changing economic environment and customer activity.

Based on periodic liquidity assessments, we may alter our asset, liability and off-balance sheet positions.

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

As of September 30, 2020 and December 31, 2019, cash and cash equivalents were $0.8 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 $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.

The estimated fair value of our available-for-sale investment securities were $5.7 billion and $4.1 billion as of September 30, 2020 and December 31, 2019, respectively.

As of September 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 September 30, 2020, our available-for-sale investment securities portfolio was comprised of securities with a weighted average life of approximately 4.3 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 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 September 30, 2020, we had borrowing capacity of $2.0 billion from the FHLB and $1.0 billion 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 $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.

Our core deposits, defined as all deposits exclusive of time deposits exceeding $250,000, totaled $17.4 billion and $15.1 billion as of September 30, 2020 and December 31, 2019, respectively, which represented 92% of our total deposits as of both September 30, 2020 and December 31, 2019.

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.

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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.

While our public time deposits have since decreased from the second quarter of 2020, we have continued to maintain strong levels of liquidity as of September 30, 2020.

Investment Securities

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

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

Investment Securities

September 30,

(dollars in thousands)

10 unchanged sentences

Total available-for-sale securities

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:

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 September 30, 2020:

Maturities and Weighted-Average Yield on Securities (1)

4 unchanged sentences

(dollars in millions)

As of June 30, 2020

As of September 30, 2020

Available-for-sale securities

8 unchanged sentences

Government-sponsored enterprises

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

Total available-for-sale securities as of September 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.

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.

The fair value of our available-for-sale investment securities portfolio was $5.7 billion as of September 30, 2020, an increase of $1.6 billion or 40% 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 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).

As of September 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 $3.7 billion invested in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac.

Our available-for-sale portfolio also included $1.9 billion in mortgage-backed securities issued by Ginnie Mae, Freddie Mac, Fannie Mae and municipal housing authorities and $145.0 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.

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We conduct a regular assessment of our investment securities portfolio to determine whether any securities are impaired.

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 this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is 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.

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

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.

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

Gross unrealized gains in our investment securities portfolio were $111.7 million and $19.0 million as of September 30, 2020 and December 31, 2019, respectively.

Gross unrealized losses in our investment securities portfolio were $3.4 million and $24.0 million as of September 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 September 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.

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

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.

As of September 30, 2020 and December 31, 2019, we held FHLB stock of $18.1 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 15 presents the composition of our loan and lease portfolio by major categories as of June 30, 2020 and December 31, 2019:

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

Loans and Leases

September 30,

(dollars in thousands)

6 unchanged sentences

Total loans and leases

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.

Total loans and leases were $13.5 billion as of September 30, 2020, an increase of $288.3 million or 2% 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 $920.2 million as of September 30, 2020.

While we have not experienced declines in our loan portfolio in the third 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 $3.4 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 and industrial loans were $3.2 billion as of September 30, 2020, an increase of $427.0 million or 16% from December 31, 2019.

This increase was primarily due to PPP loans totaling $920.2 million, offset by decreases in our Shared National Credits and dealer flooring portfolios during the nine months ended September 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.

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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 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.

Commercial real estate loans were $3.5 billion as of September 30, 2020, a decrease of $2.9 million or less than 1% from December 31, 2019.

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

2 unchanged sentences

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.

Construction loans were $662.9 million as of September 30, 2020, an increase of $143.6 million or 28% from December 31, 2019.

The increase in construction loans stemmed from various disbursements of project loans during the nine months ended September 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.

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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 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.

Residential real estate loans were $4.5 billion as of September 30, 2020, a decrease of $128.3 million or 3%

from December 31, 2019.

Our portfolio of residential real estate loans declined due to the sale of $132.0 million in residential mortgages originated for investment during the nine months ended September 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 $1.5 billion as of June 30, 2020, a decrease of $128.4 million or 8% from December 31, 2019.

Consumer loans were $1.4 billion as of September 30, 2020, a decrease of $194.6 million or 12% from December 31, 2019.

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

2 unchanged sentences

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

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

Lease financing was $246.0 million as of September 30, 2020, an increase of $43.5 million or 22% 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 16 presents the recorded investment in our loan and lease portfolio as of June 30, 2020 by rate type:

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

Loans and Leases by Rate Type

June 30, 2020

September 30, 2020

Adjustable Rate

7 unchanged sentences

Total loans and leases

% 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:

% by rate type at September 30, 2020

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

Geographic Distribution of Loan and Lease Portfolio

June 30, 2020

September 30, 2020

(dollars in thousands)

34 unchanged sentences

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

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

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

Maturities for Selected Loan Categories (1)

June 30, 2020

September 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 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:

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

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

September 30,

(dollars in thousands)

26 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 21 presents the activity in Non-Performing Assets (“NPAs”) for the six months ended June 30, 2020:

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

Non-Performing Assets

Six Months Ended June 30,

Nine Months Ended September 30,

(dollars in thousands)

2 unchanged sentences

Sales of other real estate owned

Transfers to loans held for sale

Charge-offs/write-downs

3 unchanged sentences

NPAs consist of non-accrual loans and leases and other real estate owned.

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 $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.

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 held for sale classification, 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 $17.6 million as of September 30, 2020, an increase of $11.8 million from December 31, 2019.

The ratio of our NPAs to total loans and leases and other real estate owned was 0.13% as of September 30, 2020, an increase of 9 basis points from December 31, 2019.

The increase in total NPAs was primarily due to a $7.0 million increase in commercial real estate non-accrual loans, a $2.4 million increase in residential mortgage non-accrual loans and a $2.0 million increase in construction non-accrual loans.

As of September 30, 2020, commercial real estate non-accrual loans were $7.1 million, an increase of $7.0 million from December 31, 2019.

This increase was primarily due to additions of $15.9 million in commercial real estate loans, partially offset by transfers to loans held for sale of $5.3 million and $2.7 million in charge-offs.

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

As of September 30, 2020, commercial and industrial non-accrual loans were $0.7 million, an increase of $0.7 million from December 31, 2019.

This increase was primarily due to additions in commercial and industrial loans totaling $28.6 million, partially offset by transfers to loans held for sale of $9.3 million, $13.4 million in charge-offs and $5.3 million in payments.

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

As of September 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%.

As of September 30, 2020, residential mortgage non-accrual loans were $7.8 million, an increase of $2.4 million or 44% from December 31, 2019.

As of September 30, 2020, our residential mortgage non-accrual loans were comprised of 41 loans with a weighted average current LTV ratio of 55%.

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

As of September 30, 2020, there were no other real estate owned.

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

1 unchanged sentence

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 $10.1 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.

Loans and leases past due 90 days or more and still accruing interest were $10.7 million as of September 30, 2020, a decrease of $1.4 million or 12% as compared to December 31, 2019.

Construction and consumer loans that were past due 90 days or more and still accruing interest decreased by $2.3 million and $1.4 million, respectively, during the nine months ended September 30, 2020.

This was partially offset by increases of $1.5 million and $0.5 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 nine months ended September 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 $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.

Impaired loans were $28.2 million and $20.6 million as of September 30, 2020 and December 31, 2019, respectively.

These impaired loans had a related ACL of $2.2 million and $0.2 million as of September 30, 2020 and December 31, 2019, respectively.

The increase in impaired loans during the nine months ended September 30, 2020 was primarily due to increases in commercial real estate and construction loans of $7.0 million and $1.8 million, respectively, partially offset by decreases in commercial and industrial loans and residential mortgage loans of $0.8 million and $0.5 million, respectively.

The decrease in the impaired loans balance includes charge-offs and paydowns.

For the three months ended September 30, 2020 and 2019, we recorded charge-offs of $0.1 million and $0.5 million, respectively, related to our total impaired loans.

For the nine months ended September 30, 2020 and 2019, we recorded charge-offs of $16.5 million and $0.5 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 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.

If interest due on the balances of all non-accrual loans as of September 30, 2020 had been accrued under the original terms, approximately $0.3 million and $0.9 million in additional interest income would have been recorded during the three and nine months ended September 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 and $0.2 million, respectively, for the three and nine months ended September 30, 2020, compared to $0.4 million and $1.3 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.

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

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.

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

For certain consumer loans, loan assistance was being offered in the form of payment deferrals for up to three months, which extended the term of the loan by the number of months deferred, and interest continued 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.

1 unchanged sentence

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

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

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

September 30, 2020

Number of Loans

(dollars in thousands)

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

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

Commercial and industrial

2 unchanged sentences

Residential mortgage

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

Total Loans and Leases that Received 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”).

Ratio of Loans and Leases that Received 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 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 24 weeks of payroll expenses, including employee benefits, and can also be used to make mortgage interest, rent and utility payments.

3 unchanged sentences

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:

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

PPP Loans Outstanding to Borrowers by Industry

June 30, 2020

September 30, 2020

(dollars in thousands)

12 unchanged sentences

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.

(2) Outstanding loan balances are reported net of deferred loan costs and fees of $2.0 million and $22.2 million, respectively, at September 30, 2020.

Loans Modified in a Troubled Debt Restructuring

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

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

Loans Modified in a Troubled Debt Restructuring

September 30,

(dollars in thousands)

3 unchanged sentences

Residential mortgage

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.

Loans modified in a TDR were $10.9 million as of September 30, 2020, a decrease of $5.2 million or 32% from December 31, 2019.

This decrease was primarily due to decreases in residential mortgage loans of $3.7 million and commercial and industrial loans of $1.4 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.

As of September 30, 2020, $9.7 million or 89% 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.

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Allowance for Credit Losses

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(dollars in thousands)

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Total Recoveries on Loans and Leases Previously Charged-Off

Net Loans and Leases Charged-Off

Net Loans and Leases Recovered (Charged-Off)

Provision for Credit Losses - Loans and Leases

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

(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:

(1) Annualized for the three and nine months ended September 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 September 30, 2020 and December 31, 2019:

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

September 30,

(dollars in thousands)

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

September 30,

(as a percentage of total loans

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Total residential

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.

As of September 30, 2020, the ACL was $195.9 million or 1.45% 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 recoveries of loans and leases were $0.1 million for the three months ended September 30, 2020 compared to net charge-offs of $5.6 million or 0.17% of total average loans and leases, on an annualized basis, for the three months ended September 30, 2019.

Net recoveries in our commercial lending portfolio were $1.1 million for the three months ended September 30, 2020 compared to net charge-offs of $0.2 million for the three months ended September 30, 2019.

Net recoveries in our residential lending portfolio were nil and $0.4 million for the three months ended September 30, 2020 and 2019, respectively.

Net charge-offs in our consumer lending portfolio were $1.1 million and $5.7 million for the three months ended September 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 charge-offs of loans and leases were $29.4 million, or 0.29% of total average loans and leases on an annualized basis, for the nine months ended September 30, 2020 compared to $18.3 million or 0.19% of total average loans and leases, on an annualized basis, for the nine months ended September 30, 2019.

Net charge-offs in our commercial lending portfolio were $15.7 million and $2.1 million for the three months ended September 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 $13.0 million and $11.3 million for the six months ended June 30, 2020 and 2019, respectively.

Net recoveries in our residential lending portfolio were $0.3 million and $0.9 million for the nine months ended September 30, 2020 and 2019, respectively.

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 $14.1 million and $17.0 million for the nine months ended September 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 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.

The increase in the ACL during the third 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 the re-opening of the Hawaii economy under new guidelines.

We continue to monitor the impact of COVID-19 on 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 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.

Additionally, effective October 15, 2020, while the State of Hawaii has begun to 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, the timing and extent of the return of air travel and the recovery of the Hawaii tourism industry is highly uncertain and is dependent upon the number of cases declining around the globe.

As of September 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 June 30, 2020 and December 31, 2019.

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

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

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

Goodwill generated in that acquisition was recorded on the balance sheet of the Bank as a result of push down accounting treatment, and remains on our consolidated balance sheets.

Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment at a reporting unit level.

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 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.

The Company’s policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Impairment is the condition that exists when the carrying amount of a reporting unit exceeds its fair value.

The continued adverse effect of the COVID-19 pandemic prompted the Company to perform an interim assessment of its goodwill for impairment during the third quarter of 2020.

The Company performed an assessment of the criteria included in Accounting Standards Codification Topic 350, Intangibles – Goodwill and Other , and based on such assessment, the Company concluded that there was no impairment in our goodwill for the three and nine months ended September 30, 2020.

Future events, including the ongoing impacts of 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.

Other assets were $606.7 million as of September 30, 2020, an increase of $116.1 million or 24% from December 31, 2019.

This increase was primarily due to a $96.4 million increase in interest rate swap agreements and a $39.9 million increase in prepaid 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 28 presents the composition of our deposits as of June 30, 2020 and December 31, 2019:

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

September 30,

(dollars in thousands)

Total Deposits (1)

(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.

(1) Public deposits were $1.8 billion as of September 30, 2020, an increase of $745.7 million compared to December 31, 2019.

Total deposits were $18.9 billion as of September 30, 2020, an increase of $2.5 billion or 15% from December 31, 2019.

The increase in deposit balances stemmed primarily from a $1.0 billion increase in demand deposit balances, a $545.4 million increase in public savings deposit balances and a $450.4 million increase in non-public 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

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.

As of September 30, 2020 there were no short-term borrowings as the remaining short-term FHLB fixed-rate advance matured in July 2020.

As of December 31, 2019 short-term borrowings were $400.0 million with a weighted average interest rate of 2.84%.

Long-term borrowings were $200.0 million as of both September 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 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.

As of September 30, 2020 and December 31, 2019, the available remaining borrowing capacity with the FHLB was $2.0 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 September 30, 2020 and December 31, 2019.

Pension and Postretirement Plan Obligations

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and (4) discount rate.

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.

Pension and postretirement benefit plan obligations, net of pension plan assets, were $122.2 million as of September 30, 2020, a nominal increase from December 31, 2019.

This increase was primarily due to net periodic benefit costs for the nine months ended September 30, 2020 of $6.5 million, offset by payments of $6.3 million.

See “Note 16.

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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 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 September 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 June 30, 2020 and December 31, 2019.

There were no cross-border outstandings in excess of 1% of our total consolidated assets as of both September 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.

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

As of September 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 June 30, 2020 that management believes have changed either the Company’s or the Bank’s capital classifications.

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

Regulatory Capital

September 30,

(dollars in thousands)

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Tier 1 Leverage Ratio

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.

The tier 1 leverage ratio decreased 88 basis points from 8.79% at December 31, 2019 to 7.91% at September 30, 2020.

This decrease primarily stemmed from increases in the average balances of investment securities, loans and leases and interest bearing deposits.

Total stockholders’ equity was $2.7 billion as of September 30, 2020, an increase of $93.7 million or 4% from December 31, 2019.

The increase in stockholders’ equity was primarily due to earnings for the period of $124.0 million and a net unrealized gain in the fair value of our investment securities of $83.1 million.

In October 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 December 4, 2020 to shareholders of record at the close of business on November 23, 2020.

Off-Balance Sheet Arrangements and Guarantees

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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 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.

As of both September 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.

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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 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.

For the nine months ended September 30, 2020, there was one repurchase of a residential mortgage loan of $0.3 million and there was one pending repurchase of a residential mortgage loan of $0.5 million.

In addition to servicing loans in our portfolio, substantially all of the loans we sell to investors are sold with servicing rights retained.

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Remedies could include repurchase of an affected loan.

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.

the nine months ended September 30, 2020, we had no repurchase requests related to loan servicing activities, nor were there any pending repurchase requests as of September 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 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.

However, as of September 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 September 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.

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Future Application of Accounting Pronouncements

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.

For a discussion of the expected impact of accounting pronouncements recently issued but not adopted by us as of September 30, 2020, see “Note 1.

Organization and Basis of Presentation — Recent Accounting Pronouncements” to the unaudited interim consolidated financial statements for more information.

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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.

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Our construction lending portfolio consists primarily of land loans, single family and condominium development loans.

Financing of construction loans is subject to a high degree of credit risk given the long delivery time frames for such projects.

Financing of construction loans is

subject to a high degree of credit risk given the long delivery time frames for such projects.

Construction lending activities are underwritten on a project financing basis whereby the cash flows or lease rents from the underlying real estate collateral or the sale of the finished inventory is the primary source of repayment.

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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.

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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 June 30, 2020 and December 31, 2019, we did not have material exposures to customers in the oil, gas and energy industries.

As of September 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.

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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 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.

Table 30 presents, for the twelve months subsequent to September 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.

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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.

We evaluate the sensitivity by using a static forecast, where the balance sheets as of September 30, 2020 and December 31, 2019 are held constant.

Net Interest Income Sensitivity Profile - Estimated Percentage Change Over 12 Months

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Static Forecast

June 30, 2020

September 30, 2020

December 31, 2019

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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 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.

Under the static balance sheet forecast as of September 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 September 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.

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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.

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.

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This is due to natural on balance sheet hedges arising out of offsetting interest rate exposures from loans and investment securities with deposits and other interest-bearing liabilities.

In particular, the investment securities portfolio is utilized to manage the interest rate exposure and sensitivity to within the guidelines and limits established by the ALCO.

In particular, the investment securities portfolio is utilized to manage the interest rate exposure and sensitivity to

within the guidelines and limits established by the ALCO.

We utilize natural and offsetting economic hedges in an effort to reduce the need to employ off-balance sheet derivative financial instruments to hedge interest rate risk exposures.

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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