What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-04 compared with 2020-11-02 · 339 added, 667 removed, 889 unchanged (53% of the section changed)

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A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including the following:

the impact of the ongoing COVID-19 pandemic and any other pandemic, epidemic or health-related crisis;

the geographic concentration of our business;

current and future economic and market conditions in the United States generally or in Hawaii, Guam and Saipan in particular, including, among other things, the rate of growth and the unemployment rate;

the impact on our business, operations, financial condition, liquidity, results of operations, prospects and the trading price of our shares as a result of the COVID-19 pandemic;

current and future economic and market conditions in the United States generally or in Hawaii, Guam and Saipan in particular;

our dependence on the real estate markets in which we operate;

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our ability to maintain our Bank’s reputation;

the future value of the investment securities that we own, especially in light of the market volatility caused by the spread of COVID-19 and governmental and regulatory responses thereto;

the future value of the investment securities that we own;

our ability to attract and retain customer deposits;

our inability to receive dividends from our bank, pay dividends to our common stockholders and satisfy obligations as they become due;

the effects of severe weather, geopolitical instability, including war, terrorist attacks, pandemics (including the ongoing COVID-19 pandemic) or other severe health emergencies and man-made and natural disasters;

the effects of severe weather, geopolitical instability, including war, terrorist attacks, pandemics or other severe health emergencies and man-made and natural disasters;

our ability to maintain consistent growth, earnings and profitability;

our ability to attract and retain skilled employees or changes in our management personnel;

possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations, including quantitative easing, the lowering of interest rates and the imposition of tariffs that may harm sectors to which we are particularly exposed;

our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business;

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

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

impact our ability to return capital to stockholders;

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

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

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

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, 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.

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

The global and U.S.

economies have entered into a pandemic-driven recession.

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

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

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

economy has deteriorated 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.

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.

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.

The COVID-19 pandemic has brought unprecedented challenges to businesses and economies around the world, particularly those in the United States.

Our business has been, and continues to be, impacted by the recent and ongoing outbreak of COVID-19.

There remains a high degree of uncertainty relating to the ongoing spread and severity of the virus and new variants, as well as the availability, distribution and use of effective treatments and vaccines.

To the extent that the economy continues to be negatively impacted by the pandemic, our results will be affected.

In light of the uncertainties and continuing developments discussed herein, the ultimate adverse impact of COVID-19 cannot be reliably estimated at this time, but it has been and is expected to continue to be material.

Hawaii Economy

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.

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

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

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

Subsequently, on March 23, 2020, the Governor of the State of Hawaii issued a third supplemental emergency proclamation that 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 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 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.

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 self-quarantine for visitors resulted in an unprecedented increase in Hawaii unemployment.

The statewide seasonally adjusted unemployment rate was 9.0% in March 2021 compared to 2.6% in March 2020, according to the State of Hawaii Department of Labor and Industrial Relations, while the national seasonally adjusted unemployment rate was 6.0% in March 2021 compared to 4.4% in March 2020.

Visitor arrivals and average daily visitor spending for the first three months of 2021 decreased by 60.1% and 18.2%, respectively, compared to the same period in 2020, according to the Hawaii Tourism Authority.

While we may continue to see a gradual improvement in unemployment as local businesses and the Hawaii tourism industry continues to reopen in 2021 and the COVID-19 vaccine becomes more widely administered, 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.

The volume of home sales on Oahu has increased year-over-year.

For the three months ended March 31, 2021, the volume of single-family home sales increased by 11.9%, while condominium sales increased by 32.5% compared to the same period in 2020, according to the Honolulu Board of Realtors.

The median price of single-family home sales and condominium sales on Oahu was $915,000 and $455,000, respectively, or an increase of 17.3% and 5.8%, respectively, for the three months ended March 31, 2021 as compared to the same period in 2020.

As of March 31, 2021, months of inventory of single-family homes and condominiums on Oahu remained low at approximately 1.3 and 2.9 months, respectively.

Lastly, state general excise and use tax revenues decreased by 18.3% for the first three months of 2021 as compared to the same period in 2020, according to the Hawaii Department of Business, Economic Development & Tourism.

Legislative and Regulatory Developments

Recent actions taken by the federal government and the Federal Reserve and other bank regulatory agencies to partially mitigate the economic effects of COVID-19 and related containment measures will also have an impact on our financial position and results of operations.

Actions taken by the federal government and the Federal Reserve and other bank regulatory agencies to partially mitigate the economic effects of COVID-19 and related containment measures will also have an impact on our financial position and results of operations.

These actions are further discussed below.

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%.

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:

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● expanding the collateral accepted by its Term Asset-Backed Securities Loan Facility;

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

● introducing a number of additional facilities designed to enhance support for small and mid-sized businesses.

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

● The CARES Act, enacted on March 27, 2020, established, among other COVID relief programs, a $670 billion loan program (the “Paycheck Protection Program” or the “PPP”) for fully guaranteed loans (which may then be forgiven) to small businesses.

● The Consolidated Appropriations Act – 2021 (the “CAA”) extended the term of a number of initiatives under the CARES Act.

One such example was the extension of the Small Business Administration’s (“SBA”) authority to make commitments under the PPP to March 31, 2021 or until the additional PPP funds were exhausted.

The PPP Extension Act of 2021 later extended the covered period of the PPP to June 30, 2021.

● The American Rescue Plan Act of 2021 (“American Rescue Plan”), enacted on March 11, 2021, builds upon the measures established in the CARES Act and the CAA.

Through this legislation, unemployment benefits were extended to September 6, 2021, eligible individuals received direct stimulus payments of up to $1,400, an additional $7 billion was added to the PPP, while expanding eligibility to include non-profit organizations previously excluded from the program, and funds were allocated for COVID-19 vaccines, testing and contact tracing.

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

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

The State of Hawaii received at least $1.25 billion in federal aid from the CARES Act.

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

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

The CAA provided an additional $1.7 billion in new federal funding, while extending the ability of the State of Hawaii and its local governments to use its previously received federal aid until December 31, 2021.

The American Rescue Plan also provides an additional $2.2 billion of federal funding to the State of Hawaii.

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, 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.

We saw a significant decrease in customer traffic in our branches in the past year.

As a result, we strategically closed 26 of our branch locations on a temporary basis and closed four of them permanently in November 2020.

As of March 2021, we reopened 19 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 reopened branches could result in consumers becoming more comfortable with technology and seeing less need for 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 many of our employees are working remotely.

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

Many of our employees are working remotely 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.

Impact on our Financial Position and Results of Operations

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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 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.

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.

As Hawaii’s economy continues to reopen, we expect that local consumption of goods and services will improve.

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 availability of a vaccine, treatment or testing, and tracking and tracing capabilities.

During this time of uncertainty, we remain committed to servicing our customers.

The economic pressures and uncertainties arising from the COVID-19 pandemic have 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 in-person foot traffic) 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 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.

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.

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

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.

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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.

While we expect a significant portion of loans made by the Bank through our participation in the PPP to be forgiven, we expect that a sizeable portion of such loans will remain on our balance sheet for up to two years.

As a result, we expect to see higher loan volumes and reduced capital levels as a result of the COVID-19 pandemic.

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

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%.

As of March 31, 2021, the Company was “well-capitalized” and met all applicable regulatory capital requirements, including a Common Equity Tier 1 capital ratio of 12.82%, compared to the minimum requirement of 4.50%.

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

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

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

For additional discussions regarding our capital and liquidity positions and related risks, refer to the sections titled “Liquidity” and “Capital” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

Selected Financial Data

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For the Three 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,

(dollars in thousands, except per share data)

Balance Sheet Data:

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Total deposits

Short-term borrowings

Long-term borrowings

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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 Nine Months Ended

September 30,

(dollars in thousands, except per share data)

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Noninterest income

(Gains) losses on sale of securities

Gains on sale of securities

Core noninterest income (non-GAAP)

Noninterest expense

One-time items (a)

Core noninterest expense (non-GAAP)

(Gains) losses on sale of securities

One-time noninterest expense items (a)

Tax adjustments (b)

Gains on sale of securities

Tax adjustments (a)

Total core adjustments

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Core efficiency ratio (non-GAAP)

(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 nine months ended September 30, 2020 and 2019.

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

(2) Except for the efficiency ratio and the core efficiency ratio, amounts are annualized for the three months ended March 31, 2021 and 2020.

(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 is annualized for the nine months ended September 30, 2020.

(10) Net charge-offs / average total loans and leases is annualized for the three months ended March 31, 2021.

(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 Nine Months Ended

September 30,

(dollars in thousands, except per share data)

19 unchanged sentences

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

September 30,

(dollars in thousands, except share amount and per share data)

Balance Sheet Data:

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Tangible book value per share (non-GAAP)

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

(a) Annualized for the three months ended March 31, 2021 and 2020.

Financial Highlights

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 $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 $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 $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.

Net income was $57.7 million for the three months ended March 31, 2021, an increase of $18.8 million or 48% as compared to the same period in 2020.

Basic and diluted earnings per share were $0.44 per share for the three months ended March 31, 2021, an increase of $0.14 per share or 47% as compared to the same period in 2020.

The increase in net income was primarily due to a $41.2 million decrease in the provision for credit losses (the “Provision”) and a $0.2 million decrease in noninterest expense, partially offset by a $9.5 million decrease in net interest income, a $7.6 million increase in the provision for income taxes and a $5.4 million decrease in noninterest income for the three months ended March 31, 2021.

Our return on average total assets was 1.02% for the three months ended March 31, 2021, an increase of 25 basis points from the same period in 2020, and our return on average total stockholders’ equity was 8.58% for the three months ended March 31, 2021, an increase of 271 basis points from the same period in 2020.

Our return on average tangible assets was 1.07% for the three months ended March 31, 2021, an increase of 26 basis points from the same period in 2020, and our return on average tangible stockholders’ equity was 13.51% for the three months ended March 31, 2021, up from 9.39% for the same period in 2020.

Our efficiency ratio was 55.53% for the three months ended March 31, 2021 compared to 51.33% for the same period in 2020.

Our results for the three months ended March 31, 2021 were highlighted by the following:

● Net interest income was $129.2 million for the three months ended March 31, 2021, a decrease of $9.5 million or 7% as compared to the same period in 2020.

Our net interest margin was 2.55% for the three months ended March 31, 2021, a decrease of 57 basis points as compared to the same period in 2020.

The decrease in net interest income was primarily due to lower yields in most loan categories and in our investment securities portfolio, partially offset by lower deposit funding costs and an increase in the average balances of our investment securities portfolio.

● The Provision was nil for the three months ended March 31, 2021, a decrease of $41.2 million as compared to the same period in 2020.

The Provision for the three months ended March 31, 2020 stemmed from higher expected credit losses as a result of COVID-19 and its impact on Hawaii’s economy, key industries, businesses and our customers.

In comparison, recording nil for the Provision for the three months ended March 31, 2021 stemmed from a decrease in the expected credit losses in the commercial real estate portfolio.

The Provision is recorded to maintain the allowance for credit losses for loans and leases (the “ACL”) and reserve for unfunded commitments at levels deemed adequate to absorb lifetime expected credit losses in our loan and lease portfolio and off-balance sheet credit exposures as of the balance sheet date.

● Noninterest income was $43.9 million for the three months ended March 31, 2021, a decrease of $5.4 million or 11% as compared to the same period in 2020.

The decrease was primarily due to a $2.2 million decrease in service charges on deposit accounts, a $2.0 million decrease in other noninterest income, a $1.1 million decrease in trust and investment services income, a $0.4 million decrease in credit and debit card fees and a $0.1 million decrease in

the gains from the sale of available-for-sale investment securities, partially offset by a $0.3 million increase in other service charges and fees and a $0.1 million increase in bank-owned life insurance (“BOLI”) income.

● Noninterest expense was $96.3 million for the three months ended March 31, 2021, a decrease of $0.2 million as compared to the same period in 2020.

The decrease in noninterest expense was primarily due to a $2.2 million decrease in card rewards program expense, a $0.9 million decrease in salaries and employee benefits expense, a $0.2 million decrease in advertising and marketing expense and a $0.1 million decrease in occupancy expense, partially offset by a $1.2 million increase in other noninterest expense, a $1.1 million increase in contracted services and professional fees, a $0.8 million increase in equipment expense and a $0.1 million increase in regulatory assessment and fees.

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 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 1.45% as of September 30, 2020, an increase of 46 basis points compared to December 31, 2019.

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 self-quarantine for visitors resulted in an unprecedented increase in Hawaii unemployment.

We continued to maintain high levels of liquidity and remained well-capitalized as of March 31, 2021.

● Total loans and leases were $13.3 billion as of March 31, 2021, an increase of $21.2 million from December 31, 2020.

The increase was primarily due to an increase in PPP loans, partially offset by decreases in our Shared National Credits, dealer flooring portfolios, indirect automobile loans and other unsecured consumer loans.

● The ACL was $200.4 million as of March 31, 2021, a decrease of $8.1 million or 4% from December 31, 2020.

This decrease was primarily due to the aforementioned lower expected credit losses in the commercial real estate portfolio.

The ratio of our ACL to total loans and leases outstanding was 1.51% as of March 31, 2021, a decrease of six basis points compared to December 31, 2020.

● 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 $5.7 billion as of September 30, 2020, an increase of $1.6 billion or 40% compared to December 31, 2019.

The total fair value of our investment securities portfolio was $6.7 billion as of March 31, 2021, an increase of $621.1 million or 10% from December 31, 2020.

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

● 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 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.

● Total deposits were $20.1 billion as of March 31, 2021, an increase of $906.0 million or 5% from December 31, 2020.

The increase in total deposits was primarily due to a $653.0 million increase in demand deposit balances, a $305.4 million increase in money market deposit balances and a $121.1 million increase in savings deposit balances, partially offset by a $173.5 million decrease in time deposit balances.

● Total stockholders’ equity was $2.7 billion as of March 31, 2021, a decrease of $60.5 million or 2% from December 31, 2020.

The decrease in stockholders’ equity was primarily due to a net unrealized loss in the fair value of our investment securities net of tax of $75.0 million, dividends declared and paid to the Company’s stockholders of $33.8 million and share repurchases of $9.5 million, partially offset by earnings for the period of $57.7 million.

Analysis of Results of Operations

Net Interest Income

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.

For the three months ended March 31, 2021 and 2020, 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

September 30, 2020

September 30, 2019

March 31, 2021

March 31, 2020

(dollars in millions)

2 unchanged sentences

Available-for-Sale Investment Securities

Total Available-for-Sale Investment Securities

Loans Held for Sale

24 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 $0.3 million and nil for the three months ended September 30, 2020 and 2019, respectively.

(2) Interest income includes taxable-equivalent basis adjustments of $0.4 million and nil for the three months ended March 31, 2021 and 2020, respectively.

Analysis of Change in Net Interest Income

Three Months Ended September 30, 2020

Compared to September 30, 2019

Three Months Ended March 31, 2021

Compared to March 31, 2020

(dollars in millions)

2 unchanged sentences

Available-for-Sale Investment Securities

Loans Held for Sale

Total Available-for-Sale Investment Securities

Loans and Leases

11 unchanged sentences

Short-term Borrowings

Long-term Borrowings

Total Change in Interest Expense

1 unchanged sentence

(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 $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.

Net interest income, on a fully taxable-equivalent basis, was $129.6 million for the three months ended March 31, 2021, a decrease of $9.1 million or 7% compared to the same period in 2020.

Our net interest margin was 2.55% for the three months ended March 31, 2021, a decrease of 57 basis points from the same period in 2020.

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, partially offset by lower deposit funding costs and higher average balances in our investment securities portfolio during the three months ended March 31, 2021.

Yields on our loans and leases were 3.39% for the three months ended March 31, 2021, a decrease of 72 basis points as compared to the same period in 2020.

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.

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

Nine Months Ended

September 30, 2020

September 30, 2019

(dollars in millions)

Earning Assets

Interest-Bearing Deposits in Other Banks

Available-for-Sale Investment Securities

Loans Held for Sale

Loans and Leases (1)

Commercial and industrial

Commercial real estate

Residential mortgage

Home equity line

Lease financing

Total Loans and Leases

Other Earning Assets

Total Earning Assets (2)

Cash and Due from Banks

Interest-Bearing Liabilities

Interest-Bearing Deposits

Total Interest-Bearing Deposits

Short-Term Borrowings

Long-Term Borrowings

Total Interest-Bearing Liabilities

Net Interest Income

Interest Rate Spread

Net Interest Margin

Noninterest-Bearing Demand Deposits

Other Liabilities

Stockholders' Equity

Total Liabilities and Stockholders' Equity

(1) Non-performing loans and leases are included in the respective average loan and lease balances.

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

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

Analysis of Change in Net Interest Income

Nine Months Ended September 30, 2020

Compared to September 30, 2019

(dollars in millions)

Change in Interest Income:

Interest-Bearing Deposits in Other Banks

Available-for-Sale Investment Securities

Loans Held for Sale

Loans and Leases

Commercial and industrial

Commercial real estate

Residential mortgage

Home equity line

Lease financing

Total Loans and Leases

Other Earning Assets

Total Change in Interest Income

Change in Interest Expense:

Interest-Bearing Deposits

Total Interest-Bearing Deposits

Short-Term Borrowings

Long-Term Borrowings

Total Change in Interest Expense

Change in Net Interest Income

(1) The change in interest income and expense not solely due to changes in volume or rate has been allocated on a pro-rata basis to the volume and rate columns.

Net interest income, on a fully taxable-equivalent basis, was $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.

This was partially offset by lower deposit funding costs.

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.

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.

For the three months ended March 31, 2021, the average balance of our investment securities portfolio increased $2.2 billion or 54% to $6.2 billion.

The yield in our investment securities portfolio was 1.50% for the three months ended March 31, 2021, a decrease of 60 basis points from the same period in 2020.

Deposit funding costs were $4.0 million for the three months ended March 31, 2021, a decrease of $11.6 million or 74% compared to the same period in 2020.

Rates paid on our interest-bearing deposits were 14 basis points for the three months ended March 31, 2021, a decrease of 45 basis points compared to the same period in 2020.

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

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

The prime rate began 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 third quarter of 2020.

The prime rate began in 2020 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 first quarter of 2021.

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

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.

At March 31, 2021, the one-month and three-month U.S.

dollar LIBOR interest rates were 0.11% and 0.19%, respectively, while at March 31, 2020, the one-month and three-month U.S.

dollar LIBOR interest rates were 0.14% and 0.24%, 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%.

The target range for the federal funds rate, which is the cost of immediately available overnight funds, began 2020 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 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.

at 0.00% to 0.25%, where it remained as at the end of the first quarter of 2021.

In March 2021, the Federal Reserve indicated that it expects to maintain the targeted federal funds rate at current levels through 2022.

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

Provision for Credit Losses

The Provision was $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”).

The Provision was nil for the three months ended March 31, 2021, which represented a decrease of $41.2 million compared to the same period in 2020.

The decrease in the Provision was primarily due to an adjustment during the three months ended March 31, 2020, which stemmed from higher expected credit losses as a result of COVID-19 and its impact on Hawaii’s economy, key industries, businesses and our customers.

In comparison, recording nil for the Provision for the three months ended March 31, 2021 stemmed from a decrease in the expected credit losses in the commercial real estate portfolio.

We recorded net charge-offs of loans and leases of $4.6 million and $6.1 million for the three months ended March 31, 2021 and 2020, respectively.

This represented charge-offs of 0.14% and 0.19% of average loans and leases, on an annualized basis, for the three months ended March 31, 2021 and 2020, respectively.

The ACL was $200.4 million as of March 31, 2021, a decrease of $8.1 million or 4% from December 31, 2020 and represented 1.51% of total outstanding loans and leases as of March 31, 2021 compared to 1.57% of total outstanding loans and leases as of December 31, 2020.

The reserve for unfunded commitments was $34.1 million as of March 31, 2021, compared to $30.6 million as of December 31, 2020.

Noninterest Income

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:

Table 6 presents the major components of noninterest income for the three months ended March 31, 2021 and 2020:

Noninterest Income

Three 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 three months ended September 30, 2020 to the same period in 2019.

Noninterest Income

Nine Months Ended

September 30,

(dollars in thousands)

Service charges on deposit accounts

Credit and debit card fees

Other service charges and fees

Trust and investment services income

Bank-owned life insurance

Investment securities losses, net

Total noninterest income

n/m – Denotes a variance that is not a meaningful metric to inform the change in noninterest income for the 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 $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 $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.

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 nine months ended September 30, 2019.

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.

n/m – Denotes a variance that is not a meaningful metric to inform the change in noninterest income for the three months ended March 31, 2021 to the same period in 2020.

Total noninterest income was $43.9 million for the three months ended March 31, 2021, a decrease of $5.4 million or 11% as compared to the same period in 2020.

Service charges on deposit accounts were $6.7 million for the three months ended March 31, 2021, a decrease of $2.2 million or 25% as compared to the same period in 2020.

This decrease was primarily due to a $1.4 million decrease in overdraft and checking account fees, a $0.4 million decrease in account analysis service charges and a $0.3 million decrease in checking account service fees.

Credit and debit card fees were $14.6 million for the three months ended March 31, 2021, a decrease of $0.4 million or 3% as compared to the same period in 2020.

Other service charges and fees were $8.8 million for the three months ended March 31, 2021, an increase of $0.3 million or 4% as compared to the same period in 2020.

Trust and investment services income was $8.5 million for the three months ended March 31, 2021, a decrease of $1.1 million or 11% as compared to the same period in 2020.

This decrease was due to a $0.7 million decrease in business cash management fees, a $0.2 million decrease in tax services fees and a $0.2 million decrease in trust service fees.

BOLI income was $2.4 million for the three months ended March 31, 2021, an increase of $0.1 million or 6% as compared to the same period in 2020.

Net gains on the sale of investment securities were nil for the three months ended March 31, 2021, a decrease of $0.1 million as compared to the same period in 2020.

Other noninterest income was $2.9 million for the three months ended March 31, 2021, a decrease of $2.0 million or 41% as compared to the same period in 2020.

This decrease was primarily due to a $1.4 million decrease in customer-related interest rate swap fees and a $1.1 million decrease in market value adjustments on mutual funds purchased, partially offset by a $0.7 million increase in volume-based incentives.

Noninterest Expense

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:

Table 7 presents the major components of noninterest expense for the three months ended March 31, 2021 and 2020:

Noninterest Expense

Three Months Ended

September 30,

(dollars in thousands)

5 unchanged sentences

Total noninterest expense

Noninterest Expense

Nine Months Ended

September 30,

(dollars in thousands)

Salaries and employee benefits

Contracted services and professional fees

Regulatory assessment and fees

Advertising and marketing

Card rewards program

Total noninterest expense

Total noninterest expense was $91.6 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.

Total noninterest expense was $96.3 million for the three months ended March 31, 2021, a decrease of $0.2 million as compared to the same period in 2020.

Salaries and employee benefits expense was $43.9 million for the three months ended March 31, 2021, a decrease of $0.9 million or 2% as compared to the same period in 2020.

This was primarily due to a $4.3 million increase in payroll and benefit costs being deferred as loan origination costs and a $0.4 million decrease in incentive compensation.

This was partially offset by a $1.4 million increase in other compensation, a $1.0 million increase in base salaries and related payroll taxes, a $0.7 million increase in temporary help expenses and a $0.4 million increase in retirement plan expenses.

Contracted services and professional fees were $17.2 million for the three months ended March 31, 2021, an increase of $1.1 million or 7% as compared to the same period in 2020.

This increase was primarily due to a $1.0 million increase in outside services, primarily attributable to marketing and new customer services, and a $0.3 million increase in contracted data processing expenses, primarily related to system upgrades and product enhancements.

Occupancy expense was $7.2 million for three months ended March 31, 2021, a decrease of $0.1 million or 1% as compared to the same period in 2020.

Equipment expense was $5.5 million for the three months ended March 31, 2021, an increase of $0.8 million or 17% as compared to the same period in 2020.

This increase was primarily due to a $0.6 million increase in technology-related license and maintenance fees and a $0.3 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 $5.0 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 $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.

Regulatory assessment and fees were $2.0 million for the three months ended March 31, 2021, an increase of $0.1 million or 5% as compared to the same period in 2020.

Advertising and marketing expense was $1.6 million for the three months ended March 31, 2021, a decrease of $0.2 million or 13% as compared to the same period in 2020.

Card rewards program expense was $4.8 million for the three months ended March 31, 2021, a decrease of $2.2 million or 31% as compared to the same period in 2020.

This decrease was primarily due to a $1.8 million decrease in priority rewards card redemptions and a $0.3 million decrease in credit card cash reward redemptions, as a result of decreased activity due to COVID-19 and its impact on our customers.

Other noninterest expense was $14.1 million for the three months ended March 31, 2021, an increase of $1.2 million or 9% as compared to the same period in 2020.

This increase was primarily due to a $1.1 million increase in software depreciation, partially offset by a $0.3 million decrease in pension-related expenses.

Provision for Income Taxes

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.

The provision for income taxes was $19.0 million (an effective tax rate of 24.80%) for the three months ended March 31, 2021, compared with the provision for income taxes of $11.4 million (an effective tax rate of 22.65%) for the same period in 2020.

The increase in the effective tax rate was primarily from the recognition of a tax benefit for the period ended March 31, 2020, due to 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.

A similar tax benefit was not recognized during the three months ended March 31, 2021.

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 nine months ended September 30, 2020 and 2019.

Table 8 summarizes net income from our business segments for the three months ended March 31, 2021 and 2020.

Additional information about operating segment performance is presented in “Note 17.

Reportable Operating Segments” contained in our unaudited interim consolidated financial statements.

In 2019, the Company made changes to the internal measurement of segment operating profits for the purpose of evaluating segment performance and resource allocation.

The primary reason for the change was to align deposit balances within the business segment that directly manages them.

Specifically, certain deposit balances previously included as part of the Retail Banking segment have been reclassified to the Commercial Banking segment.

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 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.

The Company has reported its selected financial information using the new deposit cost assumptions starting with the fourth quarter of 2019.

Business Segment Net Income

Three 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 $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 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 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, 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.

Net income for the Retail Banking segment was $46.6 million for the three months ended March 31, 2021, an increase of $19.6 million or 73% as compared to the same period in 2020.

The increase in net income for the Retail Banking segment was primarily due to a $21.5 million decrease in the Provision and a $11.0 million increase in net interest income, partially offset by a $8.0 million increase in the provision for income taxes, a $2.8 million decrease in noninterest income and a $2.2 million increase in noninterest expense.

The decrease in the Provision was primarily due to the adjustment during the three months ended March 31, 2020 stemming from higher expected credit losses as a result of COVID-19 and the expected impact that it would have on our customers.

The increase in net interest income was primarily due to an increase in loan fees and lower transfer pricing charges as a result of lower average yields in our loan portfolio.

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

The decrease in noninterest income was primarily due to decreases in overdraft and checking account fees and trust and investment services income.

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

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 $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 $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 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 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, 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.

Our Commercial Banking segment includes our corporate banking, 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 $21.4 million for the three months ended March 31, 2021, an increase of $14.1 million as compared to the same period in 2020.

The increase in net income for the Commercial Banking segment was primarily due to a $22.8 million decrease in the Provision, partially offset by a $4.3 million increase in the provision for income taxes, a $2.6 million decrease in net interest income and a $1.8 million decrease in noninterest income.

The decrease in the Provision was primarily due to the adjustment related to COVID-19 in 2020 and the expected impact that it would have on our customers.

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

The decrease in net interest income was primarily due to a decrease in credit card loan income.

The decrease in noninterest income was primarily due to a decrease in customer-related interest rate swap fees.

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 $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 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.

Net loss for the Treasury and Other segment was $10.3 million for the three months ended March 31, 2021, an increase in loss of $14.9 million as compared to the same period in 2020.

The increase in the net loss was primarily due to a $17.9 million increase in net interest expense and a $3.1 million increase in the Provision, partially offset by a $4.7 million increase in the benefit for income taxes and a $2.4 million decrease in noninterest expense.

The increase in net interest expense was primarily due to lower earnings credits as a result of lower average yields in our loan 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 increase in the reserve for unfunded commitments.

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 $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 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 and interest-bearing deposits in other banks.

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.

The decrease in noninterest expense was primarily due to lower overall expenses that were allocated to the Treasury and Other segment, partially offset by increases in salaries and employee benefits expense, software depreciation, contracted services and professional fees, equipment expense, supplies and pension-related expenses.

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 September 30, 2020 and December 31, 2019, cash and cash equivalents were $0.8 billion and $0.7 billion, respectively.

As of March 31, 2021 and December 31, 2020, cash and cash equivalents were $1.3 billion and $1.0 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 $5.7 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.

The carrying value of our available-for-sale investment securities were $6.7 billion and $6.1 billion as of March 31, 2021 and December 31, 2020, respectively.

As of March 31, 2021 and December 31, 2020, we maintained our excess liquidity primarily in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac.

As of March 31, 2021, our available-for-sale investment securities portfolio was comprised of securities with a weighted average life of approximately 5.4 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 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.

As of March 31, 2021, we have borrowing capacity of $2.0 billion from the FHLB and $1.2 billion 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 $17.4 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.

Our core deposits, defined as all deposits exclusive of time deposits exceeding $250,000, totaled $19.0 billion and $17.9 billion as of March 31, 2021 and December 31, 2020, which represented 94% and 93%, respectively, of our total deposits.

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

1 unchanged sentence

We expect to meet these obligations from dividends paid by the Bank to the Parent.

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

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

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.

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.

While our public time deposits have since decreased from the fourth quarter of 2020, we have continued to maintain strong levels of liquidity as of March 31, 2021.

Investment Securities

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

Table 9 presents the estimated fair value of our available-for-sale investment securities portfolio as of March 31, 2021 and December 31, 2020:

Investment Securities

September 30,

(dollars in thousands)

Treasury and government agency debt securities

Government-sponsored enterprises debt securities

Mortgage-backed securities:

7 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 September 30, 2020:

Table 10 presents the maturity distribution at amortized cost and weighted-average yield to maturity of our available-for-sale investment securities portfolio as of March 31, 2021:

Maturities and Weighted-Average Yield on Securities (1)

4 unchanged sentences

(dollars in millions)

As of September 30, 2020

As of March 31, 2021

Available-for-sale securities

8 unchanged sentences

Government-sponsored enterprises

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

Total available-for-sale securities as of March 31, 2021

(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 $5.7 billion as of September 30, 2020, an increase of $1.6 billion or 40% compared to December 31, 2019.

The fair value of our available-for-sale investment securities portfolio was $6.7 billion as of March 31, 2021, an increase of $621.1 million or 10% compared to December 31, 2020.

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 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.

As of March 31, 2021, 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 $3.9 billion invested in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac.

Our available-for-sale portfolio also included $2.6 billion in mortgage-backed securities issued by Ginnie Mae, Freddie Mac, Fannie Mae and Municipal Housing Authorities and $175.7 million in debt securities issued by the U.S Treasury and government agencies (US International Development Finance Corporation bonds).

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These evaluations may cause us to change the level of funds we deploy into investment securities and change the composition of our investment securities portfolio.

Gross unrealized gains in our investment securities portfolio were $70.5 million and $97.1 million as of March 31, 2021 and December 31, 2020, respectively.

Gross unrealized losses in our investment securities portfolio were $86.4 million and $10.7 million as of March 31, 2021 and December 31, 2020, respectively.

The increase in unrealized loss in our investment securities portfolio was primarily due to higher market interest rates as of March 31, 2021, relative to December 31, 2020, resulting in a lower valuation.

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

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

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

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.

For the three months ended March 31, 2021, we did not record any credit losses related to our investment securities portfolio.

We are required to hold non-marketable equity securities, comprised of FHLB stock, as a condition of our membership in the FHLB system.

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

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.

As of both March 31, 2021 and December 31, 2020, we held FHLB stock of $18.1 million, 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 September 30, 2020 and December 31, 2019:

Table 11 presents the composition of our loan and lease portfolio by major categories as of March 31, 2021 and December 31, 2020:

Loans and Leases

September 30,

(dollars in thousands)

Commercial and industrial:

Commercial and industrial excluding Paycheck Protection Program loans

Paycheck Protection Program loans

Total commercial and industrial

Commercial real estate

4 unchanged sentences

Total loans and leases

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.

Total loans and leases were $13.3 billion as of March 31, 2021, an increase of $21.2 million or less than 1% from December 31, 2020 with increases in commercial and industrial loans, commercial real estate loans and construction loans.

The increase in total loans and leases was primarily due to our participation in the PPP which had a total amortized cost basis of $1.2 billion as of March 31, 2021.

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 $3.2 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 and industrial loans were $3.1 billion as of March 31, 2021, an increase of $101.9 million or 3% from December 31, 2020.

This increase was primarily due to an increase in PPP loans totaling $357.5 million, partially offset by decreases in our Shared National Credits and dealer flooring portfolios during the three months ended March 31, 2021.

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.

The commercial properties are predominantly apartments, neighborhood and grocery anchored retail, industrial, office, and to a lesser extent, specialized properties such as hotels.

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

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

Commercial real estate loans were $3.4 billion as of March 31, 2021, an increase of $3.6 million or less than 1% from December 31, 2020.

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 $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.

Construction loans were $739.3 million as of March 31, 2021, an increase of $3.5 million or less than 1% from December 31, 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 offer fixed rate mortgage products and variable rate mortgage products with interest rates that are subject to change every year after the first, third, fifth or tenth year, depending on the product and are based on LIBOR.

Variable rate residential mortgage loans are underwritten at fully-indexed interest rates.

Variable rate residential mortgage loans are underwritten at fully-indexed interest

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

Residential real estate loans were $4.5 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.

Residential real estate loans were $4.5 billion as of March 31, 2021, a decrease of $10.4 million or less than 1% from December 31, 2020.

This decrease was primarily due to a decrease in home equity lines of $35.9 million, partially offset by an increase in residential mortgages of $25.5 million during the three months ended March 31, 2021.

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 $1.4 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.

Consumer loans were $1.3 billion as of March 31, 2021, a decrease of $70.1 million or 5% from December 31, 2020.

The decrease in consumer loans was primarily due to decreases in indirect automobile loans and other unsecured consumer loans.

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

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

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.

Lease financing was $238.1 million as of March 31, 2021, a decrease of $7.3 million or 3% from December 31, 2020.

The decrease in lease financing was reflective of a weak demand for new business equipment and vehicles in the Hawaii market.

Loans and Leases” and “Note 4.

1 unchanged sentence

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 September 30, 2020 by rate type:

Table 12 presents the recorded investment in our loan and lease portfolio as of March 31, 2021 by rate type:

Loans and Leases by Rate Type

September 30, 2020

March 31, 2021

Adjustable Rate

7 unchanged sentences

Total loans and leases

% 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:

% by rate type at March 31, 2021

Tables 13 and 14 present the geographic distribution of our loan and lease portfolio as of March 31, 2021 and December 31, 2020:

Geographic Distribution of Loan and Lease Portfolio

September 30, 2020

March 31, 2021

(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 September 30, 2020:

Table 15 presents certain contractual loan maturity categories and the sensitivities of those loans to changes in interest rates as of March 31, 2021:

Maturities for Selected Loan Categories (1)

September 30, 2020

March 31, 2021

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 September 30, 2020 and December 31, 2019:

Table 16 presents information on our non-performing assets and accruing loans and leases past due 90 days or more as of March 31, 2021 and December 31, 2020:

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

September 30,

(dollars in thousands)

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Residential Loans:

Residential mortgage

Home equity line

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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 nine months ended September 30, 2020:

Table 17 presents the activity in Non-Performing Assets (“NPAs”) for the three months ended March 31, 2021:

Non-Performing Assets

Nine Months Ended September 30,

(dollars in thousands)

Three Months Ended March 31, 2021

Balance at beginning of period

Return to accrual status

Sales of other real estate owned

Transfers to loans held for sale

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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 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%.

Total NPAs were $9.1 million as of both March 31, 2021 and December 31, 2020.

The ratio of our NPAs to total loans and leases and other real estate owned was 0.07% as of both March 31, 2021 and December 31, 2020.

During the three months ended March 31, 2021, construction non-accruals loans decreased by $1.5 million, offset by increases in commercial real estate non-accrual loans of $0.9 million, residential mortgage non-accrual loans of $0.6 million and commercial and industrial non-accrual loans of $0.1 million.

As of March 31, 2021, commercial real estate non-accrual loans were $0.9 million, an increase of $0.9 million from December 31, 2020.

This increase was due to the addition of a $0.9 million commercial real estate loan.

As of March 31, 2021, commercial and industrial non-accrual loans were $0.6 million, an increase of $0.1 million or 14% from December 31, 2020.

This increase was primarily due to additions in commercial and industrial loans totaling $0.2 million, partially offset by payments and charge-offs.

As of March 31, 2021, construction non-accrual loans were $0.6 million, a decrease of $1.5 million or 72% from December 31, 2020.

This decrease was primarily due to a $1.8 million transfer to loans held for sale, partially offset by $0.3 million in additions.

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

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

As of March 31, 2021, residential mortgage non-accrual loans were $7.0 million, an increase of $0.6 million or 9% from December 31, 2020.

This increase was primarily due to additions of residential mortgage non-accrual loans totaling $1.1 million, partially offset by payments of $0.2 million, returns to accrual status of $0.2 million and charge-offs of $0.1 million.

As of March 31, 2021, our residential mortgage non-accrual loans were comprised of 37 loans with a weighted average current LTV ratio of 50%.

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

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

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.

As of both March 31, 2021 and December 31, 2020, there were no other real estate owned.

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

Loans and leases in this category are 90 days or more past due, as to principal or interest, and are still accruing interest because they are well secured and in the process of collection.

Loans and leases past due 90 days or more and still accruing interest were $10.7 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.

Loans and leases past due 90 days or more and still accruing interest were $9.5 million as of March 31, 2021, a decrease of $1.7 million or 15% as compared to December 31, 2020.

Consumer loans and commercial and industrial loans that were past due 90 days or more and still accruing interest decreased by $1.2 million and $0.7 million, respectively, during the three months ended March 31, 2021.

This was partially offset by increases of $0.2 million in commercial real estate loans and $0.1 million in home equity lines that were past due 90 days or more and still accruing interest during the three months ended March 31, 2021.

Impaired Loans.

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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 $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.

Impaired loans were $49.2 million and $25.8 million as of March 31, 2021 and December 31, 2020, respectively.

These impaired loans had a related ACL of $16.9 million and $2.4 million as of March 31, 2021 and December 31, 2020, respectively.

The increase in impaired loans during the three months ended March 31, 2021 was due to increases in consumer loans of $15.8 million, residential mortgage loans of $4.9 million, commercial and industrial loans of $2.1 million and commercial real estate loans of $1.4 million, partially offset by a decrease in construction loans of $0.7 million.

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

For the three months ended March 31, 2021 and 2020, we recorded charge-offs of $0.4 million and $0.6 million, respectively, related to our total impaired loans.

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

If interest due on the balances of all non-accrual loans as of 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.

If interest due on the balances of all non-accrual loans as of March 31, 2021 and 2020 had been accrued under the original terms, approximately $0.1 million in additional interest income would have been recorded during both the three months ended March 31, 2021 and 2020, respectively.

Actual interest income recorded on these loans was $0.1 million for the three months ended March 31, 2021, compared to nil for the same period in 2020.

COVID-19 Financial Hardship Relief Programs

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

Please see “Note 4.

Allowance for Credit Losses” in the notes to our unaudited 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 September 30, 2020:

Table 18 presents information on our loans and leases that received payment deferrals under our COVID-19 financial hardship relief programs as of March 31, 2021:

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

September 30, 2020

March 31, 2021

Number of Loans

8 unchanged sentences

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.

In addition to the relief programs described above, we are 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 payroll expenses, including employee benefits, and can also be used for various other eligible expenses.

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

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

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

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

Table 23 presents information on our PPP loans outstanding as of 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:

The first payment is deferred until the date the SBA remits the borrower’s loan forgiveness amount to the Bank, or if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period.

Interest will continue to accrue during the initial deferment period.

The borrower may apply with the Bank for loan forgiveness of the amount due on the loan in an amount equal to payroll, employee benefits, and other eligible expenses incurred, subject to limitations, in accordance with the PPP and CARES Act, as amended by the PPPF Act and CAA.

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 eligible expenses, 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 19 presents information on our PPP loans outstanding as of March 31, 2021 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

September 30, 2020

March 31, 2021

(dollars in thousands)

10 unchanged sentences

Ratio of PPP Loans Outstanding to Total Loans and Leases

(1) "All other industries"

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

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

(1) “All other industries” represent borrowers that received PPP loans that did not operate in the five high impact industries listed above, which is primarily comprised of the construction, health care, professional services, and administrative and support services industries.

(2) Outstanding loan balances are reported net of deferred loan costs and fees of $2.4 million and $25.4 million, respectively, at March 31, 2021.

Loans Modified in a Troubled Debt Restructuring

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

Table 20 presents information on loans whose terms have been modified in a TDR as of March 31, 2021 and December 31, 2020:

Loans Modified in a Troubled Debt Restructuring

September 30,

(dollars in thousands)

3 unchanged sentences

Residential mortgage

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 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.

Total residential

Loans modified in a TDR were $40.6 million as of March 31, 2021, an increase of $23.6 million from December 31, 2020.

This increase was primarily due to increases in consumer loans of $15.8 million, residential mortgages of $4.4 million and commercial and industrial loans of $2.3 million.

As of March 31, 2021, $39.8 million or 98% 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.

Allowance for Credit Losses” contained in our unaudited interim consolidated financial statements for more information and a description of the modification programs that we currently offer to our customers.

As noted above, we have begun to provide our borrowers with opportunities to defer payments, or portions thereof.

Allowance for Credit Losses” contained in our unaudited interim consolidated financial statements and “Analysis of Financial Condition — COVID-19 Financial Hardship Relief Programs” for more information and a description of the modification programs that we currently offer to our customers.

As noted above, we have been providing our borrowers with opportunities to defer payments, or portions thereof.

In the absence of intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral).

2 unchanged sentences

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

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

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

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

6 unchanged sentences

Allowance for Credit Losses

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

(dollars in thousands)

6 unchanged sentences

Commercial real estate

Lease financing

Total Commercial Loans

14 unchanged sentences

Total Recoveries on Loans and Leases Previously Charged-Off

Net Loans and Leases Recovered (Charged-Off)

Net Loans and Leases Charged-Off

Provision for Credit Losses - Loans and Leases

3 unchanged sentences

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

(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:

(1) Annualized for the three months ended March 31, 2021 and 2020.

Tables 22 and 23 present the allocation of the ACL by loan and lease category, in both dollars and as a percentage of total loans and leases outstanding as of March 31, 2021 and December 31, 2020:

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

September 30,

(dollars in thousands)

7 unchanged sentences

Total Allowance for Credit Losses for Loans and Leases

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

September 30,

(as a percentage of total loans

and leases outstanding)

lease category

loans and leases

lease category

loans and leases

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

Commercial and industrial

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Total residential

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.

As of March 31, 2021, the ACL was $200.4 million or 1.51% of total loans and leases outstanding, compared with an ACL of $208.5 million or 1.57% of total loans and leases outstanding as of December 31, 2020.

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

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 of loans and leases were $4.6 million or 0.14% of total average loans and leases, on an annualized basis, for the three months ended March 31, 2021, compared to net charge-offs of $6.1 million or 0.19% of total average loans and leases, on an annualized basis, for the three months ended March 31, 2020.

Net charge-offs in our commercial lending portfolio were $0.6 million for the three months ended March 31, 2021.

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

Net charge-offs in our residential lending portfolio were $0.1 million for the three months ended March 31, 2021.

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

Net charge-offs in our consumer lending portfolio were $3.9 million and $6.5 million for the three months ended March 31, 2021 and 2020, 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 $29.4 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.

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 $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 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.

The decrease in the ACL during the first quarter of 2021 was primarily due to lower expected credit losses in the commercial real estate portfolio.

However, we retained a COVID-19 related overlay as a component of the ACL as Hawaii’s economy continues to be significantly impacted by COVID-19.

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 while their businesses have closed.

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, 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.

We continue to closely monitor the impact of COVID-19 on our tourism industry and the re-opening of the Hawaii economy under new guidelines.

While we have begun to see and may continue to see a gradual improvement in unemployment as local businesses and the Hawaii tourism industry continues to reopen in 2021 and the COVID-19 vaccine becomes more widely administered, 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 of March 31, 2021, while the allocation of our ACL to our commercial, residential and consumer portfolio segments was slightly lower as compared to December 31, 2020, the ACL was considered adequate based on our ongoing analysis of estimated expected credit losses, credit risk profiles, current economic outlook, coverage ratios and other relevant factors.

We will continue to monitor factors that drive expected credit losses including COVID-19 and the impact 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 September 30, 2020 and December 31, 2019.

Goodwill was $995.5 million as of both March 31, 2021 and December 31, 2020.

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

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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.

There was no impairment in our goodwill for the three months ended March 31, 2021.

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.

Other assets were $567.9 million as of March 31, 2021, a decrease of $35.6 million or 6% from December 31, 2020.

This decrease was primarily due to a $49.7 million decrease in interest rate swap agreements, partially offset by a $13.7 million increase in current tax receivables and deferred tax assets.

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

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

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

September 30,

Table 24 presents the composition of our deposits as of March 31, 2021 and December 31, 2020:

(dollars in thousands)

Total Deposits (1)

(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.

(1) Public deposits were $1.4 billion as of March 31, 2021, a decrease of $269.1 million or 16% compared to December 31, 2020.

Total deposits were $20.1 billion as of March 31, 2021, an increase of $906.0 million or 5% from December 31, 2020.

The increase in deposit balances stemmed primarily from a $634.7 million increase in non-public demand deposit balances, a $348.4 million increase in non-public savings deposit balances and a $305.4 million increase in non-public money market deposit balances, partially offset by a $227.3 million decrease in 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 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.

Long-term Borrowings

Long-term borrowings were $200.0 million as of both March 31, 2021 and December 31, 2020.

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 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.

As of both March 31, 2021 and December 31, 2020, the available remaining borrowing capacity with the FHLB was $2.0 billion.

The FHLB fixed-rate advances and remaining borrowing capacity were secured by residential real estate loan collateral as of March 31, 2021 and December 31, 2020.

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 $122.2 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.

Pension and postretirement benefit plan obligations, net of pension plan assets, were $127.6 million as of March 31, 2021, a nominal increase from December 31, 2020.

This increase was primarily due to net periodic benefit costs for the three months ended March 31, 2021 of $2.6 million, offset by payments of $2.1 million.

See “Note 15.

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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 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 September 30, 2020 and December 31, 2019.

As of both March 31, 2021 and December 31, 2020, there were no aggregate cross-border outstandings in other countries which amounted to 0.75% to 1% of our total consolidated assets.

Additionally, there were no cross-border outstandings in excess of 1% of our total consolidated assets as of both March 31, 2021 and December 31, 2020.

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

As of March 31, 2021, 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 25 below.

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.

There have been no conditions or events since March 31, 2021 that management believes have changed either the Company’s or the Bank’s capital classifications.

Regulatory Capital

September 30,

(dollars in thousands)

Stockholders' Equity

Accumulated other comprehensive income (loss), net

Accumulated other comprehensive (loss) income, net

Common Equity Tier 1 Capital and Tier 1 Capital

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Tier 1 Leverage Ratio

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.

Total stockholders’ equity was $2.7 billion as of March 31, 2021, a decrease of $60.5 million or 2% from December 31, 2020.

The decrease in stockholders’ equity was primarily due to a net unrealized loss in the fair value of our investment securities of $75.0 million, dividends declared and paid to the Company’s stockholders of $33.8 million and share repurchases of $9.5 million, partially offset by earnings for the period of $57.7 million during the three months ended March 31, 2021.

In February 2021, the Company announced a stock repurchase program for up to $75.0 million of its outstanding common stock during 2021.

The timing and amount of stock repurchases, if any, are influenced by various internal and external factors.

In April 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.26 per share on our outstanding shares.

The dividend will be paid on June 4, 2021 to shareholders of record at the close of business on May 24, 2021.

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 September 30, 2020 and December 31, 2019, the unpaid principal balance of our portfolio of residential mortgage loans sold was $2.3 billion.

As of March 31, 2021 and December 31, 2020, the unpaid principal balance of our portfolio of residential mortgage loans sold was $2.0 billion and $2.2 billion, respectively.

The agreements under which we sell residential mortgage loans require delivery of various documents to the investor or its document custodian.

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Repurchase demands are typically reviewed on an individual loan by loan basis to validate the claims made by the investor to determine if a contractually required repurchase event has occurred.

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 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.

We manage the risk

associated with potential repurchases or other forms of settlement through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards.

For the three months ended March 31, 2021, there were two residential mortgage loan repurchases totaling $0.6 million and there were no pending repurchase requests.

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

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Remedies could include repurchase of an affected loan.

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.

For the three months ended March 31, 2021, we had no repurchase requests related to loan servicing activities, nor were there any pending repurchase requests as of March 31, 2021.

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 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.

However, as of March 31, 2021, management believes that this exposure is not material due to the historical level of repurchase requests and loss trends and thus has not established a liability for losses related to mortgage loan repurchases.

As of March 31, 2021, 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 September 30, 2020, see “Note 1.

For a discussion of the expected impact of accounting pronouncements recently issued but not adopted by us as of March 31, 2021, 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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We understand and evaluate our customers’ borrowing needs and capacity to repay, in conjunction with their character and history.

Management has identified three categories of loans that we use to develop our systematic methodology to determine the Allowance:

Management has identified three categories of loans that we use to develop our systematic methodology to determine the ACL:

commercial, residential and consumer.

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

As of March 31, 2021 and December 31, 2020, 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 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.

Table 26 presents, for the twelve months subsequent to March 31, 2021 and December 31, 2020, 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 September 30, 2020 and December 31, 2019 are held constant.

We evaluate the sensitivity by using a static forecast, where the balance sheets as of March 31, 2021 and December 31, 2020 are held constant.

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

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Static Forecast

September 30, 2020

March 31, 2021

December 31, 2020

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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 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.

Under the static balance sheet forecast as of March 31, 2021, our net interest income sensitivity profile is relatively unchanged in higher and lower interest rate scenarios compared to similar forecasts as of December 31, 2020.

The sensitivity outcomes described above are primarily due to the impact of holding a larger federal funds position being offset by market interest rates being higher as of March 31, 2021 as compared with December 31, 2020.

A larger federal funds position has the effect of magnifying the impact of higher interest rate scenarios.

Lower market interest rates have the effect of higher prepayments on loans and investment securities and reinvestments which occur at lower rates.

Because market interest rates have been approaching an interest rate floor, this dampens the impact of the lower interest rate scenarios for both ramp and shock scenarios.

Higher market interest rates have the effect of lower prepayments on loans and investment securities.

Because market interest rates remain near an interest rate floor, this dampens the impact of the lower interest rate scenarios for both ramp and shock scenarios.

The comparisons above provide insight into the potential effects of changes in interest rates on net interest income.

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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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Management uses the results of its various simulation analyses to formulate strategies to achieve a desired risk profile within the parameters of our capital and liquidity guidelines.

In addition, our business relies upon a large volume of loans, derivative contracts and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR to establish their interest rate and/or value.

In 2017, the U.K.

Financial Conduct Authority announced that it would no longer compel banks to submit rates for the calculation of LIBOR after 2021.

The administrator of LIBOR has stated it will extend publication of the most commonly used U.S.

Dollar LIBOR settings to June 30, 2023 and to cease publishing other LIBOR settings on December 31, 2021.

federal banking agencies issued guidance strongly encouraging banking organizations to cease using U.S.

dollar LIBOR as a reference rate in new contracts as soon as practicable and in any event by December 31, 2021.

It is not possible to know whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR or what the effect of any such changes in views or alternatives may have on the financial markets for LIBOR-linked financial instruments.

The full impact of alternatives to LIBOR on the valuations, pricing and operation of our financial instruments is not yet known;

however, the primary instruments that may be impacted include loans, securities and derivatives indexed to LIBOR that mature after December 31, 2021.

We have established a working group, consisting of key stakeholders from throughout the Company, to monitor developments relating to LIBOR uncertainty and changes and to guide the Bank’s response.

This team is currently working to ensure that our technology systems are prepared for the transition, our loan documents that reference LIBOR-based rates have been appropriately amended to reference other methods of interest rate determinations and internal and external stakeholders are apprised of the transition.

Operational Risk

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Our operational risk review process is also a core part of our assessment of material new products or activities.

Critical Accounting Policies

Our interim consolidated financial statements were prepared in accordance with GAAP and follow general practices within the industries in which we operate.

The most significant accounting policies we follow are presented in “Note 1.

Organization and Summary of Significant Accounting Policies” in the notes to the consolidated financial statements included in our Form 10-K for the year ended December 31, 2019.

Application of these principles requires us to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes.

Most accounting policies are not considered by management to be critical accounting policies.

Several factors are considered in determining whether or not a policy is critical in the preparation of the consolidated financial statements.

These factors include among other things, whether the policy requires management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.

The accounting policies which we believe to be most critical in preparing our consolidated financial statements are those that are related to the determination of the ACL, fair value estimates, pension and postretirement benefit obligations and income taxes.

An updated discussion of the ACL is presented below as a result of our adoption of the CECL standard on January 1, 2020.

Allowance for Credit Losses

Management's evaluation of the adequacy of the ACL is often the most critical of accounting estimates for a financial institution.

Our determination of the amount of the ACL is a critical accounting estimate as it requires significant reliance on the accuracy of credit risk ratings on individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on impaired loans, significant reliance on estimated loss rates on portfolios and consideration of our quantitative and qualitative evaluation of macro-economic factors and trends.

While our methodology in establishing the ACL attributes portions of the ACL to the commercial, residential real estate and consumer portfolio segments, the entire ACL is available to absorb credit losses in the total loan and lease portfolio.

The ACL is a valuation account that is deducted from the amortized cost basis of loans and leases to present the net amount expected to be collected from loans and leases.

Loans and leases are charged-off against the ACL when management believes the uncollectibility of a loan or lease balance is confirmed.

Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

Changes in the ACL and, therefore, in the related Provision, can materially affect net income.

In applying the judgment and review required to determine the ACL, management considers changes in economic conditions, customer behavior, and collateral value, among other factors.

From time to time, economic factors or business decisions may affect the composition and mix of the loan and lease portfolio, causing management to increase or decrease the ACL.

The following are some of the significant judgments and inherent limitations which affect the estimate of the ACL:

● The Accuracy of Internal Credit Risk Ratings, Monitoring of Loans Past Due and Delinquency Trends.

The ACL related to our commercial portfolio segment is generally most sensitive to the accuracy of internal credit risk ratings assigned to each borrower.

Commercial loan risk ratings are evaluated based on each situation by experienced senior credit officers and are subject to periodic review by an independent internal team of credit specialists.

We have applied considerable judgments about the sufficiency and applicability of our internal data to provide an accurate view of historical loss information.

For each of our portfolio segments we have examined between 8 and 12 years of historical data.

For many of our residential real estate and consumer loan classes, we have assumed that the historical loss period observed is sufficient to capture a full credit loss cycle and that the credit loss exposures observed over this historical loss period are representative of those for which we will be making estimates of future expected credit losses under CECL.

In making this assumption, we have relied on the fact that the historical loss period incorporated the most recent observed recessionary period as well as the subsequent period of sustained recovery and growth.

● Reasonable and Supportable Forecast Period.

For contractual periods which extend beyond the one-year reasonable and supportable forecast period, management elected an immediate reversion to the mean approach.

Management will continue to assess whether a one-year reasonable and supportable forecast period is appropriate.

Changes to the economic environment and uncertainty with regards to the timing and extent of an economic recovery may result in management decreasing or increasing the current reasonable and supportable forecast period.

● Qualitative Adjustments to the Reasonable and Supportable Forecast Period.

The Bank’s economic forecast team meets to discuss possible qualitative adjustments that should be considered in estimating the ACL.

These qualitative adjustments could be attributable to forecasted levels of employment, visitor arrivals and spending, interest rates and real estate prices.

Various economic forecasts ranging from mild, medium to severe are evaluated to forecast losses over the reasonable and supportable forecast period.

Such qualitative adjustments are highly subjective and are a result of significant management judgment and estimation.

● Identification and Measurement of Individually Assessed Loans, including Loans Modified in a TDR.

Our experienced senior credit officers may consider a loan impaired based on their evaluation of current information and events, including loans modified in a TDR.

The measurement of impairment is typically based on an analysis of the present value of expected future cash flows.

The development of these expectations requires significant management judgment and estimation.

Organization and Basis of Presentation” and “Note 4.

Allowance for Credit Losses” in the notes to the interim consolidated financial statements for more information on the ACL.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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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