Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-14585
FIRST HAWAIIAN, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
99-0156159
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
999 Bishop Street, 29th Floor
Honolulu, HI
96813
(Address of Principal Executive Offices)
(Zip Code)
(808) 525-7000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Trading Symbol(s)
Name of each exchange on which registered:
Common Stock, par value $0.01 per share
FHB
NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 127,609,611 shares of Common Stock, par value $0.01 per share, were outstanding as of July 31, 2023.
TABLE OF CONTENTS
INDEX
Part I Financial Information
Page No.
Item 1.
Financial Statements (unaudited)
2
Consolidated Statements of Income for the three and six months ended June 30, 2023 and 2022
Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2023 and 2022
3
Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022
4
Consolidated Statements of Stockholders' Equity for the three and six months ended June 30, 2023 and 2022
5
Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022
7
Notes to Consolidated Financial Statements (unaudited)
8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
53
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
95
Item 4.
Controls and Procedures
Part II Other Information
Legal Proceedings
Item 1A.
Risk Factors
Item 5.
Other Information
Item 6.
Exhibits
96
Exhibit Index
Signatures
97
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST HAWAIIAN, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
Six Months Ended
June 30,
(dollars in thousands, except per share amounts)
2023
2022
Interest income
Loans and lease financing
$
185,340
111,916
357,679
215,648
Available-for-sale investment securities
18,094
16,643
36,782
48,750
Held-to-maturity investment securities
18,282
18,289
37,239
Other
7,489
2,896
11,050
3,678
Total interest income
229,205
149,744
442,750
286,365
Interest expense
Deposits
58,071
4,597
101,355
7,346
Short-term and long-term borrowings
10,656
—
13,219
539
990
Total interest expense
69,266
115,564
Net interest income
159,939
145,147
327,186
279,019
Provision for credit losses
5,000
1,000
13,800
(4,747)
Net interest income after provision for credit losses
154,939
144,147
313,386
283,766
Noninterest income
Service charges on deposit accounts
7,246
6,843
14,477
14,344
Credit and debit card fees
15,461
17,056
31,759
31,906
Other service charges and fees
9,056
9,018
18,218
18,672
Trust and investment services income
9,448
8,759
19,062
17,642
Bank-owned life insurance
3,271
(859)
8,391
(1,276)
2,866
3,320
4,464
4,229
Total noninterest income
47,348
44,137
96,371
85,517
Noninterest expense
Salaries and employee benefits
57,904
49,902
113,936
98,128
Contracted services and professional fees
17,498
18,617
33,811
35,764
Occupancy
7,554
7,334
15,336
14,744
Equipment
11,000
7,754
20,736
13,731
Regulatory assessment and fees
3,676
2,301
7,512
4,525
Advertising and marketing
1,891
1,994
3,885
4,022
Card rewards program
7,681
7,285
15,766
14,168
13,677
13,988
28,466
28,135
Total noninterest expense
120,881
109,175
239,448
213,217
Income before provision for income taxes
81,406
79,109
170,309
156,066
Provision for income taxes
18,964
19,749
41,049
38,987
Net income
62,442
59,360
129,260
117,079
Basic earnings per share
0.49
0.46
1.01
0.92
Diluted earnings per share
0.91
Basic weighted-average outstanding shares
127,591,371
127,672,244
127,522,975
127,614,564
Diluted weighted-average outstanding shares
127,832,351
128,014,777
127,901,225
128,108,630
The accompanying notes are an integral part of these unaudited interim consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
Other comprehensive (loss) income, net of tax:
Net change in investment securities
(705)
(52,371)
26,239
(446,922)
Net change in cash flow derivative hedges
(352)
(1,584)
279
(2,842)
Other comprehensive (loss) income
(1,057)
(53,955)
26,518
(449,764)
Total comprehensive income (loss)
61,385
5,405
155,778
(332,685)
CONSOLIDATED BALANCE SHEETS
December 31,
(dollars in thousands, except share amount)
Assets
Cash and due from banks
318,333
297,502
Interest-bearing deposits in other banks
239,798
229,122
Investment securities:
Available-for-sale, at fair value (amortized cost: $3,296,825 as of June 30, 2023 and $3,549,599 as of December 31, 2022)
2,909,372
3,151,133
Held-to-maturity, at amortized cost (fair value: $3,697,261 as of June 30, 2023 and $3,814,822 as of December 31, 2022)
4,180,408
4,320,639
Loans and leases
14,362,832
14,092,012
Less: allowance for credit losses
148,581
143,900
Net loans and leases
14,214,251
13,948,112
Premises and equipment, net
277,817
280,355
Other real estate owned and repossessed personal property
91
Accrued interest receivable
80,710
78,194
476,177
473,067
Goodwill
995,492
Mortgage servicing rights
6,072
6,562
Other assets
813,136
796,954
Total assets
24,511,566
24,577,223
Liabilities and Stockholders' Equity
Deposits:
Interest-bearing
12,911,539
12,824,383
Noninterest-bearing
8,166,627
8,864,646
Total deposits
21,078,166
21,689,029
Short-term borrowings
75,000
Long-term borrowings
500,000
Retirement benefits payable
100,671
102,577
Other liabilities
472,991
441,612
Total liabilities
22,151,828
22,308,218
Commitments and contingent liabilities (Note 13)
Stockholders' equity
Common stock ($0.01 par value; authorized 300,000,000 shares; issued/outstanding: 141,327,860 / 127,608,037 as of June 30, 2023; issued/outstanding: 140,963,918 / 127,363,327 as of December 31, 2022)
1,413
1,410
Additional paid-in capital
2,543,226
2,538,336
Retained earnings
799,045
736,544
Accumulated other comprehensive loss, net
(612,736)
(639,254)
Treasury stock (13,719,823 shares as of June 30, 2023 and 13,600,591 shares as of December 31, 2022)
(371,210)
(368,031)
Total stockholders' equity
2,359,738
2,269,005
Total liabilities and stockholders' equity
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Three Months Ended June 30, 2023
Accumulated
Additional
Common Stock
Paid-In
Retained
Comprehensive
Treasury
(dollars in thousands, except share amounts)
Shares
Amount
Capital
Earnings
Loss
Stock
Total
Balance as of March 31, 2023
127,573,680
2,540,653
769,791
(611,679)
(371,166)
2,329,012
Cash dividends declared ($0.26 per share)
(33,175)
Common stock issued under Employee Stock Purchase Plan
9,548
163
Equity-based awards
24,809
2,410
(13)
(44)
2,353
Other comprehensive loss, net of tax
Balance as of June 30, 2023
127,608,037
Six Months Ended June 30, 2023
Income (Loss)
Balance as of December 31, 2022
127,363,327
Cash dividends declared ($0.52 per share)
(66,290)
235,162
4,727
(469)
(3,179)
1,082
Other comprehensive income, net of tax
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)
Three Months Ended June 30, 2022
Balance as of March 31, 2022
127,686,307
1,409
2,530,795
628,642
(517,502)
(358,195)
2,285,149
(33,212)
55,338
2,612
(330)
2,269
Common stock repurchased
(290,558)
(7,000)
Balance as of June 30, 2022
127,451,087
2,533,407
654,777
(571,457)
(365,525)
2,252,611
Six Months Ended June 30, 2022
Balance as of December 31, 2021
127,502,472
1,406
2,527,663
604,534
(121,693)
(354,998)
2,656,912
(66,363)
239,173
5,744
(473)
(3,527)
1,747
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion, net
21,985
30,872
Deferred income tax (benefit) provision
(2,024)
14,228
Stock-based compensation
4,730
5,747
Other losses
1,122
2,304
Originations of loans held for sale
(5,613)
(10,256)
Proceeds from sales of loans held for sale
6,726
9,744
Net losses on sales of loans originated for investment and held for sale
20
36
Change in assets and liabilities:
Net decrease (increase) in other assets
29,087
(49,614)
Net (decrease) increase in other liabilities
(11,483)
50,351
Net cash provided by operating activities
187,610
165,744
Cash flows from investing activities
Available-for-sale securities:
Proceeds from maturities and principal repayments
223,102
598,865
Proceeds from calls and sales
25,237
1,080
Purchases
(913,268)
Held-to-maturity securities:
153,133
137,014
Proceeds from calls
7,705
110
(79,470)
Other investments:
Proceeds from sales
61,985
4,132
(81,240)
(21,386)
Loans:
Net increase in loans and leases resulting from originations and principal repayments
(240,357)
(168,986)
Purchases of loans
(48,741)
(149,512)
Proceeds from bank-owned life insurance
5,281
Purchases of premises, equipment and software
(4,191)
(5,966)
Proceeds from sales of other real estate owned
34
176
(2,882)
(1,744)
Net cash provided by (used in) investing activities
99,066
(598,955)
Cash flows from financing activities
Net (decrease) increase in deposits
(610,863)
785,308
Net decrease in short-term borrowings
(75,000)
Proceeds from long-term borrowings
Dividends paid
Stock tendered for payment of withholding taxes
Proceeds from employee stock purchase plan
Net cash (used in) provided by financing activities
(255,169)
708,418
Net increase in cash and cash equivalents
31,507
275,207
Cash and cash equivalents at beginning of period
526,624
1,258,469
Cash and cash equivalents at end of period
558,131
1,533,676
Supplemental disclosures
Interest paid
97,867
8,015
Income taxes paid, net of income tax refunds
29,928
5,356
Noncash investing and financing activities:
Operating lease right-of-use assets obtained in exchange for new lease obligations
1,680
4,979
Transfers to loans and leases from loans held for sale
834
Transfers to loans held for sale from loans and leases
1,133
Transfers of securities from available-for-sale to held-to-maturity
4,133,363
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation
First Hawaiian, Inc. (“FHI” or the “Parent”), a bank holding company, owns 100% of the outstanding common stock of First Hawaiian Bank (“FHB” or the “Bank”), its only direct, wholly owned subsidiary. FHB offers a comprehensive suite of banking services, including loans, deposit products, wealth management, insurance, trust, retirement planning, credit card and merchant processing services, to consumer and commercial customers.
The accompanying unaudited interim consolidated financial statements of First Hawaiian, Inc. and Subsidiary (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.
The accompanying unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
In the opinion of management, all adjustments, which consist of normal recurring adjustments necessary for a fair presentation of the interim period consolidated financial information, have been made. Results of operations for interim periods are not necessarily indicative of results to be expected for the entire year. Intercompany account balances and transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events, actual results may differ from these estimates.
Loan Modifications to Borrowers Experiencing Financial Difficulty
Loan modifications are assessed by the Company to determine: (1) whether the borrower is experiencing financial difficulty and (2) whether the Company granted the borrower a modification or combination of modifications in the form of one or more of the following modification types: principal forgiveness, an interest rate reduction, an other-than-insignificant payment delay and/or a term extension. If both criteria are met, then the loan modification is subject to additional evaluation for credit losses and enhanced disclosure requirements.
Generally, a non-accrual loan that has been modified with a borrower experiencing financial difficulty remains on non-accrual status for at least six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. If the borrower’s ability to meet the revised payment terms is uncertain, the loan remains on non-accrual status.
Allowance for Credit Losses
The allowance for credit losses for loans and leases (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 loan or lease balance is deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The Company’s ACL and the reserve for unfunded commitments under the Current Expected Credit Losses (“CECL”) approach consist of quantitative and qualitative estimates. The Company’s methodology leverages two quantitative models: a one-variable forward-looking macroeconomic model that estimates the impact of management’s economic outlook and a transition probability matrix that estimates expected losses over the long run. The quantitative estimation is overlaid with qualitative adjustments to account for current conditions and forward-looking factors not captured in the quantitative model. Qualitative adjustments that are considered include adjustments for regulatory determinants, model limitations, model maturity, and other current or anticipated events that are not captured in the Company’s historical loss experience.
The Company generally evaluates loans and leases on a collective or pool basis when similar risk characteristics exist. However, loans and leases that do not share similar risk characteristics are evaluated on an individual basis. Such loans and leases evaluated individually are excluded from the collective evaluation. Individually assessed loans are measured for estimated credit loss (“ECL”) based on the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, less estimated selling costs, if the loan is collateral-dependent.
Management reviews relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts about the future. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency levels, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.
The Company utilizes a Probability of Default (“PD”)/Loss Given Default (“LGD”) framework to estimate the ACL and the reserve for unfunded commitments. The PD represents the percentage expectation to default, measured by assessing loans and leases that migrate to default status (i.e., nonaccrual status, loan modifications to borrowers experiencing financial difficulty, 90 days or more past due, partial or full charge-offs or bankruptcy). LGD is defined as the percentage of the exposure at default (“EAD”) lost at the time of default, net of any recoveries, and will be unique to each of the collateral types securing the Company’s loans. PD and LGD’s are based on past experience of the Company. The ECL on loans and leases is calculated by taking the product of the credit exposure, lifetime default probability (“LDP”) and the LGD.
The ECL model is applied to current credit exposures at the account level, using assumptions calibrated at the portfolio segment level using internal historical loan and lease level data. The Company estimates the default risk of a credit exposure over the remaining life of each account using a transition probability matrix approach which captures both the average rate of up/down-grade and default transitions, as well as withdrawal rates which capture the historical rate of exposure decline due to loan and lease amortization and prepayment. To apply the transition matrices, each credit exposure’s remaining life is split into two time segments. The first time segment is for the reasonable and supportable forecast period over which the transition matrices which are applied have been adjusted to incorporate current and forecasted conditions over that period. Management has determined that using a one-year time horizon for the reasonable and supportable forecast period for all classes of loans and leases is a reasonable forecast horizon given the difficulty in predicting future economic conditions with a high degree of certainty. The second time segment is the reversion period from the end of the reasonable and supportable forecast period to the maturity of the exposure, over which long-run average transition matrices are applied. Management elected to use an immediate reversion to the mean approach. Lifetime loss rates are applied against the amortized cost basis of loans and leases and unfunded commitments to estimate the ACL and the reserve for unfunded commitments, respectively.
On at least a quarterly basis, management convenes the Bank’s forecasting team which is responsible for reviewing the economic forecast model inputs and outputs and approving the resulting economic adjustment. The model uses a one-variable econometric model to produce factors that modify the long-run default rate assumptions used in the CECL model. These factors are applied to calculate the economic adjustment over the Reasonable and Supportable Forecast Period. At the meeting, management is presented with the economic forecast model input and output as well as the resulting economic adjustment. Depending on the current economic conditions, a range of inputs and outputs may be presented, in which case, using judgment, management will select an input and output.
9
The economic forecast framework also allows management to use judgment in selecting the economic model input in cases where management’s outlook diverges from the official forecasts, and to apply qualitative dollar overlays to account for other economic related conditions not captured in the economic forecast model but are expected to potentially impact losses.
The team also reviews other relevant economic variables and economic factors at the time of the meeting that could potentially impact future losses. These materials are presented to the economic forecasting team as they are economic in nature. If determined to be relevant and needing to be considered in the ACL estimate, these risks will be included in the ACL estimate through a qualitative dollar overlay that is determined using either quantitative analysis or qualitative judgment, or a mix of both. These other factors could include inflation indicators, personal income, or visitor arrivals, for example.
At present, the Company has identified three portfolio segments in estimating the ACL: commercial, residential real estate and consumer lending. The Company’s commercial portfolio segment is comprised of four distinct classes: commercial and industrial loans, commercial real estate loans, construction loans and lease financing. The key risk drivers related to this portfolio segment include risk rating, collateral type, and remaining maturity. The Company’s residential real estate portfolio segment is comprised of two distinct classes: residential real estate loans and home equity lines of credit. Specific risk characteristics related to this portfolio include the value of the underlying collateral, credit score and remaining maturity. Finally, the Company’s consumer portfolio segment is not further segmented, but consists primarily of automobile loans, credit cards and other installment loans. Automobile loans constitute the majority of this segment and are monitored using credit scores, collateral values and remaining maturity. The remainder of the consumer portfolio is predominantly unsecured.
Regarding accrued interest receivable, the Company made accounting policy elections to (1) not measure an ACL on accrued interest receivable, (2) write-off accrued interest receivable by reversing interest income and (3) present accrued interest receivable separately from the related financial asset on the balance sheet. Furthermore, regarding collateral-dependent financial assets, the Company elected the practical expedient to use the fair value of collateral at the reporting date when recording the net carrying amount of the asset and determining the ACL for a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Company’s assessment as of the reporting date.
Accounting Standards Adopted in 2023
In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2022-01, Derivatives and Hedging (Topic 815), Fair Value Hedging –Portfolio Layer Method. This update clarifies the guidance in Topic 815 on fair value hedge accounting of interest rate risk for portfolios of financial assets. Under current hedge accounting guidance, the “last-of-layer” method enables an entity to apply fair value hedging to a stated amount of a closed portfolio of prepayable financial assets without having to consider prepayment risk or credit risk when measuring those assets. The hedged item represents a single layer within that closed portfolio. This update expands the scope of this guidance to allow entities to apply the “portfolio layer” method to portfolios of all financial assets, including both prepayable and nonprepayable financial assets. The current model is expanded to (1) explicitly allow entities to designate multiple layers in a single portfolio as individual hedged items and (2) also allow entities the flexibility to use any type of derivative (or combination of derivatives) by applying the multiple-layer model that aligns with its risk management strategy. Although no assets may be added to a closed portfolio once it is designated in a portfolio layer method hedge, at any time after the initial hedge designation, new hedging relationships associated with the portfolio may be designated and existing hedging relationships associated with the portfolio may be dedesignated to align with an entity’s evolving strategy for managing interest rate risk on a timely basis. Under the portfolio layer method, the basis of the portfolio assets is generally adjusted at the portfolio level rather than being allocated to individual assets within the portfolio, except when the allocation of basis adjustments is required by other areas of GAAP. The intent of this update is consistent with the FASB’s efforts to better align an entity’s financial reporting with the results of its risk management strategy and to further simplify the hedge accounting model. The Company adopted the provisions of ASU No. 2022-01 on January 1, 2023, and it did not have a material impact on the Company’s consolidated financial statements.
10
In March 2022, the FASB issued ASU No. 2022-02, Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. This update eliminates the accounting guidance on troubled debt restructurings (“TDRs”) for creditors in Subtopic 310-40 and amends the guidance on vintage disclosures to require disclosure of current-period gross charge-offs by year of origination. This ASU also updates the requirements related to accounting for credit losses under Topic 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. The Company adopted the provisions of ASU No. 2022-02 on January 1, 2023, and it did not have a material impact on the Company’s consolidated financial statements. See “Note 4. Allowance for Credit Losses” for required disclosures related to this new guidance.
Enactment of the Inflation Reduction Act of 2022
On August 16, 2022, the U.S. government enacted the Inflation Reduction Act (IRA) which, among other changes, created a new corporate alternative minimum tax (AMT) based on adjusted financial statement income and imposes a 1% excise tax on corporate stock repurchases. These provisions became effective January 1, 2023. The enactment of the IRA did not have a material impact on the Company’s consolidated financial statements.
Recent Accounting Pronouncements
The following ASUs have been issued by the FASB and are applicable to the Company in future reporting periods.
In March 2023, the FASB issued ASU No. 2023-01, Leases (Topic 842), Common Control Arrangements. This update clarifies the accounting for leasehold improvements associated with common control leases. Prior to this update, Topic 842 generally required leasehold improvements to have an amortization period consistent with the shorter of the useful life of those improvements or the remaining lease term. This update will require leasehold improvements associated with common control leases to be (1) amortized by the lessee over the useful life of the leasehold improvements to the common control group (regardless of the lease term) as long as the lessee controls the use of the underlying asset (the leased asset) through a lease, and (2) accounted for as a transfer between entities under common control through an adjustment to equity if, and when, the lessee no longer controls the use of the underlying asset. In addition, this update also subjects leasehold improvements to the impairment guidance in Topic 360, Property, Plant, and Equipment. This update is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU No. 2023-01 is not expected to have a material impact on the Company’s consolidated financial statements.
In March 2023, the FASB issued ASU No. 2023-02, Investments—Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method. This update expands the population of tax equity investments for which a reporting entity may elect to apply the proportional amortization method (“PAM”). Under current guidance, an entity can only elect to apply the PAM to investments in low-income housing tax credit (“LIHTC”) structures. This update permits an entity to make an election to account for tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the PAM if certain conditions are met. An accounting policy election is made to apply the PAM on a tax credit program-by-program basis rather than electing to apply the PAM at the reporting entity level or to individual investments. By applying the PAM, a reporting entity must account for the receipt of the investment tax credits using the flow-through method under Topic 740, Income Taxes, even if the entity applies the deferral method for other investment tax credits received. For all tax equity investments accounted for using the PAM, this update also requires the use of the delayed equity contribution guidance. LIHTC investments not accounted for using the PAM will no longer be permitted to use the delayed equity contribution guidance. In addition, LIHTC investments accounted for using the equity method must apply the impairment guidance in Subtopic 323-10, Investments—Equity Method and Joint Ventures—Overall. Further, LIHTC investments that are not accounted for using the PAM or the equity method must use the guidance in Topic 321, Investments—Equity Securities, when accounting for equity investments. In addition, the amendments in this update require specific disclosures that must be applied to all investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the PAM, including investments within that elected program that do not meet the conditions to apply the PAM. Such disclosures include the nature of its tax equity investments and the effect of such investments and related income tax credits and other income tax benefits on its financial position and results of operations. This update is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The adoption of ASU No. 2023-02 is not expected to have a material impact on the Company’s consolidated financial statements.
11
2. Investment Securities
As of June 30, 2023 and December 31, 2022, investment securities consisted predominantly of the following investment categories:
U.S. Treasury and debt securities – includes U.S. Treasury notes and debt securities issued by government agencies and government-sponsored enterprises.
Mortgage-backed securities – includes securities backed by notes or receivables secured by mortgage assets with cash flows based on actual or scheduled payments.
Collateralized mortgage obligations – includes securities backed by a pool of mortgages with cash flows distributed based on certain rules rather than pass through payments.
Collateralized loan obligations – includes structured debt securities backed by a pool of loans, consisting of primarily non-investment grade broadly syndicated corporate loans with additional credit enhancement. These are floating rate securities that have an investment grade rating of AA or better.
Debt securities issued by states and political subdivisions – includes general obligation bonds issued by state and local governments.
As of June 30, 2023 and December 31, 2022, the Company’s investment securities were classified as either available-for-sale or held-to-maturity. Amortized cost, gross unrealized holding gains and losses and fair value of available-for-sale and held-to-maturity investment securities as of June 30, 2023 and December 31, 2022 were as follows:
June 30, 2023
December 31, 2022
Amortized
Unrealized
Fair
Cost
Gains
Losses
Value
U.S. Treasury and government agency debt securities
128,594
(11,709)
116,885
163,309
(12,327)
150,982
Government-sponsored enterprises debt securities
45,000
(760)
44,240
(699)
44,301
Mortgage-backed securities:
Residential - Government agency
63,486
(6,284)
57,202
66,792
(7,069)
59,723
Residential - Government-sponsored enterprises
1,229,375
(146,383)
1,082,992
1,317,718
(157,263)
1,160,455
Commercial - Government agency
276,365
(50,903)
225,462
282,700
(44,847)
237,853
Commercial - Government-sponsored enterprises
96,441
(8,544)
87,897
130,612
(11,039)
119,573
Commercial - Non-agency
21,964
(585)
21,379
(493)
21,471
Collateralized mortgage obligations:
Government agency
688,844
(83,623)
605,221
738,524
(85,202)
653,322
Government-sponsored enterprises
496,867
(69,387)
427,480
533,103
(70,971)
462,132
Collateralized loan obligations
249,889
(9,275)
240,614
249,877
50
(8,606)
241,321
Total available-for-sale securities
3,296,825
(387,453)
3,549,599
(398,516)
Government agency debt securities
53,189
(5,675)
47,514
54,318
(5,674)
48,644
45,097
(5,484)
39,613
46,302
(6,294)
40,008
102,940
(11,898)
91,042
106,534
(12,978)
93,556
30,675
(6,381)
24,294
30,544
(5,229)
25,315
1,137,157
196
(129,963)
1,007,390
1,150,449
(138,451)
1,011,998
1,036,671
(119,506)
917,165
1,080,492
(122,378)
958,114
1,720,672
(198,450)
1,522,222
1,798,178
(207,045)
1,591,133
Debt securities issued by states and political subdivisions
54,007
(5,986)
48,021
53,822
(7,768)
46,054
Total held-to-maturity securities
(483,343)
3,697,261
(505,817)
3,814,822
12
During the year ended December 31, 2022, the Company reclassified at fair value approximately $4.6 billion, in available-for-sale investment securities to the held-to-maturity category. The related total unrealized after-tax losses of approximately $372.4 million remained in accumulated other comprehensive loss to be amortized over the estimated remaining life of the securities as an adjustment of yield, offsetting the related accretion of the discount on the transferred securities. No gains or losses were recognized at the time of reclassification. Management considers the held-to-maturity classification of these investment securities to be appropriate as the Company has the positive intent and ability to hold these securities to maturity. There were no securities transferred from available-for-sale investment securities to the held-to-maturity category during the three and six months ended June 30, 2023.
Accrued interest receivable related to available-for-sale investment securities was $8.7 million and $8.9 million as of June 30, 2023 and December 31, 2022, respectively. Accrued interest receivable related to held-to-maturity investment securities was $7.2 million and $7.5 million as of June 30, 2023 and December 31, 2022, respectively. Accrued interest receivable is recorded separately from the amortized cost basis of investment securities on the Company’s unaudited interim consolidated balance sheets.
Proceeds from calls and sales of investment securities were $7.5 million and $25.2 million, respectively, for the three months ended June 30, 2023, and $7.7 million and $25.2 million, respectively, for the six months ended June 30, 2023. Proceeds from calls and sales of investment securities were $0.2 million and nil, respectively, for the three months ended June 30, 2022, and $1.2 million and nil, respectively, for the six months ended June 30, 2022. The Company recorded gross realized gains of nil and gross realized losses of nil for the three and six months ended June 30, 2023 and 2022. The income tax expense related to the Company’s net realized gain on the sale of investment securities was nil for the three and six months ended June 30, 2023 and 2022. Gains and losses realized on sales of securities are determined using the specific identification method.
Interest income from taxable investment securities was $33.3 million and $31.6 million, respectively, for the three months ended June 30, 2023 and 2022, and $67.3 million and $60.7 million, respectively, for the six months ended June 30, 2023 and 2022. Interest income from non-taxable investment securities was $3.1 million and $3.3 million, respectively, for the three months ended June 30, 2023 and 2022, and $6.7 million and $6.3 million, respectively, for the six months ended June 30, 2023 and 2022.
The amortized cost and fair value of debt securities issued by the U.S. Treasury, government agencies, government-sponsored enterprises and states and political subdivisions, non-agency mortgage-backed securities and collateralized loan obligations as of June 30, 2023, by contractual maturity, are shown below. Mortgage-backed securities and collateralized mortgage obligations issued by government agencies and government-sponsored enterprises are disclosed separately in the table below as remaining expected maturities will differ from contractual maturities as borrowers have the right to prepay obligations.
13
Available-for-sale securities
Due in one year or less
44,820
44,242
Due after one year through five years
60,590
57,478
Due after five years through ten years
175,172
162,622
Due after ten years
164,865
158,776
445,447
423,118
Total mortgage-backed securities
1,665,667
1,453,553
Total collateralized mortgage obligations
1,185,711
1,032,701
Held-to-maturity securities
10,255
9,264
96,941
86,271
107,196
95,535
1,315,869
1,162,339
2,757,343
2,439,387
At June 30, 2023, pledged securities totaled $6.0 billion, of which $3.2 billion was pledged to secure public deposits, $2.6 billion was pledged to secure borrowing capacity and $171.5 million was pledged to secure other financial transactions. At December 31, 2022, pledged securities totaled $3.2 billion, of which $3.0 billion was pledged to secure public deposits and $207.8 million was pledged to secure other financial transactions.
The Company held no securities of any single issuer, other than debt securities issued by the U.S. government, government agencies and government-sponsored enterprises, taken in the aggregate, which were in excess of 10% of stockholders’ equity as of June 30, 2023 or December 31, 2022.
The following tables present the unrealized gross losses and fair values of securities in the available-for-sale portfolio by length of time that the 281 and 275 individual securities in each category have been in a continuous loss position as of June 30, 2023 and December 31, 2022, respectively. The unrealized losses on available-for-sale investment securities were attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.
14
Time in Continuous Loss as of June 30, 2023
Less Than 12 Months
12 Months or More
Fair Value
(708)
19,255
(11,001)
97,630
(8,831)
165,828
(137,552)
917,164
(104)
4,256
(50,799)
221,206
(546)
15,738
(7,998)
72,159
(1,260)
31,225
(82,363)
573,996
(2,894)
36,881
(66,493)
390,599
(6,360)
163,538
(2,915)
77,076
Total available-for-sale securities with unrealized losses
(22,048)
502,340
(365,405)
2,407,032
Time in Continuous Loss as of December 31, 2022
(2,962)
83,870
(9,365)
67,112
(73,954)
645,338
(83,309)
515,117
(15,852)
108,842
(28,995)
129,011
(7,348)
94,657
(3,691)
24,916
(74,797)
596,907
(10,405)
56,415
(21,916)
198,108
(49,055)
264,024
Collateralized loan obligations:
170,042
(213,696)
2,023,259
(184,820)
1,056,595
3,079,854
At June 30, 2023 and December 31, 2022, the Company did not have any available-for-sale securities in an unrealized loss position with the intent to sell and determined it was more likely than not that the Company would not be required to sell these securities prior to recovery of the amortized cost basis. As the Company had the intent and ability to hold the remaining available-for-sale securities in an unrealized loss position as of June 30, 2023 and December 31, 2022, each security with an unrealized loss position in the above tables has been further assessed to determine if a credit loss exists. As of June 30, 2023 and December 31, 2022, the Company did not expect any credit losses in its available-for-sale debt securities and no credit losses were recognized on available-for-sale securities during the three and six months ended June 30, 2023 and for the year ended December 31, 2022.
As of June 30, 2023 and December 31, 2022, the Company’s investment securities were comprised primarily of debt securities, mortgage-backed securities and collateralized mortgage obligations issued by the U.S. Government, its agencies and government-sponsored enterprises, with under 5% of the investment securities comprised of collateralized loan obligations rated AA or better and obligations issued by local state and political subdivisions rated AA or better. For investment securities issued by the U.S. Government, its agencies and government-sponsored enterprises, management has concluded that the long history with no credit losses from these issuers indicates an expectation that nonpayment of the amortized cost basis is zero, and these securities are explicitly or implicitly fully guaranteed by the U.S. government. The U.S. government can print its own currency and its currency is routinely held by central banks and other major financial institutions. The dollar is used in international commerce, and commonly is viewed as a reserve currency, all of which qualitatively indicates that historical credit loss information should be minimally affected by current conditions and reasonable and supportable forecasts. For collateralized loan obligations and debt securities issued by local state and political subdivisions, these securities are investment grade and highly rated and carry either sufficient credit enhancement or days cash on hand to support timely payments of principal and interest. As a result, the Company does not expect any future payment defaults and has not recorded an allowance for credit losses for its available-for-sale and held-to-maturity debt securities as of June 30, 2023 or December 31, 2022.
15
The Company held approximately 120,000 Visa Class B restricted shares as of both June 30, 2023 and December 31, 2022. These shares continued to be carried at $0 cost basis as of both June 30, 2023 and December 31, 2022.
3. Loans and Leases
As of June 30, 2023 and December 31, 2022, loans and leases were comprised of the following:
Commercial and industrial
2,187,831
2,235,897
Commercial real estate
4,290,948
4,132,309
Construction
913,837
844,643
Residential:
Residential mortgage
4,317,537
4,302,788
Home equity line
1,138,163
1,055,351
Total residential
5,455,700
5,358,139
Consumer
1,182,116
1,222,934
Lease financing
332,400
298,090
Total loans and leases
Outstanding loan balances are reported net of deferred loan costs and fees of $58.7 million and $56.1 million at June 30, 2023 and December 31, 2022, respectively.
Accrued interest receivable related to loans and leases was $64.6 million and $61.6 million as of June 30, 2023 and December 31, 2022, respectively, and is recorded separately from the amortized cost basis of loans and leases on the Company’s unaudited interim consolidated balance sheets.
As of June 30, 2023, commercial real estate and residential real estate loans totaling $4.9 billion were pledged to collateralize the Company’s borrowing capacity at the Federal Home Loan Bank of Des Moines (“FHLB”), and consumer, commercial and industrial, commercial real estate, residential real estate loans and pledged securities totaling $4.9 billion were pledged to collateralize the Company’s borrowing capacity at the Federal Reserve Bank of San Francisco (“FRB”). As of December 31, 2022, residential real estate loans totaling $3.5 billion were pledged to collateralize the Company’s borrowing capacity at the FHLB, and consumer, commercial and industrial, commercial real estate and residential real estate loans totaling $1.7 billion were pledged to collateralize the Company’s borrowing capacity at the FRB. Residential real estate loans collateralized by properties that were in the process of foreclosure totaled $4.0 million and $2.8 million as of June 30, 2023 and December 31, 2022, respectively.
In the course of evaluating the credit risk presented by a customer and the pricing that will adequately compensate the Company for assuming that risk, management may require a certain amount of collateral support. The type of collateral held varies, but may include accounts receivable, inventory, land, buildings, equipment, income-producing commercial properties and residential real estate. The Company applies the same collateral policy for loans whether they are funded immediately or on a delayed basis. The loan and lease portfolio is principally located in Hawaii and, to a lesser extent, on the U.S. Mainland, Guam and Saipan. The risk inherent in the portfolio depends upon both the economic strength and stability of the state or territories, which affects property values, and the financial strength and creditworthiness of the borrowers.
4. Allowance for Credit Losses
The Company maintains the ACL that is deducted from the amortized cost basis of loans and leases to present the net carrying value of loans and leases expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount of loans and leases. While management utilizes its best judgment and information available, the ultimate appropriateness of the ACL is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. The Company’s methodology is more fully described in our Annual Report on Form 10-K for the year ended December 31, 2022.
16
The Company also maintains an estimated reserve for unfunded commitments on the unaudited interim consolidated balance sheets. The reserve for unfunded commitments is reduced in the period in which the off-balance sheet financial instruments expire, loan funding occurs, or is otherwise settled.
Rollforward of the Allowance for Credit Losses
The following presents the activity in the ACL by class of loans and leases for the three and six months ended June 30, 2023 and 2022:
Commercial Lending
Residential Lending
Commercial
Home
and
Real
Lease
Residential
Equity
Industrial
Estate
Financing
Mortgage
Line
Allowance for credit losses:
Balance at beginning of period
14,038
40,311
6,473
1,481
34,320
9,341
41,158
147,122
Charge-offs
(997)
(137)
(4,516)
(5,650)
Recoveries
292
30
59
1,728
2,109
Provision
477
(424)
3,398
(34)
(1,547)
2,543
587
Balance at end of period
13,810
39,887
9,871
1,447
32,803
11,806
38,957
14,564
43,810
5,843
1,551
35,175
8,296
34,661
(1,788)
(122)
(272)
(9,298)
(11,480)
538
57
236
3,894
4,725
496
(3,923)
4,028
(2,307)
3,546
9,700
11,436
19,160
45,238
8,908
1,362
30,888
5,084
39,640
150,280
(243)
(1,120)
(3,659)
(5,022)
301
60
192
191
1,940
2,684
(3,294)
(512)
(3,541)
(24)
2,555
579
5,237
15,924
44,726
5,367
1,398
33,635
4,734
43,158
148,942
20,080
42,951
9,773
1,659
34,364
5,642
42,793
157,262
(949)
(1,163)
(9,880)
354
208
219
4,088
4,943
(3,561)
1,761
(4,406)
(321)
(937)
4,045
(3,383)
17
Rollforward of the Reserve for Unfunded Commitments
The following presents the activity in the Reserve for Unfunded Commitments for the three and six months ended June 30, 2023 and 2022:
Reserve for unfunded commitments:
7,153
1,692
8,952
18,336
49
36,199
(799)
299
837
(18)
6,354
1,991
9,789
19
18,015
31
7,811
2,004
7,470
16,483
37
33,835
(1,457)
2,319
(11)
1,532
(6)
2,364
9,308
1,789
8,046
9,766
46
28,958
(1,668)
1,961
(1,962)
29
1,657
(17)
7,640
3,750
6,084
32
11,423
8,615
2,114
8,963
10,546
69
30,322
(975)
1,636
(2,879)
877
(40)
(1,364)
Credit Quality Information
The Company performs an internal loan review and grading or scoring procedures on an ongoing basis. The review provides management with periodic information as to the quality of the loan portfolio and effectiveness of the Company’s lending policies and procedures. The objective of the loan review and grading or scoring procedures is to identify, in a timely manner, existing or emerging credit quality issues so that appropriate steps can be initiated to avoid or minimize future losses.
Loans and leases subject to grading primarily include: commercial and industrial loans, commercial real estate loans, construction loans and lease financing. Other loans subject to grading include installment loans to businesses or individuals for business and commercial purposes, overdraft lines of credit, commercial credit cards, and other credits as may be determined. Credit quality indicators for internally graded loans and leases are generally updated on an annual basis or on a quarterly basis for those loans and leases deemed to be of potentially higher risk.
18
An internal credit risk rating system is used to determine loan grade and is based on borrower credit risk and transactional risk. The loan grading process is a mechanism used to determine the risk of a particular borrower and is based on the following factors of a borrower: character, earnings and operating cash flow, asset and liability structure, debt capacity, management and controls, borrowing entity, and industry and operating environment.
Pass – “Pass” (uncriticized) loans and leases, are not considered to carry greater than normal risk. The borrower has the apparent ability to satisfy obligations to the Company, and therefore no loss in ultimate collection is anticipated.
Special Mention – Loans and leases that have potential weaknesses deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for assets or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.
Substandard – Loans and leases that are inadequately protected by the current financial condition and paying capacity of the obligor or by any collateral pledged. Loans and leases so classified must have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the distinct possibility that the bank may sustain some loss if the deficiencies are not corrected.
Doubtful – Loans and leases that have weaknesses found in substandard borrowers with the added provision that the weaknesses make collection of debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Loss – Loans and leases classified as loss are considered uncollectible and of such little value that their continuance as an asset is not warranted. This classification does not mean that the loan or lease has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.
Loans that are primarily monitored for credit quality using FICO scores include: residential mortgage loans, home equity lines and consumer loans. FICO scores are calculated primarily based on a consideration of payment history, the current amount of debt, the length of credit history available, a recent history of new sources of credit and the mix of credit type. FICO scores are updated on a monthly, quarterly or bi-annual basis, depending on the product type.
The amortized cost basis by year of origination and credit quality indicator of the Company’s loans and leases as of June 30, 2023 was as follows:
Revolving
Loans
Converted
Term Loans
to Term
Amortized Cost Basis by Origination Year
2021
2020
2019
Prior
Cost Basis
Commercial and Industrial
Risk rating:
Pass
33,877
299,913
385,159
38,769
157,794
165,747
952,182
15,003
2,048,444
Special Mention
103
31,193
154
849
2,397
2,967
186
39,330
Substandard
352
563
260
936
819
1,100
12,539
16,586
Other (1)
11,743
13,284
6,301
3,275
2,644
1,668
44,556
83,471
Total Commercial and Industrial
46,075
344,953
391,874
43,829
163,654
169,996
1,012,244
15,206
Current period gross charge-offs
72
28
92
1,527
1,788
Commercial Real Estate
212,159
876,558
655,847
333,142
564,881
1,499,805
72,447
4,214,839
1,737
156
547
6,983
12,389
12,952
34,764
5,141
171
35,883
41,197
148
Total Commercial Real Estate
213,896
881,855
333,860
571,864
1,548,225
85,401
77,826
182,679
365,959
76,728
61,906
82,554
854,214
205
6,601
26,882
3,261
2,136
4,067
705
59,418
Total Construction
84,427
209,561
381,725
79,989
64,247
86,621
7,267
Lease Financing
69,487
94,276
21,167
39,215
35,964
70,312
330,421
365
425
1,376
1,554
Total Lease Financing
21,532
39,446
35,971
71,688
Total Commercial Lending
413,885
1,530,645
1,450,978
497,124
835,736
1,876,530
1,104,912
7,725,016
(continued)
Residential Mortgage
FICO:
740 and greater
138,593
530,776
1,030,287
544,330
236,821
1,036,361
3,517,168
680 - 739
25,500
81,562
117,701
74,446
34,186
135,766
469,161
620 - 679
2,468
11,212
16,463
10,747
5,743
38,132
84,765
550 - 619
3,383
4,058
2,471
254
12,362
22,528
Less than 550
197
2,372
1,581
51
5,403
9,604
No Score (3)
6,075
19,497
12,552
6,378
9,837
56,201
110,540
Other (2)
9,916
18,075
17,857
8,915
28,438
7,618
103,771
Total Residential Mortgage
182,552
664,702
1,201,290
652,905
295,807
1,312,663
122
Home Equity Line
930,741
932,409
151,418
2,449
153,867
32,897
34,273
9,428
1,448
10,876
5,127
312
5,439
1,299
Total Home Equity Line
1,130,910
7,253
272
Total Residential Lending
1,138,528
394
Consumer Lending
70,561
153,960
93,788
45,022
34,093
19,410
117,437
140
534,411
44,064
84,900
49,136
23,895
19,424
11,352
72,327
431
305,529
14,643
37,576
19,488
9,771
11,007
8,482
33,692
941
135,600
2,255
10,974
8,135
5,608
6,314
5,207
11,730
748
50,971
418
4,358
4,478
2,695
2,975
2,765
4,247
560
22,496
1,425
586
39,035
167
41,238
1,208
3,536
343
1,113
85,634
91,871
Total Consumer Lending
133,402
293,562
178,563
87,334
74,932
47,234
364,102
2,987
58
1,244
1,260
630
1,239
1,388
3,131
348
9,298
Total Loans and Leases
729,839
2,488,909
2,830,831
1,237,363
1,206,475
3,236,427
2,607,542
25,446
130
1,304
1,269
658
1,331
3,037
3,385
366
11,480
21
The amortized cost basis by year of origination and credit quality indicator of the Company’s loans and leases as of December 31, 2022 was as follows:
2018
359,881
422,567
54,656
170,222
51,476
137,257
894,384
15,715
2,106,158
2,059
240
1,371
2,643
184
1,431
22,897
378
31,203
625
289
1,117
1,092
668
885
14,733
65
19,474
17,679
7,721
4,329
3,965
1,881
1,167
42,320
79,062
380,244
430,817
61,473
177,922
54,209
140,740
974,334
16,158
889,583
695,882
319,838
565,587
395,474
1,173,163
48,081
4,087,608
170
555
14,878
512
11,398
675
28,188
173
1,704
14,485
16,362
151
889,753
320,566
580,465
397,690
1,199,197
48,756
124,464
261,536
96,423
97,000
88,973
84,704
25,957
779,057
221
490
511
29,694
21,339
4,686
2,201
3,784
2,196
954
64,854
154,158
282,875
101,109
99,422
92,778
87,390
26,911
113,563
24,052
43,497
37,502
6,004
67,687
292,305
411
2,498
4,208
1,357
1,577
24,463
46,192
38,813
6,015
69,044
1,537,718
1,434,037
529,340
896,622
550,692
1,496,371
1,050,001
7,510,939
22
557,636
1,064,444
560,463
245,241
165,258
920,100
3,513,142
73,929
112,672
82,416
40,355
22,126
130,508
462,006
12,320
13,804
9,881
3,649
3,054
35,441
78,149
2,455
2,246
1,791
263
601
6,955
14,311
1,321
367
966
5,304
7,958
22,289
14,671
6,820
10,599
15,921
47,245
117,545
18,970
18,211
15,287
9,201
9,124
29,128
9,202
554
109,677
687,599
1,227,369
677,025
309,308
217,050
1,174,681
817,123
819,182
171,117
2,714
173,831
45,368
2,100
47,468
7,485
1,029
8,514
1,151
481
1,632
4,724
1,046,968
8,383
1,056,170
8,937
200,887
111,047
53,534
43,912
24,951
8,432
125,126
185
568,074
99,787
67,140
37,260
31,751
15,874
7,665
72,101
514
332,092
25,949
29,587
14,226
16,872
9,672
6,488
31,854
937
135,585
3,017
5,475
5,226
8,056
5,396
3,924
11,269
854
43,217
656
1,351
2,286
3,779
1,869
1,593
3,541
443
15,518
3,205
258
24
38,805
227
42,599
1,615
4,082
353
1,368
78,430
85,849
335,116
218,940
112,885
105,789
57,786
28,131
361,126
3,161
2,560,433
2,880,346
1,319,250
1,311,719
825,528
2,699,183
2,467,297
28,256
There were no loans and leases graded as Loss as of June 30, 2023 or December 31, 2022.
23
Past-Due Status
The Company continually updates its aging analysis for loans and leases to monitor the migration of loans and leases into past due categories. The Company considers loans and leases that are delinquent for 30 days or more to be past due. As of June 30, 2023 and December 31, 2022, the aging analysis of the amortized cost basis of the Company’s past due loans and leases was as follows:
Past Due
Loans and
Greater
Leases Past
Than or
Due 90 Days
30-59
60-89
Equal to
or More and
Days
90 Days
Total Loans
Still Accruing
Current
and Leases
Interest
1,318
899
1,606
3,823
2,184,008
599
3,278
619
3,897
4,287,051
2,662
4,531
3,524
10,717
4,306,820
3,843
404
3,103
7,350
1,130,813
19,897
3,933
1,975
25,805
1,156,311
27,720
13,045
10,827
51,592
14,311,240
3,251
2,682
769
1,441
4,892
2,231,005
291
4,505
727
5,232
4,127,077
109
844,534
3,681
1,983
2,572
8,236
4,294,552
5,161
1,381
2,072
8,614
1,046,737
29,927
6,801
2,886
39,614
1,183,320
2,885
46,065
10,934
9,698
66,697
14,025,315
3,234
Nonaccrual Loans and Leases
The Company generally places a loan or lease on nonaccrual status when management believes that collection of principal or interest has become doubtful or when a loan or lease becomes 90 days past due as to principal or interest, unless it is well secured and in the process of collection. The Company charges off a loan or lease when facts indicate that the loan or lease is considered uncollectible.
The amortized cost basis of loans and leases on nonaccrual status as of June 30, 2023 and December 31, 2022 and the amortized cost basis of loans and leases on nonaccrual status with no ACL as of June 30, 2023 and December 31, 2022 were as follows:
Nonaccrual
With No
Allowance
for Credit Losses
523
1,024
1,549
6,097
596
6,107
Total Nonaccrual Loans and Leases
2,668
13,228
665
1,215
1,560
6,166
3,797
3,548
11,905
For the three and six months ended June 30, 2023, the Company recognized interest income of $0.2 million and $0.3 million, respectively, on nonaccrual loans and leases, and for both the three and six months ended June 30, 2022, the Company recognized interest income of $0.1 million on nonaccrual loans and leases. Furthermore, for the three and six months ended June 30, 2023, the amount of accrued interest receivables written off by reversing interest income was $0.3 million and $0.5 million, respectively, and for the three and six months ended June 30, 2022, the amount of accrued interest receivables written off by reversing interest income was $0.2 million and $0.4 million, respectively.
Collateral-Dependent Loans and Leases
Collateral-dependent loans and leases are those for which repayment (on the basis of the Company’s assessment as of the reporting date) is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. As of June 30, 2023 and December 31, 2022, the amortized cost basis of collateral-dependent loans were $7.3 million and $8.2 million, respectively. As of June 30, 2023 and December 31, 2022, these loans were primarily collateralized by residential real estate property. As of both June 30, 2023 and December 31, 2022, the fair value of collateral on substantially all collateral-dependent loans were significantly in excess of their amortized cost basis.
The Company adopted the provisions of Accounting Standards Update (“ASU”) No. 2022-02, Financial Instruments – Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures, on January 1, 2023. This update eliminates the accounting guidance on troubled debt restructurings (“TDRs”) for creditors in Subtopic 310-40, updates the requirements related to accounting for credit losses under Topic 326 and adds enhanced disclosures for creditors with respect to loan refinancings and restructurings for borrowers experiencing financial difficulty. For additional information, see “Note 1. Organization and Basis of Presentation.”
Commercial and industrial loans with a borrower experiencing financial difficulty may be modified through interest rate reductions, term extensions, and converting revolving credit lines to term loans. Modifications of commercial real estate and construction loans with a borrower experiencing financial difficulty may involve reducing the interest rate for the remaining term of the loan or extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk. Modifications of construction loans with a borrower experiencing financial difficulty may also involve extending the interest-only payment period. Interest continues to accrue on the missed payments and as a result, the effective yield on the loan remains unchanged. Modifications of residential real estate loans with a borrower experiencing financial difficulty may be comprised of loans where monthly payments are lowered to accommodate the borrowers' financial needs for a period of time, including extended interest-only periods and reamortization of the balance. Modifications of consumer loans with a borrower experiencing financial difficulty may involve interest rate reductions and term extensions.
Loans modified with a borrower experiencing financial difficulty, whether in default or not, may already be on nonaccrual status and in some cases, partial charge-offs may have already been taken against the outstanding loan balance. Loans modified with a borrower experiencing financial difficulty are evaluated for impairment. As a result, this may have a financial effect of impacting the specific ACL associated with the loan. An ACL for impaired commercial loans, including commercial real estate and construction loans, is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or if the loan is collateral-dependent, the estimated fair value of the collateral, less any selling costs. An ACL for impaired residential real estate loans is measured based on the estimated fair value of the collateral, less any selling costs. Management exercises significant judgment in developing these estimates.
25
The following tables present, by class of financing receivable and type of modification granted, the amortized cost basis as of June 30, 2023, related to loans modified to borrowers experiencing financial difficulty during the three and six months ended June 30, 2023:
Interest Rate Reduction
% of Total Class
Cost Basis(1)
of Financing Receivable
%
n/m
371
0.03
0.06
707
n/m – Represents less than 0.01% of total class of financing receivable.
Term Extension
87
1,227
230
33
117
0.01
1,360
1,716
The following tables describe, by class of financing receivable and type of modification granted, the financial effect of the modifications made to borrowers experiencing financial difficulty during the three and six months ended June 30, 2023:
Financial Effect
Reduced weighted-average contractual interest rate by 0.75%.
Reduced weighted-average contractual interest rate by 12.98%.
Reduced weighted-average contractual interest rate by 13.23%.
Added a weighted-average 3.6 years to the life of loans.
Added a weighted-average 3.5 years to the life of loans.
Added a weighted-average 1.0 years to the life of loans.
Added a weighted-average 2.9 years to the life of loans.
Added a weighted-average 5.9 years to the life of loans.
Added a weighted-average 2.3 years to the life of loans.
26
The following table presents, by class of financing receivable and type of modification granted, the amortized cost basis, as of June 30, 2023, of loans that had a payment default during the three and six months ended June 30, 2023 and were modified in the 12 months before default to borrowers experiencing financial difficulty. The Company is reporting these defaulted loans based on a payment default definition of 30 days past due:
Amortized Cost Basis of Modified Loans That Subsequently Defaulted(1)
88
Performance of the loans that are modified to borrowers experiencing financial difficulty is monitored to understand the effectiveness of the Company’s modification efforts. As of June 30, 2023, the aging analysis of the amortized cost basis of the performance of loans that have been modified in the last 12 months related to borrowers experiencing financial difficulty was as follows:
Greater Than
or Equal to
30-59 Days
60-89 Days
1,229
67
755
822
2,356
2,423
The Company had commitments to extend credit, standby letters of credit, and commercial letters of credit totaling $7.0 billion as of June 30, 2023. Of the $7.0 billion at June 30, 2023, there were commitments of $5.0 million to lend additional funds to borrowers experiencing financial difficulty for which the Company had modified the terms of the loans in the form of an interest rate reduction or a term extension during the six months ended June 30, 2023.
Troubled Debt Restructuring Disclosures Prior to Adoption of ASU No. 2022-02
Prior to the adoption of ASU No. 2022-02, the Company accounted for a modification to the contractual terms of a loan that resulted in granting a concession to a borrower experiencing financial difficulty as a TDR. On January 1, 2023, the Company adopted ASU No. 2022-02, which eliminated TDR accounting prospectively for all restructurings occurring on or after January 1, 2023. Loans that were restructured in a TDR prior to the adoption of ASU No. 2022-02 will continue to be accounted for under the historical TDR accounting until the loan is paid off or subsequently modified. The disclosures below related to TDRs for prior periods are presented in accordance with Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors.
Commercial and industrial loans modified in a TDR may have involved temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Modifications of commercial real estate and construction loans in a TDR may have involved reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Modifications of construction loans in a TDR may have also involved extending the interest-only payment period. Interest continued to accrue on the missed payments and as a result, the effective yield on the loan remained unchanged. Residential real estate loans modified in a TDR may have been comprised of loans where monthly payments were lowered to accommodate the borrowers' financial needs for a period of time, including extended interest-only periods and reamortization of the balance. Modifications of consumer loans in a TDR may have involved temporary or permanent reduced payments, temporary interest-only payments and below-market interest rates.
27
Loans modified in a TDR may have already been on nonaccrual status and in some cases, partial charge-offs may have already been taken against the outstanding loan balance. Loans modified in a TDR were evaluated for impairment. As a result, this may have had a financial effect of impacting the specific ACL associated with the loan. An ACL for impaired commercial loans, including commercial real estate and construction loans, that had been modified in a TDR was measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or if the loan was collateral-dependent, the estimated fair value of the collateral, less any selling costs. An ACL for impaired residential real estate loans that had been modified in a TDR was measured based on the estimated fair value of the collateral, less any selling costs. Management exercised significant judgment in developing these estimates.
The following presents, by class, information related to loans modified in a TDR during the three and six months ended June 30, 2022, presented in accordance with Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors:
June 30, 2022
Number of
Recorded
Related
Contracts(1)
Investment(2)
ACL
66
143
201
2,107
346
774
177
202
2,367
380
The above loans were modified in a TDR through an extension of maturity dates, reduced payments or below-market interest rates.
The Company had commitments to extend credit, standby letters of credit, and commercial letters of credit totaling $7.0 billion as of December 31, 2022. Of the $7.0 billion at December 31, 2022, there were commitments of $0.1 million to lend additional funds related to borrowers who had loan terms modified in a TDR.
The following table presents, by class, loans modified in TDRs that have defaulted in the periods below within 12 months of their permanent modification date for the periods indicated, presented in accordance with Subtopic 310-40, Receivables—Troubled Debt Restructurings by Creditors. The Company was reporting these defaulted TDRs based on a payment default definition of 30 days past due:
541
655
2,197
229
3,250
153
2,738
232
3,905
Foreclosed Property
As of June 30, 2023, there were no residential real estate properties held from foreclosed residential mortgage loans. As of December 31, 2022, residential real estate property held from one foreclosed residential mortgage loan of $0.1 million was included in other real estate owned and repossessed personal property shown in the unaudited interim consolidated balance sheets.
5. Mortgage Servicing Rights
Mortgage servicing activities include collecting principal, interest, tax, and insurance payments from borrowers while accounting for and remitting payments to investors, taxing authorities, and insurance companies. The Company also monitors delinquencies and administers foreclosure proceedings.
Mortgage loan servicing income is recorded in noninterest income as a part of other service charges and fees and amortization of the servicing assets is recorded in noninterest income as part of other income. The unpaid principal amount of residential real estate loans serviced for others was $1.4 billion as of both June 30, 2023 and December 31, 2022. Servicing fees include contractually specified fees, late charges, and ancillary fees and were $0.8 million and $1.0 million for the three months ended June 30, 2023 and 2022, respectively, and $1.7 million and $2.0 million for the six months ended June 30, 2023 and 2022, respectively.
Amortization of mortgage servicing rights (“MSRs”) was $0.3 million and $0.5 million for three months ended June 30, 2023 and 2022, respectively, and $0.6 million and $1.3 million for the six months ended June 30, 2023 and 2022, respectively. The estimated future amortization expenses for MSRs over the next five years are as follows:
Estimated
Amortization
Under one year
One to two years
786
Two to three years
696
Three to four years
614
Four to five years
542
The details of the Company’s MSRs are presented below:
Gross carrying amount
69,341
69,273
Less: accumulated amortization
63,269
62,711
Net carrying value
The following table presents changes in amortized MSRs for the three and six months ended June 30, 2023 and 2022:
Three Months Ended June 30,
Six Months Ended June 30,
6,299
7,650
8,302
Originations
68
105
(278)
(518)
(558)
(1,255)
7,152
Fair value of amortized MSRs at beginning of period
15,169
13,585
15,193
12,243
Fair value of amortized MSRs at end of period
14,557
14,969
MSRs are evaluated for impairment if events and circumstances indicate a possible impairment. No impairment of MSRs was recorded for the three and six months ended June 30, 2023 and 2022.
The quantitative assumptions used in determining the lower of cost or fair value of the Company’s MSRs as of June 30, 2023 and December 31, 2022 were as follows:
Weighted
Range
Average
Conditional prepayment rate
6.96
-
11.63
7.07
7.02
13.58
7.11
Life in years (of the MSR)
3.97
7.29
7.13
3.35
7.37
7.20
Weighted-average coupon rate
3.55
5.91
3.69
6.24
3.68
Discount rate
10.36
10.53
10.51
10.41
10.54
The sensitivities surrounding MSRs are expected to have an immaterial impact on fair value.
6. Transfers of Financial Assets
The Company’s transfers of financial assets with continuing interest may include pledges of collateral to secure public deposits and repurchase agreements, FHLB and FRB borrowing capacity, automated clearing house (“ACH”) transactions and interest rate swaps.
For public deposits and repurchase agreements, the Company enters into bilateral agreements with the entity to pledge investment securities as collateral in the event of default. The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase agreement should the Company be in default. The counterparty has the right to sell or repledge the investment securities. The Company is required by the counterparty to maintain adequate collateral levels. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional investment securities. For transfers of assets with the FHLB and the FRB, the Company enters into bilateral agreements to pledge loans and/or securities as collateral to secure borrowing capacity. For ACH transactions, the Company enters into bilateral agreements to collateralize possible daylight overdrafts. For interest rate swaps, the Company enters into bilateral agreements to pledge collateral when either party is in a negative fair value position to mitigate counterparty credit risk. Counterparties to ACH transactions, certain interest rate swaps, the FHLB and the FRB do not have the right to sell or repledge the collateral.
The carrying amounts of the assets pledged as collateral to secure public deposits, borrowing arrangements and other transactions as of June 30, 2023 and December 31, 2022 were as follows:
Public deposits
3,204,810
2,977,693
Federal Home Loan Bank
4,850,075
3,451,070
Federal Reserve Bank
4,858,315
1,704,803
ACH transactions
128,442
133,173
Interest rate swaps
2,659
31,091
13,044,301
8,297,830
As the Company did not enter into reverse repurchase agreements or repurchase agreements, no collateral was accepted as of June 30, 2023 and December 31, 2022. In addition, no debt was extinguished by in-substance defeasance.
7. Deposits
As of June 30, 2023 and December 31, 2022, deposits were categorized as interest-bearing or noninterest-bearing as follows:
U.S.:
12,048,400
11,936,775
7,297,964
7,978,046
Foreign:
863,139
887,608
868,663
886,600
The following table presents the maturity distribution of time certificates of deposit as of June 30, 2023:
Under
$250,000
or More
Three months or less
164,863
998,187
1,163,050
Over three through six months
182,710
666,817
849,527
Over six through twelve months
563,473
407,484
970,957
149,667
50,631
200,298
49,772
13,239
63,011
30,798
3,682
34,480
19,437
6,656
26,093
Thereafter
356
1,161,076
2,146,696
3,307,772
Time certificates of deposit in denominations of $250,000 or more, in the aggregate, were $2.1 billion and $1.5 billion as of June 30, 2023 and December 31, 2022, respectively. Overdrawn deposit accounts are classified as loans and totaled $3.6 million and $2.5 million as of June 30, 2023 and December 31, 2022, respectively.
8. Short-Term Borrowings
At June 30, 2023 and December 31, 2022, short-term borrowings were comprised of the following:
Federal funds purchased
Total short-term borrowings
As of December 31, 2022, the Company’s short-term borrowings consisted of $75.0 million in federal funds purchased with a 4.35% annual interest rate that matured in January 2023. As of June 30, 2023, the Company had no short-term borrowings as the remaining short-term FHLB repo advance (as of March 31, 2023) matured in April 2023. As of June 30, 2023 and December 31, 2022, the Company had a remaining line of credit of $2.9 billion and $2.5 billion available from the FHLB, respectively. The FHLB borrowing capacity was secured by commercial real estate and residential real estate loan collateral as of June 30, 2023 and residential real estate loan collateral as of December 31, 2022. As of June 30, 2023 and December 31, 2022, respectively, the Company had an undrawn line of credit of $3.8 billion and $1.2 billion available from the FRB. The borrowing capacity with the FRB was secured by consumer, commercial and industrial, commercial real estate, residential real estate loans and pledged securities as of June 30, 2023 and consumer, commercial and industrial, commercial real estate and residential real estate loans as of December 31, 2022. See “Note 6. Transfers of Financial Assets” for more information.
Federal funds purchased:
Weighted-average interest rate at June 30,
Highest month-end balance
150,000
Average outstanding balance
34,779
Weighted-average interest rate paid
4.45
Short-term FHLB repo advance:
400,000
208,702
5.14
9. Long-Term Borrowings
Long-term borrowings consisted of the following as of June 30, 2023 and December 31, 2022:
FHLB fixed-rate advances(1)
Total long-term borrowings
As of June 30, 2023, the Company’s long-term borrowings consisted of $500.0 million in FHLB fixed-rate advances with a weighted average interest rate of 4.71% and maturity dates in September 2024. The FHLB fixed-rate advances require monthly interest-only payments with the principal amount due on the maturity date. There were no long-term borrowings as of December 31, 2022. The FHLB fixed-rate advances and remaining borrowing capacity were secured by commercial real estate and residential real estate loan collateral as of June 30, 2023. The FHLB borrowing capacity was secured by residential real estate loan collateral as of December 31, 2022.
As of June 30, 2023, future contractual principal payments and maturities of long-term borrowings were as follows:
Principal
Payments
2024
2025
2026
2027
10. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is defined as the revenues, expenses, gains and losses that are included in comprehensive loss but excluded from net income. The Company’s significant items of accumulated other comprehensive loss are pension and other benefits, net unrealized gains or losses on investment securities and net unrealized gains or losses on cash flow derivative hedges.
Changes in accumulated other comprehensive income (loss) for the three and six months ended June 30, 2023 and 2022 are presented below:
Income
Tax
Pre-tax
Benefit
Net of
(Expense)
Accumulated other comprehensive loss at March 31, 2023
(834,206)
222,527
Three months ended June 30, 2023
Unrealized net losses arising during the period
(14,025)
3,741
(10,284)
Reclassification of net losses to net income:
Amortization of unrealized holding losses on held-to-maturity securities
13,064
(3,485)
9,579
(961)
256
Cash flow derivative hedges:
(2,053)
548
(1,505)
Reclassification of net losses included in net income
1,573
(420)
1,153
(480)
128
Other comprehensive loss
(1,441)
384
Accumulated other comprehensive loss at June 30, 2023
(835,647)
222,911
Accumulated other comprehensive loss at December 31, 2022
(871,813)
232,559
Six months ended June 30, 2023
Unrealized net gains arising during the period
11,013
(2,938)
8,075
24,772
(6,608)
18,164
35,785
(9,546)
(2,495)
(1,830)
2,876
(767)
381
(102)
Other comprehensive income
36,166
(9,648)
Accumulated other comprehensive loss at March 31, 2022
(705,768)
188,266
Three months ended June 30, 2022
(91,352)
24,369
(66,983)
19,929
(5,317)
14,612
(71,423)
19,052
(1,523)
407
(1,116)
Reclassification of net gains included in net income
(638)
(468)
(2,161)
577
(73,584)
19,629
Accumulated other comprehensive loss at June 30, 2022
(779,352)
207,895
Accumulated other comprehensive loss at December 31, 2021
(165,967)
44,274
Six months ended June 30, 2022
(629,437)
167,903
(461,534)
(609,508)
162,586
(3,239)
865
(2,374)
(3,877)
1,035
(613,385)
163,621
The following table summarizes changes in accumulated other comprehensive income (loss), net of tax, for the periods indicated:
Pensions
Available-for-Sale
Held-to-Maturity
Cash Flow
Investment
Derivative
Benefits
Securities
Hedges
(5,431)
(273,816)
(328,361)
(4,071)
(284,100)
(318,782)
(4,423)
(292,175)
(336,946)
(4,702)
(24,390)
(491,854)
(1,258)
Unrealized net losses related to the transfer of securities from available-for-sale to held-to-maturity
338,816
(338,816)
(220,021)
(324,204)
(97,303)
11. Regulatory Capital Requirements
Federal and state laws and regulations limit the amount of dividends the Company may declare or pay. The Company depends primarily on dividends from FHB as the source of funds for the Company’s payment of dividends.
The Company and the Bank are subject to various regulatory capital requirements imposed by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s operating activities and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of its assets and certain off-balance sheet items. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of Common Equity Tier 1 (“CET1”) capital, Tier 1 capital and total capital to risk-weighted assets, as well as a minimum leverage ratio.
The table below sets forth those ratios at June 30, 2023 and December 31, 2022:
First Hawaiian
Minimum
Well-
First Hawaiian, Inc.
Bank
Capitalized
Ratio
Ratio(1)
June 30, 2023:
Common equity tier 1 capital to risk-weighted assets
1,976,982
12.05
1,963,228
11.96
4.50
6.50
Tier 1 capital to risk-weighted assets
6.00
8.00
Total capital to risk-weighted assets
2,161,762
13.17
2,148,008
13.09
10.00
Tier 1 capital to average assets (leverage ratio)
8.30
8.24
4.00
5.00
December 31, 2022:
1,912,767
11.82
1,895,693
11.71
2,090,502
12.92
2,073,428
12.81
8.11
8.04
Federal regulations require a 2.5% capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is composed entirely of CET1, on top of these minimum risk weighted asset ratios, effectively resulting in minimum ratios of (i) 7% CET1 to risk-weighted assets, (ii) 8.5% Tier 1 capital to risk-weighted assets, and (iii) 10.5% total capital to risk-weighted assets. As of June 30, 2023, under the bank regulatory capital guidelines, the Company and Bank were both classified as well-capitalized. Management is not aware of any conditions or events that have occurred since June 30, 2023, to change the capital adequacy category of the Company or the Bank.
12. Derivative Financial Instruments
The Company enters into derivative contracts primarily to manage its interest rate risk, as well as for customer accommodation purposes. Derivatives used for risk management purposes consist of interest rate swaps and collars that are designated as either a fair value hedge or a cash flow hedge. The derivatives are recognized on the unaudited interim consolidated balance sheets as either assets or liabilities at fair value. Derivatives entered into for customer accommodation purposes consist of various free-standing interest rate derivative products and foreign exchange contracts. The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes.
The following table summarizes the notional amounts and fair values of derivatives held by the Company as of June 30, 2023 and December 31, 2022:
Notional
Asset
Liability
Derivatives(1)
Derivatives(2)
Derivatives designated as hedging instruments:
267,500
7,669
(5,466)
7,276
(6,840)
Interest rate collars
200,000
(566)
491
(63)
Derivatives not designated as hedging instruments:
5,706,771
21,030
(20,788)
2,849,776
3,178
(42,365)
Visa derivative
98,322
(1,200)
121,013
(851)
Foreign exchange contracts
118
210
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Certain interest rate swaps noted above, are cleared through clearinghouses, rather than directly with counterparties. Those transactions cleared through a clearinghouse require initial margin collateral and variation margin payments depending on the contracts being in a net asset or liability position. As of June 30, 2023 and December 31, 2022, the amount of initial margin cash collateral posted by the Company was $2.7 million and $1.2 million, respectively. As of June 30, 2023 and December 31, 2022, the variation margin was $0.2 million and $39.2 million, respectively.
As of June 30, 2023, the Company pledged $2.7 million in cash and received $82.9 million in cash as collateral for interest rate swaps. As of December 31, 2022, the Company pledged $29.9 million in financial instruments and $1.2 million in cash and received $48.1 million in cash as collateral for interest rate swaps. As of June 30, 2023 and December 31, 2022, the cash collateral includes the excess initial margin for interest rate swaps cleared through clearinghouses and cash collateral for interest rate swaps with financial institution counterparties.
Fair Value Hedges
To manage the risk related to the Company’s net interest margin, interest rate swaps are utilized to hedge certain fixed-rate loans. These swaps have maturity, amortization and prepayment features that correspond to the loans hedged, and are designated and qualify as fair value hedges. Any gain or loss on the swaps, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, is recognized in current period earnings.
At June 30, 2023 and December 31, 2022, the Company carried one interest rate swap with a notional amount of $67.5 million, which was designated and qualified as a fair value hedge for a commercial and industrial loan. As of June 30, 2023 and December 31, 2022, the interest rate swap had a positive fair value of $7.7 million and $7.3 million, respectively. The swap matures in 2041. The Company received a USD Federal Funds floating rate and paid a fixed rate of 2.07%.
The following table shows the gains and losses recognized in income related to derivatives in fair value hedging relationships for the three and six months ended June 30, 2023 and 2022:
Gains (losses) recognized in
the consolidated statements
of income line item
Gains (losses) on fair value hedging relationships recognized in interest income:
Recognized on interest rate swap
(795)
4,631
6,143
Recognized on hedged item
708
(4,729)
(577)
(6,346)
As of June 30, 2023 and December 31, 2022, the following amounts were recorded in the unaudited interim consolidated balance sheets related to the cumulative basis adjustments for fair value hedges:
Cumulative Amount of Fair Value
Hedging Adjustment Included in the
Carrying Amount of the Hedged Asset
Line item in the consolidated balance sheets in which the hedged item is included
59,793
60,189
(7,707)
(7,311)
Cash Flow Hedges
The Company utilized interest rate swaps to reduce asset sensitivity and enhance current yields associated with interest payments received on a pool of floating-rate loans. The Company entered into interest rate swaps paying floating rates and receiving fixed rates. The floating-rate index (Bloomberg Short-Term Bank Yield Index, or “BSBY”) corresponds to the floating-rate nature of the interest receipts being hedged (based on USD Prime). The swaps provided an initial benefit to interest income as the Company received the higher fixed rate, which persisted while the floating rate remained below the swap’s fixed rate. By hedging with interest rate swaps, the Company minimized the adverse impact on interest income previously associated with a low interest rate environment on floating-rate loans.
As of June 30, 2023 and December 31, 2022, the Company carried two interest rate swaps with notional amounts totaling $200.0 million, with a negative fair value totaling $5.5 million and $6.8 million, respectively. The swaps mature in 2024. The Company received fixed rates ranging from 1.70% to 2.08% and paid 1-month BSBY.
The Company also utilized interest rate collars to manage interest rate risk and protect against downside risk in yields associated with interest payments received on a pool of floating-rate assets. The floating-rate index of the collars (Secured Overnight Financing Rate, or “SOFR”) corresponds to the floating-rate nature of the interest receipts being hedged (based on SOFR). Interest rate collars involve the payments of variable-rate amounts if the collar index exceeds the cap strike rate on the contract and receipts of variable-rate amounts if the collar index falls below the floor strike rate on the contract. No payments are required if the collar index falls between the cap and floor rates. By hedging with interest rate collars, the Company mitigates the adverse impact on interest income associated with possible future decreases in interest rates.
As of June 30, 2023 and December 31, 2022, the Company carried two interest rate collars with notional amounts totaling $200.0 million. As of June 30, 2023, these interest rate collars had a negative fair value of $0.6 million. As of December 31, 2022, these interest rate collars had a positive fair value of $0.5 million and a negative fair value of $0.1 million. The collars mature in 2025 and 2027. The interest rate collars had a floor strike rate of 2.00% and cap strike rates ranging from 5.31% to 5.64%.
The interest rate swaps and collars are designated and qualify as cash flow hedges. To the extent that the hedge is considered highly effective, the gain or loss on the interest rate swaps and collars is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period that the hedged transaction affects earnings.
The following table summarizes the effect of cash flow hedging relationships for the three and six months ended June 30, 2023 and 2022:
Pretax net losses recognized in other comprehensive income on cash flow derivative hedges
Pretax net losses (gains) reclassified from accumulated other comprehensive income to interest income from loans and lease financing
The estimated net amount to be reclassified within the next 12 months out of accumulated other comprehensive income (loss) into earnings is $5.5 million as a decrease to interest income from loans and lease financing. As of June 30, 2023, the maximum length of time over which forecasted transactions are hedged is approximately four years.
Free-Standing Derivative Instruments
For the derivatives that are not designated as hedges, changes in fair value are reported in current period earnings. The following table summarizes the impact on pretax earnings of derivatives not designated as hedges, as reported on the unaudited interim consolidated statements of income for the three and six months ended June 30, 2023 and 2022:
Net gains (losses) recognized
in the consolidated statements
Derivatives Not Designated As Hedging Instruments:
Other noninterest income
(180)
(1,816)
123
(3,779)
(1,357)
As of June 30, 2023, the Company carried multiple interest rate swaps with notional amounts totaling $5.7 billion, all of which were related to the Company’s customer swap program, with a positive fair value of $21.0 million and a negative fair value of $20.8 million. The Company received floating rates ranging from 5.48% to 8.17% and paid fixed rates ranging from 2.39% to 6.91%. The swaps mature between July 2023 and June 2040. As of December 31, 2022, the Company carried multiple interest rate swaps with notional amounts totaling $2.8 billion, all of which were related to the Company’s customer swap program, with a positive fair value of $3.2 million and a negative fair value of $42.4 million. The Company received floating rates ranging from 4.62% to 7.12% and paid fixed rates ranging from 2.39% to 6.13%. These swaps resulted in net interest expense of nil during both the three and six months ended June 30, 2023 and 2022.
The Company’s customer swap program is designed by offering customers a variable-rate loan that is swapped to fixed-rate through an interest rate swap. The Company simultaneously executes an offsetting interest rate swap with a swap dealer. Upfront fees on the dealer swap are recorded in other noninterest income and totaled $1.4 million and $0.5 million for the three months ended June 30, 2023 and 2022, respectively, and $1.5 million and $1.4 million for the six months ended June 30, 2023 and 2022, respectively.
Visa Class B Restricted Shares
In 2016, the Company recorded a $22.7 million net realized gain related to the sale of 274,000 Visa Class B restricted shares. Concurrent with the sale of the Visa Class B restricted shares, the Company entered into a funding swap agreement with the buyer that requires payment to the buyer in the event Visa reduces each member bank’s Class B conversion rate to unrestricted Class A common shares. During 2018 through 2023, Visa funded its litigation escrow account, thereby reducing each member bank’s Class B conversion rate to unrestricted Class A common shares from 1.6483 to the current conversion rate of 1.5902. Under the terms of the funding swap agreement, the Company will make monthly payments to the buyer based on Visa’s Class A stock price and the number of Visa Class B restricted shares that were sold until the date on which the covered litigation is settled. A derivative liability (“Visa derivative”) of $1.2 million and $0.9 million was included in the unaudited interim consolidated balance sheets at June 30, 2023 and December 31, 2022, respectively, to provide for the fair value of this liability. There were no sales of these shares prior to 2016. See “Note 17. Fair Value” for more information.
Counterparty Credit Risk
By using derivatives, the Company is exposed to counterparty credit risk if counterparties to the derivative contracts do not perform as expected. If a counterparty fails to perform, the Company’s counterparty credit risk is equal to the amount reported as a derivative asset, net of cash or other collateral received, and net of derivatives in a loss position with the same counterparty to the extent master netting arrangements exist. The Company minimizes counterparty credit risk through credit approvals, limits, monitoring procedures, executing master netting arrangements and obtaining collateral, where appropriate. Counterparty credit risk related to derivatives is considered in determining fair value.
The Company’s interest rate swap agreements include bilateral collateral agreements with collateral requirements, which begin with exposures in excess of $0.3 million. For each counterparty, the Company reviews the interest rate swap collateral daily. Collateral for customer interest rate swap agreements, calculated as the pledged asset less loan balance, requires valuation of the pledged asset. Counterparty credit risk adjustments of nil were recognized during both the three months ended June 30, 2023 and 2022, and nil and $0.1 million were recognized during the six months ended June 30, 2023 and 2022, respectively.
Credit-Risk Related Contingent Features
Certain of the Company’s derivative contracts contain provisions whereby if the Company’s credit rating were to be downgraded by certain major credit rating agencies as a result of a merger or material adverse change in the Company’s financial condition, the counterparty could require an early termination of derivative instruments. The aggregate fair value of all derivative instruments with such credit-risk related contingent features that are in a net liability position was nil at both June 30, 2023 and December 31, 2022, for which the Company posted nil in collateral in the normal course of business. If the Company’s credit rating had been downgraded as of June 30, 2023 and December 31, 2022, the Company may have been required to settle the contracts in an amount equal to their fair value.
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13. Commitments and Contingent Liabilities
Contingencies
On November 2, 2020, a lawsuit was filed in Hawaii Circuit Court by a Bank customer related to the sale of credit facilities that the Bank had previously extended to the customer. The customer asserts claims against the Bank for interference with the customer’s contract and business opportunity, unfair methods of competition and declaratory and injunctive relief. The outcome of this legal proceeding is uncertain at this point. Based on information available to the Company at present, the Company cannot reasonably estimate a range of potential loss, if any, for this action. Accordingly, the Company has not recognized any liability associated with this action. Management disputes any wrongdoing and the case is being vigorously defended.
In addition to the litigation noted above, various legal proceedings are pending or threatened against the Company. After consultation with legal counsel, management does not expect that the aggregate liability, if any, resulting from these proceedings would have a material effect on the Company’s unaudited interim consolidated financial position, results of operations or cash flows.
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and commercial letters of credit which are not reflected in the unaudited interim consolidated financial statements.
Unfunded Commitments to Extend Credit
A commitment to extend credit is a legally binding agreement to lend funds to a customer, usually at a stated interest rate and for a specified purpose. Commitments are reported net of participations sold to other institutions. Such commitments have fixed expiration dates and generally require a fee. The extension of a commitment gives rise to credit risk. The actual liquidity requirements or credit risk that the Company will experience is expected to be lower than the contractual amount of commitments to extend credit because a significant portion of those commitments are expected to expire without being drawn upon. Certain commitments are subject to loan agreements containing covenants regarding the financial performance of the customer that must be met before the Company is required to fund the commitment. The Company uses the same credit policies in making commitments to extend credit as it does in making loans. In addition, the Company manages the potential credit risk in commitments to extend credit by limiting the total amount of arrangements, both by individual customer and in the aggregate, by monitoring the size and expiration structure of these portfolios and by applying the same credit standards maintained for all of its related credit activities. Commitments to extend credit are reported net of participations sold to other institutions of $75.8 million and $90.5 million at June 30, 2023 and December 31, 2022, respectively.
Standby and Commercial Letters of Credit
Standby letters of credit are issued on behalf of customers in connection with contracts between the customers and third parties. Under standby letters of credit, the Company assures that the third parties will receive specified funds if customers fail to meet their contractual obligations. The credit risk to the Company arises from its obligation to make payment in the event of a customer’s contractual default. Standby letters of credit are reported net of participations sold to other institutions of $8.3 million and $8.1 million at June 30, 2023 and December 31, 2022, respectively. The Company also had commitments for commercial and similar letters of credit. Commercial letters of credit are issued specifically to facilitate commerce whereby the commitment is typically drawn upon when the underlying transaction between the customer and a third-party is consummated. The maximum amount of potential future payments guaranteed by the Company is limited to the contractual amount of these letters. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held supports those commitments for which collateral is deemed necessary. The commitments outstanding as of June 30, 2023 have maturities ranging from July 2023 to September 2026. Substantially all fees received from the issuance of such commitments are deferred and amortized on a straight-line basis over the term of the commitment.
39
Financial instruments with off-balance sheet risk at June 30, 2023 and December 31, 2022 were as follows:
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit
6,748,717
6,760,395
Standby letters of credit
236,450
244,275
Commercial letters of credit
7,541
7,299
Guarantees
The Company sells residential mortgage loans in the secondary market primarily to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation that may potentially require repurchase under certain conditions. This risk is managed through the Company’s underwriting practices. The Company services loans sold to investors and loans originated by other originators under agreements that may include repurchase remedies if certain servicing requirements are not met. This risk is managed through the Company’s quality assurance and monitoring procedures. Management does not anticipate any material losses as a result of these transactions.
Foreign Exchange Contracts
The Company has forward foreign exchange contracts that represent commitments to purchase or sell foreign currencies at a future date at a specified price. The Company’s utilization of forward foreign exchange contracts is subject to the primary underlying risk of movements in foreign currency exchange rates and to additional counterparty risk should its counterparties fail to meet the terms of their contracts. Forward foreign exchange contracts are utilized to mitigate the Company’s risk to satisfy customer demand for foreign currencies and are not used for trading purposes. See “Note 12. Derivative Financial Instruments” for more information.
Reorganization Transactions
On April 1, 2016, a series of reorganization transactions were undertaken to facilitate FHI’s initial public offering. In connection with the reorganization transactions, FHI distributed its interest in BancWest Holding Inc. (“BWHI”), including Bank of the West (“BOW”) to BNP Paribas (“BNPP”) so that BWHI was held directly by BNPP. As a result of the reorganization transactions that occurred on April 1, 2016, various tax or other contingent liabilities could arise related to the business of BOW, or related to the Company’s operations prior to the restructuring when it was known as BancWest Corporation, including its then wholly owned subsidiary, BOW. The Company is not able to determine the ultimate outcome or estimate the amounts of these contingent liabilities, if any, at this time.
14. Revenue from Contracts with Customers
Revenue Recognition
In accordance with Topic 606, Revenue from Contracts with Customers, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
40
Disaggregation of Revenue
The following table summarizes the Company’s revenues, which includes net interest income on financial instruments and noninterest income, disaggregated by type of service and business segments for the periods indicated:
Retail
Banking
Net interest income(1)
104,237
41,496
14,206
6,458
662
126
13,639
6,049
424
550
7,023
2,534
436
3,058
Not in scope of Topic 606(1)
1,754
1,827
5,695
23,797
19,086
4,465
Total revenue
128,034
60,582
18,671
207,287
213,157
82,435
31,594
13,000
1,288
189
28,053
2,536
30,589
12,220
844
1,063
14,127
327
3,850
2,086
6,263
3,455
2,939
5,459
11,853
48,064
36,974
11,333
261,221
119,409
42,927
423,557
107,368
36,826
953
6,085
413
345
15,243
1,206
16,449
6,306
417
487
7,210
175
2,873
287
3,335
1,160
1,469
(1,088)
1,541
22,485
20,415
1,237
129,853
57,241
2,190
189,284
41
201,416
71,914
5,689
12,734
759
851
28,269
2,422
30,691
12,869
1,198
856
14,923
303
5,457
545
6,305
2,252
3,387
(4,027)
1,612
45,800
39,070
647
247,216
110,984
6,336
364,536
For the three and six months ended June 30, 2023 and 2022, substantially all of the Company’s revenues under the scope of Topic 606 were related to performance obligations satisfied at a point in time.
The following is a discussion of revenues within the scope of Topic 606.
Service Charges on Deposit Accounts
Service charges on deposit accounts relate to fees generated from a variety of deposit products and services rendered to customers. Charges include, but are not limited to, overdraft fees, non-sufficient fund fees, dormant fees and monthly service charges. Such fees are recognized concurrent with the event on a daily basis or on a monthly basis depending upon the customer’s cycle date.
Credit and Debit Card Fees
Credit and debit card fees primarily represent revenues earned from interchange fees, ATM fees and merchant processing fees. Interchange and network revenues are earned on credit and debit card transactions conducted with payment networks. ATM fees are primarily earned as a result of surcharges assessed to non-FHB customers who use an FHB ATM. Merchant processing fees are primarily earned on transactions in which FHB is the acquiring bank. Such fees are generally recognized concurrently with the delivery of services on a daily basis.
Trust and Investment Services Fees
Trust and investment services fees represent revenue earned by directing, holding and managing customers’ assets. Fees are generally computed based on a percentage of the previous period’s value of assets under management. The transaction price (i.e., percentage of assets under management) is established at the inception of each contract. Trust and investment services fees also include fees collected when the Company acts as agent or personal representative and executes security transactions, performs collection and disbursement of income, and completes investment management and other administrative tasks.
Other Fees
Other fees primarily include revenues generated from wire transfers, lockboxes, bank issuance of checks and insurance commissions. Such fees are recognized concurrent with the event or on a monthly basis.
42
Contract Balances
A contract liability is an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer. The Company received signing bonuses from two vendors in prior years, which are being amortized over the term of the respective contracts. As of June 30, 2023 and December 31, 2022, the Company had contract liabilities of $2.3 million and $2.7 million, respectively, which it expects to recognize over the remaining term of the respective contracts with the vendors. For the three and six months ended June 30, 2023, the Company’s recognized revenues increased and contract liabilities decreased by approximately $0.2 million and $0.4 million due to the passage of time. For the three and six months ended June 30, 2022, the Company’s recognized revenues increased and contract liabilities decreased by approximately $0.2 million and $0.5 million, respectively, due to the passage of time. There were no changes in contract liabilities due to changes in transaction price estimates.
A contract asset is the right to consideration for transferred goods or services when the amount is conditioned on something other than the passage of time. As of June 30, 2023 and December 31, 2022, there were no material receivables from contracts with customers or contract assets recorded on the Company’s unaudited interim consolidated balance sheets.
Except for the contract liabilities noted above, the Company did not have any significant performance obligations as of June 30, 2023 and December 31, 2022. The Company also did not have any material contract acquisition costs or use any significant judgments or estimates in recognizing revenue for financial reporting purposes.
15. Earnings per Share
For the three and six months ended June 30, 2023, the Company made no adjustments to net income for the purpose of computing earnings per share and there were 699,000 and 310,000 antidilutive securities, respectively. For the three and six months ended June 30, 2022, the Company made no adjustments to net income for the purposes of computing earnings per share and there were 149,000 and 22,000 antidilutive securities, respectively. For the three and six months ended June 30, 2023 and 2022, the computations of basic and diluted earnings per share were as follows:
(dollars in thousands, except shares and per share amounts)
Numerator:
Denominator:
Basic: weighted-average shares outstanding
Add: weighted-average equity-based awards
240,980
342,533
378,250
494,066
Diluted: weighted-average shares outstanding
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16. Noninterest Income and Noninterest Expense
Benefit Plans
The following table sets forth the components of net periodic benefit cost for the Company’s pension and postretirement benefit plans for the three and six months ended June 30, 2023 and 2022:
Income line item where recognized in
Pension Benefits
Other Benefits
the consolidated statements of income
Service cost
147
214
Interest cost
Other noninterest expense
1,361
220
Expected return on plan assets
(882)
(782)
Recognized net actuarial loss (gain)
719
(379)
(101)
Total net periodic benefit cost
1,896
1,848
(12)
294
429
4,118
2,722
440
(1,765)
(1,565)
1,438
2,537
(758)
(202)
3,791
3,694
Leases
The Company recognized operating lease income related to lease payments of $1.5 million and $1.6 million for the three months ended June 30, 2023 and 2022, respectively, and $3.1 million for both the six months ended June 30, 2023 and 2022. In addition, the Company recognized $1.5 million and $1.6 million of lease income related to variable lease payments for the three months ended June 30, 2023 and 2022, respectively, and $3.3 million and $3.2 million for the six months ended June 30, 2023 and 2022, respectively.
17. Fair Value
The Company determines the fair values of its financial instruments based on the requirements established in Accounting Standards Codification Topic 820 (“Topic 820”), Fair Value Measurements, which provides a framework for measuring fair value under GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Topic 820 defines fair value as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions.
Fair Value Hierarchy
Topic 820 establishes three levels of fair values based on the markets in which the assets or liabilities are traded and the reliability of the assumptions used to determine fair value. The levels are:
44
Topic 820 requires that the Company disclose estimated fair values for certain financial instruments. Financial instruments include such items as investment securities, loans, deposits, interest rate and foreign exchange contracts, swaps and other instruments as defined by the standard. The Company has an organized and established process for determining and reviewing the fair value of financial instruments reported in the Company’s financial statements. The fair value measurements are reviewed to ensure they are reasonable and in line with market experience in similar asset and liability classes.
Additionally, the Company may be required to record at fair value other assets on a nonrecurring basis, such as other real estate owned, other customer relationships, and other intangible assets. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-fair-value accounting or write-downs of individual assets.
Disclosure of fair values is not required for certain items such as lease financing, obligations for pension and other postretirement benefits, premises and equipment, prepaid expenses, deposit liabilities with no defined or contractual maturity, and income tax assets and liabilities.
Reasonable comparisons of fair value information with that of other financial institutions cannot necessarily be made because the standard permits many alternative calculation techniques, and numerous assumptions have been used to estimate the Company’s fair values.
Valuation Techniques Used in the Fair Value Measurement of Assets and Liabilities Carried at Fair Value
For the assets and liabilities measured at fair value on a recurring basis (categorized in the valuation hierarchy table below), the Company applies the following valuation techniques:
Available-for-sale debt securities are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices, including estimates by third-party pricing services, if available. If quoted prices are not available, fair values are measured using proprietary valuation models that utilize market observable parameters from active market makers and inter-dealer brokers whereby securities are valued based upon available market data for securities with similar characteristics. Management reviews the pricing information received from the Company’s third-party pricing service to evaluate the inputs and valuation methodologies used to place securities into the appropriate level of the fair value hierarchy and transfers of securities within the fair value hierarchy are made if necessary. On a monthly basis, management reviews the pricing information received from the third-party pricing service which includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by the third-party pricing service. Management also identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume or frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. As of June 30, 2023 and December 31, 2022, management did not make adjustments to prices provided by the third-party pricing services as a result of illiquid or inactive markets. The Company’s third-party pricing service has also established processes for the Company to submit inquiries regarding quoted prices. Periodically, the Company will challenge the quoted prices provided by the third-party pricing service. The Company’s third-party pricing service will review the inputs to the evaluation in light of the new market data presented by the Company. The Company’s third-party pricing service may then affirm the original quoted price or may update the evaluation on a going forward basis. The Company classifies all available-for-sale securities as Level 2.
Derivatives
Most of the Company’s derivatives are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the Company measures fair value on a recurring basis using proprietary valuation models that primarily use market observable inputs, such as yield curves, and option volatilities. The fair value of derivatives includes values associated with counterparty credit risk and the Company’s own credit standing. The Company classifies these derivatives, included in other assets and other liabilities, as Level 2.
45
Concurrent with the sale of the Visa Class B restricted shares, the Company entered into an agreement with the buyer that requires payment to the buyer in the event Visa reduces each member bank’s Class B conversion rate to unrestricted Class A common shares. During 2018 through 2023, Visa funded its litigation escrow account, thereby reducing each member bank’s Class B conversion rate to unrestricted Class A common shares from 1.6483 to the current conversion rate of 1.5902. The Visa derivative of $1.2 million and $0.9 million was included in the unaudited interim consolidated balance sheets at June 30, 2023 and December 31, 2022, respectively, to provide for the fair value of this liability. The potential liability related to this funding swap agreement was determined based on management’s estimate of the timing and the amount of Visa’s litigation settlement and the resulting payments due to the counterparty under the terms of the contract. As such, the funding swap agreement is classified as Level 3 in the fair value hierarchy. The significant unobservable inputs used in the fair value measurement of the Company’s funding swap agreement are the potential future changes in the conversion rate, expected term and growth rate of the market price of Visa Class A common shares. Material increases (or decreases) in any of those inputs may result in a significantly higher (or lower) fair value measurement.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022 are summarized below:
Fair Value Measurements as of June 30, 2023
Quoted Prices in
Significant
Active Markets for
Identical Assets
Observable
Unobservable
(Level 1)
Inputs (Level 2)
Inputs (Level 3)
Residential - Government agency(1)
Residential - Government-sponsored enterprises(1)
Other assets(2)
2,257
28,699
30,956
Liabilities
Other liabilities(3)
(26,820)
(28,020)
2,911,251
2,912,308
Fair Value Measurements as of December 31, 2022
5,376
10,945
16,321
(49,268)
(50,119)
3,112,810
3,117,335
For Level 3 assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022, the significant unobservable inputs used in the fair value measurements were as follows:
Quantitative Information about Level 3 Fair Value Measurements at June 30, 2023
Fair value
Valuation Technique
Unobservable Input
Discounted Cash Flow
Expected Conversion Rate - 1.5902(1)
1.5341-1.5902
Expected Term - 3 months(2)
0 - 6 months
Growth Rate - 26%(3)
10% - 38%
Quantitative Information about Level 3 Fair Value Measurements at December 31, 2022
Expected Conversion Rate - 1.5991(1)
1.5514-1.5991
47
Changes in Fair Value Levels
For the three and six months ended June 30, 2023 and 2022, there were no transfers between fair value hierarchy levels.
The changes in Level 3 liabilities measured at fair value on a recurring basis for the three and six months ended June 30, 2023 and 2022 are summarized below:
Visa Derivative
Balance as of April 1,
(5,794)
Total net gains (losses) included in other noninterest income
Settlements
1,816
1,885
Balance as of June 30,
(3,786)
Total net gains (losses) included in net income attributable to the change in unrealized gains or losses related to liabilities still held as of June 30,
Balance as of January 1,
(5,530)
Total net losses included in other noninterest income
3,430
3,101
Total net losses included in net income attributable to the change in unrealized losses related to liabilities still held as of June 30,
Assets and Liabilities Carried at Other Than Fair Value
The following tables summarize for the periods indicated the estimated fair value of the Company’s financial instruments that are not required to be carried at fair value on a recurring basis, excluding leases and deposit liabilities with no defined or contractual maturity.
Fair Value Measurements
Active Markets
for Identical
Inputs
Book Value
Assets (Level 1)
(Level 3)
Financial assets:
Cash and cash equivalents
Investment securities held-to-maturity
Loans(1)
14,030,432
13,304,749
Financial liabilities:
Time deposits(2)
3,262,608
492,616
48
13,793,922
13,138,787
2,476,050
2,423,231
74,991
Unfunded loan and lease commitments and letters of credit are not included in the tables above. As of both June 30, 2023 and December 31, 2022, the Company had $7.0 billion of unfunded loan and lease commitments and letters of credit. The Company believes that a reasonable estimate of the fair value of these instruments is the carrying value of deferred fees plus the related reserve for unfunded commitments, which totaled $51.1 million and $48.5 million at June 30, 2023 and December 31, 2022, respectively. No active trading market exists for these instruments, and the estimated fair value does not include value associated with the borrower relationship. The Company does not estimate the fair values of certain unfunded loan and lease commitments that can be canceled by providing notice to the borrower. As Company-level data is incorporated into the fair value measurement, unfunded loan and lease commitments and letters of credit are classified as Level 3.
Valuation Techniques Used in the Fair Value Measurement of Assets and Liabilities Carried at the Lower of Cost or Fair Value
The Company applies the following valuation techniques to assets measured at the lower of cost or fair value:
MSRs are carried at the lower of cost or fair value and are therefore subject to fair value measurements on a nonrecurring basis. The fair value of MSRs is determined using models which use significant unobservable inputs, such as estimates of prepayment rates, the resultant weighted average lives of the MSRs and the option-adjusted spread levels. Accordingly, the Company classifies MSRs as Level 3.
Collateral-dependent loans
Collateral-dependent loans are those for which repayment is expected to be provided substantially through the operation or sale of the collateral. These loans are measured at fair value on a nonrecurring basis using collateral values as a practical expedient. The fair values of collateral are primarily based on real estate appraisal reports prepared by third-party appraisers less estimated selling costs. The Company measures the estimated credit losses on collateral-dependent loans by performing a lower of cost or fair value analysis. If the estimated credit losses are determined by the value of the collateral, the net carrying amount is adjusted to fair value on a nonrecurring basis as Level 3 by recognizing an ACL.
Other real estate owned
The Company values these properties at fair value at the time the Company acquires them, which establishes their new cost basis. After acquisition, the Company carries such properties at the lower of cost or fair value less estimated selling costs on a nonrecurring basis. Fair value is measured on a nonrecurring basis using collateral values as a practical expedient. The fair values of collateral for other real estate owned are primarily based on real estate appraisal reports prepared by third-party appraisers less disposition costs, and are classified as Level 3.
Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis
The Company may be required to record certain assets at fair value on a nonrecurring basis in accordance with GAAP. These assets are subject to fair value adjustments that result from the application of lower of cost or fair value accounting or write-downs of individual assets to fair value.
There were no assets with nonrecurring fair value adjustments held as of June 30, 2023 and December 31, 2022. Additionally, there were no nonrecurring fair value adjustments for both the three and six months ended June 30, 2023 and 2022.
18. Reportable Operating Segments
The Company’s operations are organized into three business segments – Retail Banking, Commercial Banking, and Treasury and Other. These segments reflect how discrete financial information is currently evaluated by the chief operating decision maker and how performance is assessed and resources allocated. The Company’s internal management process measures the performance of these business segments. This process, which is not necessarily comparable with similar information for any other financial institution, uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of income, expense, the provision for credit losses, and capital. This process is dynamic and requires certain allocations based on judgment and other subjective factors. Unlike financial accounting, there is no comprehensive authoritative guidance for management accounting that is equivalent to GAAP.
The net interest income of the business segments reflects the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics and reflects the allocation of net interest income related to the Company’s overall asset and liability management activities on a proportionate basis. The basis for the allocation of net interest income is a function of the Company’s assumptions that are subject to change based on changes in current interest rates and market conditions. Funds transfer pricing also serves to transfer interest rate risk to Treasury.
The Company allocates the provision for credit losses from the Treasury and Other business segment (which is comprised of many of the Company’s support units) to the Retail and Commercial business segments. These allocations are based on direct costs incurred by the Retail and Commercial business segments.
Noninterest income and expense includes allocations from support units to the business segments. These allocations are based on actual usage where practicably calculated or by management’s estimate of such usage. Income tax expense is allocated to each business segment based on the consolidated effective income tax rate for the period shown.
Business Segments
Retail Banking
Retail Banking offers a broad range of financial products and services to consumers and small businesses. Loan and lease products offered include residential and commercial mortgage loans, home equity lines of credit and loans, automobile loans and leases, secured and unsecured lines of credit, installment loans and small business loans and leases. Deposit products offered include checking, savings, and time deposit accounts. Retail Banking also offers wealth management services. Products and services from Retail Banking are delivered to customers through 51 banking locations throughout the State of Hawaii, Guam and Saipan.
Commercial Banking
Commercial Banking offers products that include corporate banking related products, commercial real estate loans, commercial lease financing, secured and unsecured lines of credit, automobile loans and auto dealer financing, business deposit products and credit cards. Commercial lending and deposit products are offered primarily to middle-market and large companies locally, nationally and internationally.
Treasury and Other
Treasury consists of corporate asset and liability management activities including interest rate risk management. The segment’s assets and liabilities (and related interest income and expense) consist of interest-bearing deposits, investment securities, federal funds sold and purchased, government deposits, short- and long-term borrowings and bank-owned properties. The primary sources of noninterest income are from bank-owned life insurance, net gains from the sale of investment securities, foreign exchange income related to customer-driven cross-border wires for business and personal reasons and management of bank-owned properties. The net residual effect of the transfer pricing of assets and liabilities is included in Treasury, along with the elimination of intercompany transactions.
Other organizational units (Technology, Operations, Credit and Risk Management, Human Resources, Finance, Administration, Marketing, and Corporate and Regulatory Administration) provide a wide range of support to the Company’s other income earning segments. Expenses incurred by these support units are charged to the business segments through an internal cost allocation process.
The following tables present selected business segment financial information for the periods indicated.
(1,991)
(3,009)
(5,000)
102,246
38,487
(77,597)
(27,086)
(16,198)
(120,881)
48,446
30,487
2,473
(11,361)
(6,882)
(721)
(18,964)
37,085
23,605
1,752
(4,554)
(2,364)
(13,800)
208,603
75,553
29,230
(153,440)
(54,856)
(31,152)
(239,448)
103,227
57,671
9,411
(24,627)
(13,212)
(3,210)
(41,049)
78,600
44,459
6,201
(386)
(614)
(1,000)
106,982
36,212
(73,357)
(26,962)
(8,856)
(109,175)
Income (loss) before (provision) benefit for income taxes
56,110
29,665
(6,666)
(Provision) benefit for income taxes
(13,896)
(7,251)
(19,749)
Net income (loss)
42,214
22,414
(5,268)
Benefit for credit losses
1,455
1,928
1,364
4,747
Net interest income after benefit for credit losses
202,871
73,842
7,053
(143,577)
(53,467)
(16,173)
(213,217)
105,094
59,445
(8,473)
(26,046)
(14,504)
1,563
(38,987)
79,048
44,941
(6,910)
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including the documents incorporated by reference herein, contains, and from time to time our management may make, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. Statements that are not historical or current facts, are forward-looking statements, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including the following: conditions in the financial markets and economic conditions generally and in Hawaii, Guam and Saipan in particular; turmoil and volatility in the financial services industry, including failures or rumors of failures of other depository institutions, which could affect the ability of FHB to attract and retain depositors, and could affect the ability of financial services providers, including us, to borrow or raise capital; increases in Federal Deposit Insurance Corporation (“FDIC”) assessments due to bank failures; actions taken by governmental agencies to stabilize the financial system and the effectiveness of such actions; a sustained period of high inflation; our dependence on the real estate markets in which we operate; risk arising from conditions in the commercial real estate market; concentration of exposures to certain asset classes and individual obligors; interest rate risk and fluctuations in interest rates; events resulting from the discontinuance of the London Interbank Offered Rate (“LIBOR”); the possibility of a decline in the value of the investment securities we own; the possibility of a deterioration in the credit quality of, or defaults by, third parties who owe us money, securities or other assets or whose securities or obligations we hold; the possibility we might underestimate the credit losses inherent in our loan and lease portfolio; our ability to attract and retain customer deposits; our inability to receive dividends from our bank, our ability to raise additional capital in the future; our ability to maintain, attract and retain customer relationships; our ability to attract and retain key personnel and other skilled employees; the effectiveness of our techniques for managing risk and our use of data and modeling both in our management decision-making generally and in meeting regulatory expectations in particular; the effectiveness of the appraisals and other valuation techniques we use; the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents; the possibility of employee misconduct or mistakes; changes in the actual or perceived soundness or condition of other financial institutions; consumer protection initiatives related to the foreclosure process; risks in connection with any sale of loans; the possibility that certain external vendors on which we rely experience difficulty, terminate their services or fail to comply with banking laws and regulations; issues regarding the accuracy and completeness of information about customers and counterparties; risks associated with our accounting estimates and risk management processes and controls. changes in our accounting policies or in accounting standards; risks relating to the geographic concentration in our existing markets; risks relating to competition in a highly competitive industry and market area; the possibility that new lines of business, products, product enhancements or services may subject us to additional risks; a change in the key role of dealers within the automotive industry or our ability to maintain or build relationships with them; technological change; future legislative or regulatory change; risks relating to our bank in times of stress; capital adequacy requirements; the possibility that we may not pay dividends on our common stock in the future; the possibility of rulemaking changes implemented by the CFPB; the possibility of litigation and regulatory actions; the possibility of increases in FDIC insurance premiums; the risk of non-compliance with the USA PATRIOT Act, the Bank Secrecy Act or other laws and regulations; risks regarding regulations relating to privacy, information security and data protection, and differences in regulation; risks relating to our use of third-party vendors and our other ongoing third-party business relationships; environmental liability risks associated with our bank branches and any real estate collateral we acquire upon foreclosure; the possibility of litigation pertaining to our fiduciary responsibilities; the impact of pandemics, epidemics or other health-related crises; the effects of severe weather, hurricanes, tsunamis, natural disasters, pandemics, acts of war or terrorism or other external events; volatility in our stock price; the possibility of future sales and issuances of our common stock; the possibility of unexpected tax liabilities and unexpected tax liabilities that may
be applicable to us as a result of the reorganization transactions to facilitate FHI’s initial public offering; 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, 2022 and Quarterly Report on Form 10-Q for the quarter ended March 31, 2023. 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. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law.
Company Overview
FHI is a bank holding company, which owns 100% of the outstanding common stock of FHB, its only direct, wholly owned subsidiary. FHB was founded in 1858 under the name Bishop & Company and was the first successful banking partnership in the Kingdom of Hawaii and the second oldest bank formed west of the Mississippi River. The Bank operates its business through three operating segments: Retail Banking, Commercial Banking and Treasury and Other.
References to “we,” “our,” “us,” or the “Company” refer to the Parent and its subsidiary that are consolidated for financial reporting purposes.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of the Company reflect the results of operations, financial position and cash flows of FHI and its wholly owned subsidiary, FHB. All significant intercompany accounts and transactions have been eliminated in consolidation.
The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect normal recurring adjustments necessary for a fair presentation of the results for the interim periods.
The accompanying unaudited interim consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 and filed with the U.S. Securities and Exchange Commission (the “SEC”).
Hawaii Economy
Hawaii’s economy reflects growth during the six months ended June 30, 2023, but the forecast for the remainder of the year is still highly uncertain due to the uncertainty of the effect of rate increases and liquidity concerns from the recent bank closures. According to the Hawaii Department of Business, Economic Development & Tourism, the statewide seasonally adjusted unemployment rate has improved to 3.0% at June 30, 2023, compared to 4.3% at June 30, 2022. Nationally, the seasonally adjusted unemployment rate was 3.6% at June 30, 2023, equivalent to the 3.6% rate at June 30, 2022.
Domestic visitor arrivals continue to remain strong and have nearly returned to pre-pandemic levels. The average daily domestic passenger counts for the first six months of 2023 were approximately 95.6% of the average daily passenger counts during the first six months of 2019, according to the Hawaii Tourism Authority. International visitors have been slower to return to pre-pandemic levels, but are continuing to increase.
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The housing market has slowed compared to previous periods but remains relatively stable. Both volume of real estate sales and housing prices decreased when comparing the first six months of 2023 with the first six months of 2022. According to the Honolulu Board of Realtors, the volume of single-family home sales decreased by 35%, while condominium sales decreased by 36%, as compared to the same period in 2022. The median price of a single-family home sold on Oahu in the first six months of 2023 was $1,050,000, a decrease of 5.5% from the same period in 2022. The median price of a condominium sold on Oahu in the first six months of 2023 was $500,000, a decrease of 2.9% from the same period in 2022. As of June 30, 2023, months of inventory of single-family homes and condominiums on Oahu remained low at approximately 2.6 and 2.8 months, respectively.
Lastly, state general excise and use tax revenues increased by 8.6% for the six months ended June 30, 2023 as compared to the same period in 2022, according to the Hawaii Department of Business, Economic Development & Tourism.
Effect of Inflation, Changing Prices, and Recent Financial Events
The consolidated financial statements and related financial data presented in this Form 10-Q have been prepared according to generally accepted accounting principles in the United States, which require the measurement of financial positions and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation.
Although inflation is not rising as quickly as it did in previous periods, prices remain high due to, among other factors, continued global supply chain disruptions, changes in the labor market and geopolitical tensions.
Our operating costs continue to increase as inflationary conditions put upward pressure on the Company’s expenses. As virtually all of our assets and liabilities are monetary in nature, interest rates (which do not necessarily move in the same direction or the same extent as the prices of goods and services) generally have a more significant impact on our performance than do general levels of inflation. Rising interest rates may contribute to increased yields on assets and higher costs on funding, which generally improves net interest margins when balance sheet composition remains constant. However, changes in interest rates could influence not only the interest rates we receive on loans and securities and the interest rates we pay on deposits and borrowings, but also the composition of loans and deposits. The changing composition of our loans and deposits following a large interest rate change may cause periods where net interest margin compresses as fixed rate loans pay off at a slower pace and deposits migrate to higher cost categories. Our ability to originate loans and deposits could also be impacted. In addition, changes in interest rates have had an impact, and may have a significant impact on (i) the carrying value of certain assets, including loans, real estate and investment securities, on our balance sheet and (ii) the level of loan refinancing activity in our portfolio, which impacts the amount of prepayment penalty income we receive on loans we hold. In addition, we may incur debt in the future, and that debt may also be sensitive to interest rates.
There also remain many uncertainties given the recent financial events in the banking sector. On March 12 and 13, 2023, following the closures of Silicon Valley Bank (“SVB”) and Signature Bank and the appointment of the FDIC as the receiver for those banks, the FDIC announced that, under the systemic risk exception set forth in the Federal Deposit Insurance Act (“FDIA”), all insured and uninsured deposits of those banks were transferred to the respective bridge banks for SVB and Signature Bank. The FDIC also announced that, as required by the FDIA, any losses to the Deposit Insurance Fund (“DIF”) to support uninsured depositors would be recovered by a special assessment. Under the FDIA, the assessment may be on insured depository institutions, depository institution holding companies (with the concurrence of the Treasury Secretary), or both, as the FDIC determines to be appropriate. The FDIC has discretion with respect to the design and timeframe for any special assessment, and, under the FDIA, the FDIC may consider the types of entities that benefit from the action taken, economic conditions, the effects on the industry, and such other factors as the FDIC deems appropriate. In May 2023, the FDIC issued a notice of proposed rulemaking (“NPR”), which proposed an annual special assessment rate of approximately 12.5 basis points to an assessment base that would equal an insured depository institution’s estimated uninsured deposits reported as of December 31, 2022, adjusted to exclude the first $5 billion, to be paid in eight quarterly installments beginning in the first quarter of 2024. If the rule is adopted as proposed, the total amount of the special assessment would be expected to be accrued and recognized as a loss in the period the rule is adopted. The ultimate impact and timing of recognition will depend on the final outcome of the ongoing FDIC deliberations.
55
In addition, the closures of SVB and Signature Bank and adverse developments affecting other banks in the first half of 2023 resulted in heightened levels of market activity and volatility, as well as the potential for increased regulations and more stringent capital requirements going forward. In response to the deterioration in the operating environment and funding conditions for U.S. banks, in April 2023, Moody’s lowered the macro profile of the U.S. banking system and downgraded the credit ratings of the Bank, among other regional banks. In light of volatility in the capital markets and economic disruptions, we continue to carefully monitor our capital and liquidity positions.
As of June 30, 2023, the Company was “well-capitalized” and met all applicable regulatory capital requirements, including a Common Equity Tier 1 capital ratio of 12.05%, compared to the minimum requirement of 4.50%. In light of the recent volatility in the banking sector, we increased our liquidity with higher than normal levels and continued to maintain high levels of liquidity. For additional discussions regarding our capital and liquidity positions and related risks, refer to the sections titled “Liquidity and Capital Resources” and “Capital” in this MD&A.
Economic conditions and therefore our results of operations may be impacted by a variety of other factors as well, such as an economic slowdown or recession, financial market volatility, supply chain disruptions, monetary and fiscal policy measures, heightened geopolitical tensions, fluctuations in interest rates and foreign currency exchange rates, the political and regulatory environment, changes to the U.S. Federal budget and potential changes in tax laws.
These and other key factors could impact our profitability in future reporting periods. See Item 1A. Risk Factors, beginning in the section captioned “Summary of Risk Factors,” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023.
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Selected Financial Data
Our financial highlights for the periods indicated are presented in Table 1:
Financial Highlights
Table 1
For the Three Months Ended
For the Six Months Ended
(dollars in thousands, except per share data)
Income Statement Data:
Dividends declared per share
0.26
0.52
Dividend payout ratio
53.06
56.52
51.49
57.14
Other Financial Information / Performance Ratios(1):
Net interest margin
2.91
2.60
3.01
2.51
Efficiency ratio
57.96
57.33
56.17
58.15
Return on average total assets
0.94
1.06
Return on average tangible assets (non-GAAP)(2)
1.05
0.98
1.10
Return on average total stockholders' equity
10.68
10.52
11.23
9.82
Return on average tangible stockholders' equity (non-GAAP)(2)
18.57
18.79
19.65
16.76
Noninterest expense to average assets
1.95
1.73
1.96
1.71
Balance Sheet Data:
Investment securities available-for-sale
Allowance for credit losses for loans and leases
Book value per share
18.49
17.82
Tangible book value per share (non-GAAP)(2)
10.69
Asset Quality Ratios:
Non-accrual loans and leases / total loans and leases
0.09
0.08
Allowance for credit losses for loans and leases / total loans and leases
1.03
1.02
Net charge-offs / average total loans and leases(3)
0.10
Capital Ratios:
Common Equity Tier 1 Capital Ratio
Tier 1 Capital Ratio
Total Capital Ratio
Tier 1 Leverage Ratio
Total stockholders' equity to total assets
9.63
9.23
Tangible stockholders' equity to tangible assets (non-GAAP)(2)
5.80
5.40
The following table provides a reconciliation of these non-GAAP financial measures with their most closely related GAAP measures for the periods indicated:
GAAP to Non-GAAP Reconciliation
Table 2
Average total stockholders' equity
2,344,285
2,262,654
2,321,977
2,404,471
Less: average goodwill
Average tangible stockholders' equity
1,348,793
1,267,162
1,326,485
1,408,979
Average total assets
24,821,486
25,250,176
24,685,560
25,165,783
Average tangible assets
23,825,994
24,254,684
23,690,068
24,170,291
Return on average total stockholders' equity(a)
Return on average tangible stockholders' equity (non-GAAP)(a)
Return on average total assets(a)
Return on average tangible assets (non-GAAP)(a)
Noninterest expense to average assets(a)
As of
(dollars in thousands, except share amount and per share data)
Less: goodwill
Tangible stockholders' equity
1,364,246
1,273,513
Tangible assets
23,516,074
23,581,731
Shares outstanding
Tangible stockholders' equity to tangible assets (non-GAAP)
Tangible book value per share (non-GAAP)
Net income was $62.4 million for the three months ended June 30, 2023, an increase of $3.1 million or 5% as compared to the same period in 2022. Basic and diluted earnings per share were both $0.49 per share for the three months ended June 30, 2023, an increase of $0.03 per share or 7% as compared to the same period in 2022. The increase in net income was primarily due to a $14.8 million increase in net interest income driven by the rising interest rate environment, a $3.2 million increase in noninterest income and a $0.8 million decrease in the provision for income taxes. This was partially offset by a $11.7 million increase in noninterest expense and a $4.0 million increase in the provision for credit losses (the “Provision”).
Our return on average total assets was 1.01% for the three months ended June 30, 2023, an increase of seven basis points from the same period in 2022, and our return on average total stockholders’ equity was 10.68% for the three months ended June 30, 2023, an increase of 16 basis points from the same period in 2022. Our return on average tangible assets was 1.05% for the three months ended June 30, 2023, an increase of seven basis points from the same period in 2022, and our return on average tangible stockholders’ equity was 18.57% for the three months ended June 30, 2023, a decrease of 22 basis points, from the same period in 2022. Our efficiency ratio was 57.96% for the three months ended June 30, 2023 compared to 57.33% for the same period in 2022.
Our results for the three months ended June 30, 2023 were highlighted by the following:
Net income was $129.3 million for the six months ended June 30, 2023, an increase of $12.2 million or 10% as compared to the same period in 2022. Basic earnings per share was $1.01 per share for the six months ended June 30, 2023, an increase of $0.09 per share or 10% as compared to the same period in 2022. Diluted earnings per share was $1.01 per share for the six months ended June 30, 2023, an increase of $0.10 per share or 11% as compared to the same period in 2022. The increase in net income was primarily due to a $48.2 million increase in net interest income and a $10.9 million increase in noninterest income. This was partially offset by a $26.2 million increase in noninterest expense and a $2.1 million increase in the provision for income taxes, in addition to a Provision of $13.8 million for the six months ended June 30, 2023, compared to a negative Provision of $4.7 million for the six months ended June 30, 2022.
Our return on average total assets was 1.06% for the six months ended June 30, 2023, an increase of 12 basis points from the same period in 2022, and our return on average total stockholders’ equity was 11.23% for the six months ended June 30, 2023, an increase of 141 basis points for the same period in 2022. Our return on average tangible assets was 1.10% for the six months ended June 30, 2023, an increase of 12 basis points from the same period in 2022, and our return on average tangible stockholders’ equity was 19.65% for the six months ended June 30, 2023, an increase of 289 basis points from the same period in 2022. Our efficiency ratio was 56.17% for the six months ended June 30, 2023 compared to 58.15% for the same period in 2022.
Our results for the six months ended June 30, 2023 were highlighted by the following:
For the six months ended June 30, 2023, we continued to maintain high levels of liquidity and adequate reserves for credit losses. We also remained well-capitalized. Common Equity Tier 1 (“CET1”) was 12.05% as of June 30, 2023, an increase of 23 basis points from December 31, 2022. The increase in CET1 was primarily due to earnings for the six months ended June 30, 2023, partially offset by the dividends declared and paid to the Company’s stockholders and an increase in risk-weighted assets driven by an increase in loans and leases.
61
Analysis of Results of Operations
Net Interest Income
For the three months ended June 30, 2023 and 2022, average balances, related income and expenses, on a fully taxable-equivalent basis, and resulting yields and rates are presented in Table 3. An analysis of the change in net interest income, on a fully taxable-equivalent basis, is presented in Table 4.
62
Average Balances and Interest Rates
Table 3
Income/
Yield/
(dollars in millions)
Balance
Expense
Rate
Earning Assets
Interest-Bearing Deposits in Other Banks
569.3
7.2
5.07
1,297.3
2.8
0.85
Available-for-Sale Investment Securities
Taxable
2,978.6
18.0
2.42
3,946.4
16.6
1.68
Non-Taxable
5.8
0.1
5.74
8.4
5.26
Held-to-Maturity Investment Securities
3,618.7
15.3
1.69
3,533.6
15.0
1.70
610.4
3.7
2.46
607.0
4.1
2.71
Total Investment Securities
7,213.5
37.1
2.06
8,095.4
35.8
1.77
Loans Held for Sale
0.5
5.87
0.3
5.06
Loans and Leases (1)
2,265.7
36.2
6.41
1,951.3
3.09
4,183.6
64.9
6.22
3,808.9
30.7
3.23
874.3
15.2
711.3
6.3
3.57
4,314.0
39.1
3.62
4,183.0
36.7
3.51
1,119.3
9.2
3.31
945.7
5.9
2.49
1,196.6
17.7
5.92
1,218.0
15.5
5.09
329.7
3.6
4.43
240.4
2.1
3.53
14,283.2
185.9
5.22
13,058.6
112.2
3.44
Other Earning Assets
119.8
0.99
69.0
0.79
Total Earning Assets (2)
22,186.3
230.5
4.16
22,520.6
150.9
2.68
Cash and Due from Banks
257.9
300.8
Other Assets
2,377.3
2,428.8
Total Assets
24,821.5
25,250.2
Interest-Bearing Liabilities
Interest-Bearing Deposits
Savings
6,099.4
16.1
6,971.3
1.7
Money Market
3,809.8
19.6
2.07
4,127.4
1.4
0.14
Time
2,877.8
22.4
3.12
1,671.4
1.5
0.36
Total Interest-Bearing Deposits
12,787.0
58.1
1.82
12,770.1
4.6
Federal Funds Purchased
2.9
Other Short-Term Borrowings
362.9
4.7
5.16
Long-Term Borrowings
500.0
6.0
4.78
Other Interest-Bearing Liabilities
54.0
Total Interest-Bearing Liabilities
13,706.8
69.3
2.03
161.2
146.3
Interest Rate Spread
2.13
2.54
Net Interest Margin
Noninterest-Bearing Demand Deposits
8,270.3
9,631.4
Other Liabilities
500.1
586.0
Stockholders' Equity
2,344.3
2,262.7
Total Liabilities and Stockholders' Equity
63
Analysis of Change in Net Interest Income
Table 4
Compared to June 30, 2022
Volume
Total (1)
Change in Interest Income:
(2.3)
6.7
4.4
(4.7)
6.1
(0.4)
(4.4)
5.7
1.3
Loans and Leases
18.4
21.2
3.3
30.9
34.2
8.9
1.2
2.4
(0.3)
2.5
2.2
0.9
0.6
10.8
62.9
73.7
0.2
Total Change in Interest Income
4.2
75.4
79.6
Change in Interest Expense:
(0.2)
14.6
14.4
(0.1)
18.3
18.2
1.8
19.1
20.9
52.0
53.5
Other Short-term Borrowings
Long-term Borrowings
Total Change in Interest Expense
12.7
64.7
Change in Net Interest Income
(8.5)
23.4
14.9
Net interest income, on a fully taxable-equivalent basis, was $161.2 million for the three months ended June 30, 2023, an increase of $14.9 million or 10% compared to the same period in 2022. Our net interest margin was 2.91% for the three months ended June 30, 2023, an increase of 31 basis points from the same period in 2022. The increase in net interest income, on a fully taxable-equivalent basis, was driven by the rising interest rate environment and was primarily due to higher yields and average balances in our loan and lease portfolio, partially offset by higher deposit funding costs and higher average balances in total borrowings during the three months ended June 30, 2023, compared to the same period in 2022. The yield on our loan and lease portfolio was 5.22% for the three months ended June 30, 2023, an increase of 178 basis points as compared to the same period in 2022. We experienced an increase in our yields from total loans and leases primarily due to increases in yields from our adjustable-rate commercial real estate loans, commercial and industrial loans and construction loans, which are largely based on the SOFR. For the three months ended June 30, 2023, the average balance of our loan and lease portfolio was $14.3 billion, an increase of $1.2 billion or 9% compared to the same period in 2022. The increase in the average balance of our loans and leases reflected increases in most loan categories. Deposit funding costs were $58.1 million for the three months ended June 30, 2023, an increase of $53.5 million compared to the same period in 2022 primarily due to an increase in interest rates. Rates paid on our interest-bearing deposits were 1.82% for the three months ended June 30, 2023, an increase of 168 basis points compared to the same period in 2022, primarily due to increases in our time, money market and savings deposits. For the three months ended June 30, 2023, the average balance of our total borrowings was $865.8 million, compared to nil during the same period in 2022, primarily due to increases in FHLB advances.
For the six months ended June 30, 2023 and 2022, average balances, related income and expenses, on a fully taxable-equivalent basis, and resulting yields and rates are presented in Table 5. An analysis of the change in net interest income, on a fully taxable-equivalent basis, is presented in Table 6.
64
Table 5
435.2
10.6
4.91
1,218.3
0.55
3,029.7
36.4
2.41
5,862.7
45.7
1.56
5.58
320.8
3.9
3,651.1
1,776.6
611.3
7.9
305.2
7,310.5
75.7
2.08
8,265.3
68.7
1.66
5.79
0.8
Loans and Leases(1)
2,229.5
68.6
6.20
1,962.1
29.7
3.05
4,144.9
123.2
5.99
3,721.0
56.4
3.06
874.1
29.9
6.89
738.9
12.1
3.30
4,310.5
77.5
3.59
4,147.2
71.5
3.45
1,097.2
17.9
3.29
918.8
11.3
2.48
1,205.0
34.8
5.84
31.1
320.6
6.8
4.27
233.4
4.0
3.48
14,181.8
358.7
12,939.7
216.1
3.36
102.9
0.90
68.0
0.4
Total Earning Assets(2)
22,030.7
445.5
4.07
22,492.1
288.5
2.58
271.9
296.5
2,383.0
2,377.2
24,685.6
25,165.8
6,226.2
30.0
0.97
6,820.7
0.07
3,831.5
33.9
1.78
4,088.3
2.0
2,697.7
37.5
2.80
1,709.8
3.2
0.38
12,755.4
101.4
1.60
12,618.8
7.4
0.12
208.7
5.3
303.8
7.1
4.73
48.5
1.0
4.12
13,351.2
115.6
1.75
329.9
281.1
2.32
8,506.4
9,563.6
506.0
578.9
2,322.0
2,404.5
Table 6
Total(1)
(3.4)
10.7
7.3
(27.6)
(9.3)
(5.6)
15.8
15.9
3.8
(13.4)
20.4
7.0
4.5
34.4
38.9
59.7
66.8
17.8
3.0
6.6
1.1
121.7
142.6
4.3
152.7
157.0
28.0
27.8
32.0
31.9
31.5
34.3
91.5
94.0
16.7
108.2
(12.4)
61.2
48.8
Net interest income, on a fully taxable-equivalent basis, was $329.9 million for the six months ended June 30, 2023, an increase of $48.8 million or 17% compared to the same period in 2022. Our net interest margin was 3.01% for the six months ended June 30, 2023, an increase of 50 basis points from the same period in 2022. The increase in net interest income, on a fully taxable-equivalent basis, was driven by the rising interest rate environment and was primarily due to higher yields and average balances in our loan and lease portfolio, higher yields in our investment securities portfolio and higher yields on interest-bearing deposits in other banks. This was partially offset by higher deposit funding costs, lower average balances in our investment securities portfolio and higher average balances in total borrowings during the six months ended June 30, 2023. The yield on our loan and lease portfolio was 5.09% for the six months ended June 30, 2023, an increase of 173 basis points as compared to the same period in 2022. We experienced an increase in our yields from total loans and leases primarily due to increases in yields from our adjustable-rate commercial real estate loans, commercial and industrial loans and construction loans, which are largely based on the SOFR. For the six months ended June 30, 2023, the average balance of our loan and lease portfolio was $14.2 billion, an increase of $1.2 billion or 10% compared to the same period in 2022. The increase in the average balance of our loans and leases reflected increases in most loan categories. For the six months ended June 30, 2023, the yield on our investment securities portfolio was 2.08%, an increase of 42 basis points compared to the same period in 2022, primarily due to an increase in interest rates. For the six months ended June 30, 2023, the average balance of our investment securities portfolio was $7.3 billion, a decrease of $954.8 million or 12% compared to the same period in 2022. For the six months ended June 30, 2023, the yield on our interest-bearing deposits in other banks was 4.91%, an increase of 436 basis points compared to the same period in 2022. Deposit funding costs were $101.4 million for the six months ended June 30, 2023, an increase of $94.0 million compared to the same period in 2022, primarily due to an increase
in interest rates. Rates paid on our interest-bearing deposits were 1.60% for the six months ended June 30, 2023, an increase of 148 basis points compared to the same period in 2022, primarily due to increases in our money market, time and savings deposits. For the six months ended June 30, 2023, the average balance of our total borrowings was $547.3 million, compared to nil during the same period in 2022, primarily due to increases in FHLB advances.
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 2022 at 3.25% and increased a total of 425 basis points (25 basis points in March, 50 basis points in May, 75 basis points in each month of June, July, September and November, and 50 basis points in December) to end the year at 7.50%. During 2023, the prime rate increased 75 basis points (25 basis points each in February, March and May) to end the second quarter of 2023 at 8.25%. As noted above, our loan portfolio is also impacted by changes in the SOFR. At June 30, 2023, the one-month and three-month CME Term SOFR interest rates were 5.14% and 5.27%, respectively. At June 30, 2022, the one-month and three-month CME Term SOFR interest rates were 1.69% and 2.12%, respectively. The target range for the federal funds rate, which is the cost of immediately available overnight funds, began in 2022 at 0.00% to 0.25%. During 2022, the federal funds rate increased 425 basis points to end the year at 4.25% to 4.50%. During 2023, the federal funds rate increased 75 basis points to end the second quarter at 5.00% to 5.25%.
Provision for Credit Losses
The Provision was $5.0 million for the three months ended June 30, 2023, compared to a Provision of $1.0 million for the same period in 2022. The Provision of $5.0 million for the three months ended June 30, 2023, was primarily due to increases in the provision for construction loans and home equity lines. We recorded net charge-offs of loans and leases of $3.5 million and $2.3 million for the three months ended June 30, 2023 and 2022, respectively. This represented charge-offs of 0.10% and 0.07% of average loans and leases, on an annualized basis, for the three months ended June 30, 2023 and 2022, respectively. The Provision was $13.8 million for the six months ended June 30, 2023, compared to a negative Provision of $4.7 million for the same period in 2022. The Provision of $13.8 million for the six months ended June 30, 2023, was primarily due to increases in the provision for consumer loans, construction loans and home equity lines and the provision for unfunded construction and home equity line commitments. We recorded net charge-offs of loans and leases of $6.8 million and $4.9 million for the six months ended June 30, 2023 and 2022, respectively. This represented charge-offs of 0.10% and 0.08% of average loans and leases, on an annualized basis, for the six months ended June 30, 2023 and 2022, respectively. The ACL was $148.6 million as of June 30, 2023, an increase of $4.7 million or 3% from December 31, 2022 and represented 1.03% of total outstanding loans and leases as of June 30, 2023 compared to 1.02% of total outstanding loans and leases as of December 31, 2022. The reserve for unfunded commitments was $36.2 million as of June 30, 2023, compared to $33.8 million as of December 31, 2022. 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 MD&A.
Noninterest Income
Table 7 presents the major components of noninterest income for the three months ended June 30, 2023 and 2022 and Table 8 presents the major components of noninterest income for the six months ended June 30, 2023 and 2022:
Table 7
Dollar
Percent
Change
403
(1,595)
(9)
689
4,130
(454)
(14)
3,211
n/m – Denotes a variance that is not a meaningful metric to inform the change in noninterest income from the three months ended June 30, 2023 to the same period in 2022.
Table 8
133
(147)
(2)
1,420
9,667
235
10,854
n/m – Denotes a variance that is not a meaningful metric to inform the change in noninterest income from the six months ended June 30, 2023 to the same period in 2022.
Total noninterest income was $47.3 million for the three months ended June 30, 2023, an increase of $3.2 million or 7% as compared to the same period in 2022. Total noninterest income was $96.4 million for the six months ended June 30, 2023, an increase of $10.9 million or 13% as compared to the same period in 2022.
Service charges on deposit accounts were $7.2 million for the three months ended June 30, 2023, an increase of $0.4 million or 6% as compared to the same period in 2022. This increase was primarily due to a $0.4 million increase in dormant account fees and a $0.4 million increase in overdraft and checking account fees, partially offset by a $0.3 million decrease in checking account service fees. Service charges on deposit accounts were $14.5 million for the six months ended June 30, 2023, an increase of $0.1 million or 1% as compared to the same period in 2022.
Credit and debit card fees were $15.5 million for the three months ended June 30, 2023, a decrease of $1.6 million or 9% as compared to the same period in 2022. This decrease was primarily due to a $1.9 million increase in network association dues and a $0.4 million decrease in merchant service revenues, partially offset by a $0.6 million increase in interchange settlement fees. Credit and debit card fees were $31.8 million for the six months ended June 30, 2023, a decrease of $0.1 million as compared to the same period in 2022.
Other service charges and fees were $9.1 million for the three months ended June 30, 2023, a minimal change as compared to the same period in 2022. Other service charges and fees were $18.2 million for the six months ended June 30, 2023, a decrease of $0.5 million or 2% as compared to the same period in 2022. This decrease was primarily due to a $0.3 million decrease in miscellaneous service fees and a $0.2 million decrease in service fees related to participation loans.
Trust and investment services income was $9.4 million for the three months ended June 30, 2023, an increase of $0.7 million or 8% as compared to the same period in 2022. This increase was primarily due to a $0.5 million increase in business cash management fees and a $0.4 million increase in investment management fees. Trust and investment services income was $19.1 million for the six months ended June 30, 2023, an increase of $1.4 million or 8% as compared to the same period in 2022. This increase was primarily due to a $1.4 million increase in business cash management fees and a $0.5 million increase in investment management fees, partially offset by a $0.3 million decrease in irrevocable trust fees.
BOLI income was $3.3 million for the three months ended June 30, 2023, an increase of $4.1 million as compared to the same period in 2022. This increase was primarily due to a $4.0 million increase in BOLI earnings and a $0.1 million increase in death benefit proceeds from life insurance policies. BOLI income was $8.4 million for the six months ended June 30, 2023, an increase of $9.7 million as compared to the same period in 2022. This increase was primarily due to a $7.6 million increase in BOLI earnings and a $2.1 million increase in death benefit proceeds from life insurance policies.
Other noninterest income was $2.9 million for the three months ended June 30, 2023, a decrease of $0.5 million or 14% as compared to the same period in 2022. This decrease was primarily due to a $1.9 million increase in net losses recognized in income related to derivative contracts and a $0.2 million increase in interest paid on collateral payments related to derivative instruments, partially offset by a $0.9 million increase in customer-related interest rate swap fees and a $0.8 million increase in market adjustments on mutual funds purchased. Other noninterest income was $4.5 million for the six months ended June 30, 2023, an increase of $0.2 million or 6% as compared to the same period in 2022.
Noninterest Expense
Table 9 presents the major components of noninterest expense for the three months ended June 30, 2023 and 2022 and Table 10 presents the major components of noninterest expense for the six months ended June 30, 2023 and 2022:
Table 9
Percentage
8,002
(1,119)
3,246
1,375
(103)
(5)
396
(311)
11,706
Table 10
15,808
(1,953)
592
7,005
(3)
1,598
331
26,231
Total noninterest expense was $120.9 million for the three months ended June 30, 2023, an increase of $11.7 million or 11% as compared to the same period in 2022. Total noninterest expense was $239.4 million for the six months ended June 30, 2023, an increase of $26.2 million or 12% as compared to the same period in 2022.
Salaries and employee benefits expense was $57.9 million for the three months ended June 30, 2023, an increase of $8.0 million or 16% as compared to the same period in 2022. This increase was primarily due to a $3.7 million increase in base salaries, a $2.9 million decrease in payroll and benefit costs being deferred as loan origination costs, a $2.0 million expense for payments accrued in the quarter ended June 30, 2023 in connection with separation agreements executed with two executive officers, and $0.9 million in severance payments accrued in the quarter ended June 30, 2023 for other employee terminations as part of an effort to reduce operating costs. This was partially offset by a $0.7 million decrease in temporary help expenses and a $0.6 million decrease in incentive compensation. Salaries and employee benefits expense was $113.9 million for the six months ended June 30, 2023, an increase of $15.8 million or 16% as compared to the same period in 2022. This increase was primarily due to a $7.9 million increase in base salaries, a $7.1 million decrease in payroll and benefit costs being deferred as loan origination costs, and the aforementioned separation and termination payments accrued as of June 30, 2023. This was partially offset by a $1.2 million decrease in incentive compensation and a $1.1 million decrease in temporary help expenses.
Contracted services and professional fees were $17.5 million for the three months ended June 30, 2023, a decrease of $1.1 million or 6% as compared to the same period in 2022. This decrease was primarily due to a $2.7 million decrease in contracted data processing expenses and a $2.0 million decrease in audit, legal and consultant fees, partially offset by a $3.5 million increase in outside services, primarily attributable to technology-related projects, marketing and new customer services. Contracted services and professional fees were $33.8 million for the six months ended June 30, 2023, a decrease of $2.0 million or 5% as compared to the same period in 2022. This decrease was primarily due to a $6.0 million decrease in contracted data processing expenses and a $3.2 million decrease in audit, legal and consultant fees, partially offset by a $7.1 million increase in outside services, primarily attributable to technology-related projects, marketing and new customer services.
Occupancy expense was $7.6 million for the three months ended June 30, 2023, an increase of $0.2 million or 3% as compared to the same period in 2022. Occupancy expense was $15.3 million for the six months ended June 30, 2023, an increase of $0.6 million or 4% as compared to the same period in 2022. This increase was primarily due to a $0.6 million increase in utilities expense and a $0.5 million decrease in net sublease rental income, partially offset by a $0.4 million decrease in building depreciation.
Equipment expense was $11.0 million for the three months ended June 30, 2023, an increase of $3.2 million or 42% as compared to the same period in 2022. This increase was primarily due to a $3.6 million increase in technology-related amortization and licensing and maintenance fees, partially offset by a $0.2 million decrease in furniture and equipment depreciation. Equipment expense was $20.7 million for the six months ended June 30, 2023, an increase of $7.0 million or 51% as compared to the same period in 2022. This increase was primarily due to a $7.6 million increase in technology-related amortization and licensing and maintenance fees, partially offset by a $0.3 million decrease in furniture and equipment depreciation.
Regulatory assessment and fees were $3.7 million for the three months ended June 30, 2023, an increase of $1.4 million or 60% as compared to the same period in 2022. Regulatory assessment and fees were $7.5 million for the six months ended June 30, 2023, an increase of $3.0 million or 66% as compared to the same period in 2022. These increases were primarily due to increases in the FDIC insurance assessment. In October 2022, the FDIC adopted a final rule to increase the initial base deposit insurance assessment rate schedules by 2 basis points beginning with the first quarterly assessment period of 2023. In May 2023, the FDIC issued a notice of proposed rulemaking for a special assessment to replenish the deposit insurance fund following the recent bank failures. If the rule is adopted as proposed, the total amount of the special assessment would be expected to be accrued and recognized as a loss in the period the rule is adopted. The ultimate impact and timing of recognition will depend on the final outcome of the ongoing FDIC deliberations.
Advertising and marketing expense was $1.9 million for the three months ended June 30, 2023, a decrease of $0.1 million or 5% as compared to the same period in 2022. Advertising and marketing expense was $3.9 million for the six months ended June 30, 2023, a decrease of $0.1 million or 3% as compared to the same period in 2022.
Card rewards program expense was $7.7 million for the three months ended June 30, 2023, an increase of $0.4 million or 5% as compared to the same period in 2022. This increase was primarily due to a $0.6 million increase in credit card cash reward redemptions and a $0.5 million increase in interchange fees paid to our credit card partners, partially offset by a $0.7 million decrease in priority rewards card redemptions. Card rewards program expense was $15.8 million for the six months ended June 30, 2023, an increase of $1.6 million or 11% as compared to the same period in 2022. This increase was primarily due to a $1.1 million increase in credit card cash reward redemptions and a $1.0 million increase in interchange fees paid to our credit card partners, partially offset by a $0.6 million decrease in priority rewards card redemptions.
Other noninterest expense was $13.7 million for the three months ended June 30, 2023, a decrease of $0.3 million or 2% as compared to the same period in 2022. Other noninterest expense was $28.5 million for the six months ended June 30, 2023, an increase of $0.3 million or 1% as compared to the same period in 2022.
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Provision for Income Taxes
The provision for income taxes was $19.0 million (an effective tax rate of 23.30%) for the three months ended June 30, 2023, compared with a provision for income taxes of $19.7 million (an effective tax rate of 24.96%) for the same period in 2022. The provision for income taxes was $41.0 million (an effective tax rate of 24.10%) for the six months ended June 30, 2023, compared with a provision for income taxes of $39.0 million (an effective tax rate of 24.98%) for the same period in 2022. The reduction in the effective tax rate was partially due to an increase in non-taxable BOLI income recognized during the three and six months ended June 30, 2023.
Analysis of Business Segments
Our business segments are Retail Banking, Commercial Banking and Treasury and Other. Table 11 summarizes net income from our business segments for the three and six months ended June 30, 2023 and 2022. Additional information about operating segment performance is presented in “Note 18. Reportable Operating Segments” contained in our unaudited interim consolidated financial statements.
Business Segment Net Income
Table 11
Retail Banking. Our Retail Banking segment includes the financial products and services we provide to consumers and small businesses. Loan and lease products offered include residential and commercial mortgage loans, home equity lines of credit and loans, automobile loans and leases, secured and unsecured lines of credit, installment loans and small business loans and leases. Deposit products offered include checking, savings and time deposit accounts. Our Retail Banking segment also includes our wealth management services.
Net income for the Retail Banking segment was $37.1 million for the three months ended June 30, 2023, a decrease of $5.1 million or 12% as compared to the same period in 2022. The decrease in net income for the Retail Banking segment was primarily due to a $4.2 million increase in noninterest expense, a $3.1 million decrease in net interest income and a $1.6 million increase in the Provision, partially offset by a $2.5 million decrease in the provision for income taxes and a $1.3 million increase in noninterest income. The increase in noninterest expense was primarily due to increases in salaries and benefits expense and regulatory assessment and fees. The decrease in net interest income was primarily due to lower loan spreads, partially offset by higher deposit spreads. The decrease in the provision for income taxes was primarily due to the decrease in pretax income. The increase in the Provision was primarily due to increases in the provision for commercial lending. The increase in noninterest income was primarily due to increases in trust and investment services income and service charges on deposit accounts.
Net income for the Retail Banking segment was $78.6 million for the six months ended June 30, 2023, a decrease of $0.4 million or 1% as compared to the same period in 2022. The decrease in net income for the Retail Banking segment was primarily due to a $9.9 million increase in noninterest expense and a Provision of $4.6 million for the six months ended June 30, 2023, compared to a negative Provision of $1.5 million for the six months ended June 30, 2022. This was partially offset by a $11.7 million increase in net interest income, a $2.3 million increase in noninterest income and a $1.4 million decrease in the provision for income taxes. The increase in noninterest expense was primarily due to increases in salaries and benefits expense, regulatory assessment and fees and occupancy expense. The increase in the Provision was primarily due to an increase in the provision for commercial, residential and consumer lending. The increase in net interest income was primarily due to higher deposit spreads, partially offset by lower loan spreads. The increase in noninterest income was primarily due to increases in trust and investment services income and net mortgage servicing rights income. The decrease in the provision for income taxes was primarily due to the decrease in pretax income.
Commercial Banking. Our Commercial Banking segment includes our corporate banking related products, commercial real estate loans, commercial lease financing, secured and unsecured lines of credit, automobile loans and auto dealer financing, business deposit products and credit cards that we provide primarily to middle market and large companies locally, nationally and internationally.
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Net income for the Commercial Banking segment was $23.6 million for the three months ended June 30, 2023, an increase of $1.2 million or 5% as compared to the same period in 2022. The increase in net income for the Commercial Banking segment was primarily due to a $4.7 million increase in net interest income, partially offset by a $2.4 million increase in the Provision and a $1.3 million decrease in noninterest income. The increase in net interest income was primarily due to higher average loan balances and spreads, partially offset by lower deposit spreads. The increase in the Provision was primarily due to an increase in the provision for commercial lending. The decrease in noninterest income was primarily due to a decrease in credit and debit card fees.
Net income for the Commercial Banking segment was $44.5 million for the six months ended June 30, 2023, a decrease of $0.5 million or 1% as compared to the same period in 2022. The decrease in net income for the Commercial Banking segment was primarily due to a Provision of $6.9 million for the six months ended June 30, 2023, compared to a negative Provision of $1.9 million for the six months ended June 30, 2022. The decrease in net income for the Commercial Banking segment also stemmed from a $2.1 million decrease in noninterest income and a $1.4 million increase in noninterest expense, partially offset by a $10.5 million increase in net interest income and a $1.3 million decrease in the provision for income taxes. The increase in the Provision was primarily due to increases in the provision for commercial and consumer lending. The decrease in noninterest income was primarily due to a tax refund received in 2022. The increase in noninterest expense was primarily due to increases in card rewards program expense, contracted services and professional fees, regulatory assessment and fees and operational losses, partially offset by lower overall expenses that were allocated to the Commercial Banking segment. The increase in net interest income was primarily due to higher average loan balances and spreads, partially offset by a decrease in loan fees. The decrease in the provision for income taxes was primarily due to the decrease in pretax income.
Treasury and Other. Our Treasury and Other segment includes our treasury business, which consists of corporate asset and liability management activities, including interest rate risk management. The assets and liabilities (and related interest income and expense) of our treasury business consist of interest-bearing deposits, investment securities, federal funds sold and purchased, government deposits, short- and long-term borrowings and bank-owned properties. Our primary sources of noninterest income are from bank-owned life insurance, net gains from the sale of investment securities, foreign exchange income related to customer driven cross-border wires for business and personal reasons and management of bank-owned properties. The net residual effect of the transfer pricing of assets and liabilities is included in Treasury and Other, along with the elimination of intercompany transactions.
Other organizational units (Technology, Operations, Credit and Risk Management, Human Resources, Finance, Administration, Marketing and Corporate and Regulatory Administration) provide a wide range of support to our other income earning segments. Expenses incurred by these support units are charged to the applicable business segments through an internal cost allocation process.
Net income for the Treasury and Other segment was $1.8 million for the three months ended June 30, 2023, an increase of $7.0 million as compared to the same period in 2022. The increase in net income for the Treasury and Other segment was primarily due to a $13.3 million increase in net interest income and a $3.2 million increase in noninterest income. This was partially offset by a $7.3 million increase in noninterest expense and a $2.1 million increase in the provision for income taxes. The increase in net interest income was primarily due to an increase in net transfer pricing credits that reside in the Treasury and Other segment and higher yields on our interest-bearing deposits in other banks, partially offset by an increase in interest expense from public deposits and higher borrowings costs. The increase in noninterest income was primarily due to increases in BOLI income and market adjustments on mutual funds purchased, partially offset by an increase in net losses recognized in income related to derivative contracts. The increase in noninterest expense was primarily due to increases in salaries and benefits expense, equipment expense and a lower credit allocation to the Treasury and Other segment. This was partially offset by a decrease in contracted services and professional fees. The increase in the provision for income taxes was primarily due to the increase in pretax income.
Net income for the Treasury and Other segment was $6.2 million for the six months ended June 30, 2023, an increase of $13.1 million as compared to the same period in 2022. The increase in net income was primarily due to a $25.9 million increase in net interest income and a $10.7 million increase in noninterest income. This was partially offset by a $15.0 million increase in noninterest expense and a $4.8 million increase in the provision for income taxes, in addition to a Provision of $2.4 million for the six months ended June 30, 2023, compared to a negative Provision of $1.4 million for the six months ended June 30, 2022. The increase in net interest income was primarily due to an increase in net transfer pricing credits that reside in the Treasury and Other segment and higher yields on interest-bearing deposits in other banks and our investment securities portfolio, partially offset by an increase in interest expense from public deposits and higher borrowing costs. The increase in noninterest income was primarily due to increases in BOLI income and market adjustments on mutual funds purchased and income due to adjustments to certain liabilities assumed as a result of the Reorganization Transactions, partially offset by an increase in net losses recognized in income related to derivative contracts. The increase in noninterest expense was primarily due to increases in equipment expense and salaries and benefits expense, in addition to a lower credit allocation to the Treasury and Other segment. This was partially offset by a decrease in contracted services and professional fees. The increase in the provision for income taxes was primarily due to the increase in pretax income. The increase in the Provision was primarily due to increases in the provision for unfunded construction and home equity commitments.
Analysis of Financial Condition
Liquidity and Capital Resources
Liquidity refers to our ability to maintain cash flow that is adequate to fund operations and meet present and future financial obligations through either the sale or maturity of existing assets or by obtaining additional funding through liability management. We consider the effective and prudent management of liquidity to be fundamental to our health and strength. Our objective is to manage our cash flow and liquidity reserves so that they are adequate to fund our obligations and other commitments on a timely basis and at a reasonable cost.
Liquidity is managed to ensure stable, reliable and cost-effective sources of funds to satisfy demand for credit, deposit withdrawals and investment opportunities. 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. Based on periodic liquidity assessments, we may alter our asset, liability and off-balance sheet positions. The Company’s Asset Liability Management Committee (“ALCO”) monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change. This process, combined with our ability to raise funds in money and capital markets and through private placements, provides flexibility in managing the exposure to liquidity risk.
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Immediate liquid resources are available in cash, which is primarily on deposit with the Federal Reserve Bank of San Francisco (the “FRB”). As of June 30, 2023 and December 31, 2022, cash and cash equivalents were $0.6 billion and $0.5 billion, respectively. Potential sources of liquidity also include investment securities in our available-for-sale portfolio and held-to-maturity portfolio. The carrying values of our available-for-sale investment securities and held-to-maturity investment securities were $2.9 billion and $4.2 billion as of June 30, 2023, respectively. The carrying values of our available-for-sale investment securities and held-to-maturity investment securities were $3.2 billion and $4.3 billion as of December 31, 2022, respectively. As of June 30, 2023 and December 31, 2022, we maintained our excess liquidity primarily in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac and mortgage-backed securities issued by Ginnie Mae, Freddie Mac, Fannie Mae, Municipal Housing Authorities and non-agency entities. As of June 30, 2023, our available-for-sale investment securities portfolio was comprised of securities with a weighted average life of approximately 4.2 years and our held-to-maturity investment securities portfolio was comprised of securities with a weighted average life of approximately 8.1 years. These funds offer substantial resources to meet either new loan demand or to help offset reductions in our deposit funding base as they provide quick sources of liquidity by pledging to obtain secured borrowings and repurchase agreements or sales of our available-for-sale securities portfolio. Our available-for-sale investment securities portfolio and our held-to-maturity investment securities portfolio could also be used to support borrowings through the Federal Reserve’s new Bank Term Funding Program (“BTFP”). Under the program, eligible depository institutions can obtain loans of up to one year in length by pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. Although the Bank currently has no intention to borrow funds under the program, the BTFP is available and intended to provide depository institutions with liquidity so as to avoid selling securities at market values below cost. Liquidity is further enhanced by our ability to pledge loans to access secured borrowings from the FHLB and the FRB. As of June 30, 2023, we have borrowing capacity of $2.9 billion from the FHLB and $3.8 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 $18.9 billion and $20.2 billion as of June 30, 2023 and December 31, 2022, respectively, which represented 90% and 93% of our total deposits as of June 30, 2023 and December 31, 2022, respectively. 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, including alternative investment options, that reduce deposit balances.
In March 2023, to enhance liquidity as a precaution in light of recent volatility in the banking sector, the Bank took $500.0 million in FHLB advances. For information with respect to the financial terms of such advances, see “ – Short-term and Long-term Borrowings.” We also utilize short-term advances to help manage liquidity needs that may arise from time to time.
The Company’s routine funding requirements are expected to consist primarily of general corporate needs and capital to be returned to our shareholders. 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, taking out short- and long-term borrowings and issuing long-term debt and equity securities.
Our material cash requirements from our current and long-term contractual obligations have not changed materially since previously reported as of December 31, 2022. We believe that our existing cash, cash equivalents, investments, and cash expected to be generated from operations, are still sufficient to meet our cash requirements within the next 12 months and beyond.
Potential Demands on Liquidity from Off-Balance Sheet Arrangements
We have off-balance sheet arrangements, such as variable interest entities, guarantees, and certain financial instruments with off-balance sheet risk, that may affect the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
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Variable Interest Entities
We hold interests in several unconsolidated variable interest entities (“VIEs”). These unconsolidated VIEs are primarily low-income housing tax credit investments in partnerships and limited liability companies. Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in an entity’s net asset value. The primary beneficiary consolidates the VIE. Based on our analysis, we have determined that the Company is not the primary beneficiary of these entities. As a result, we do not consolidate these VIEs. Unfunded commitments to fund these low-income housing tax credit investments were $40.6 million and $47.2 million as of June 30, 2023 and December 31, 2022, respectively.
We sell residential mortgage loans on the secondary market, primarily to Fannie Mae or Freddie Mac. The agreements under which we sell residential mortgage loans to Fannie Mae or Freddie Mac contain provisions that include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the specific representations and warranties vary among investors, insurance or guarantee agreements, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state and local laws and other matters. The unpaid principal balance of our portfolio of residential mortgage loans sold was $1.4 billion as of both June 30, 2023 and December 31, 2022. The agreements under which we sell residential mortgage loans require delivery of various documents to the investor or its document custodian. Although these loans are primarily sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred if a loan review reveals that underwriting and documentation standards were potentially not met in the origination of those loans. Upon receipt of a repurchase request, we work with investors to arrive at a mutually agreeable resolution. Repurchase demands are typically reviewed on an individual loan by loan basis to validate the claims made by the investor 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 six months ended June 30, 2023, there was one residential mortgage loan repurchase totaling $0.2 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. We also service loans originated by other mortgage loan originators. As servicer, our primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans, or loan modifications or short sales. Each agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by the Company in such capacity and provides protection against expenses and liabilities incurred by the Company when acting in compliance with the respective servicing agreements. However, if we commit a material breach of obligations as servicer, we may be subject to termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards vary by investor. These standards and remedies are determined by servicing guides issued by the investors as well as the contract provisions established between the investors and the Company. Remedies could include repurchase of an affected loan. For the six months ended June 30, 2023, we had no repurchase requests related to loan servicing activities, nor were there any pending repurchase requests as of June 30, 2023.
Although to-date repurchase requests related to representation and warranty provisions and servicing activities have been limited, it is possible that requests to repurchase mortgage loans may increase in frequency as investors more aggressively pursue all means of recovering losses on their purchased loans. However, as of June 30, 2023, management believes that this exposure is not material due to the historical level of repurchase requests and loss trends and thus has not established a liability for losses related to mortgage loan repurchases. As of June 30, 2023, 99% 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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The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and commercial letters of credit which are not reflected in the consolidated financial statements.
See “Note 13. Commitments and Contingent Liabilities” contained in our unaudited interim consolidated financial statements for more information on our financial instruments with off-balance sheet risk.
Investment Securities
Table 12 presents the estimated fair value of our available-for-sale investment securities portfolio and amortized cost of our held-to-maturity investment securities portfolio as of June 30, 2023 and December 31, 2022:
Table 12
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Table 13 presents the maturity distribution at amortized cost and weighted-average yield to maturity of our investment securities portfolio as of June 30, 2023:
Maturities and Weighted-Average Yield on Securities(1)
Table 13
1 Year or Less
After 1 Year - 5 Years
After 5 Years - 10 Years
Over 10 Years
Yield
As of June 30, 2023
19.8
1.53
40.6
1.97
68.2
128.6
1.40
116.9
25.0
20.0
3.33
45.0
44.2
Residential - Government agency(2)
63.5
2.33
57.2
Residential - Government-sponsored enterprises(2)
1,168.2
1.63
1,229.4
1,083.0
Commercial - Government agency(2)
3.19
237.4
1.88
34.6
1.76
276.4
225.5
Commercial - Government-sponsored enterprises(2)
29.3
2.90
67.1
1.36
96.4
1.83
87.9
22.0
5.83
21.4
Collateralized mortgage obligations(2):
1.80
274.0
2.05
409.5
1.79
688.8
1.89
605.2
1.94
325.7
1.39
168.1
496.8
1.54
427.5
107.0
6.33
142.9
249.9
6.03
240.6
Total available-for-sale securities as of June 30, 2023
86.8
2.62
2,133.0
912.1
2.30
164.9
5.81
3,296.8
2.09
2,909.4
53.2
1.58
47.5
Mortgage-backed securities(2):
45.1
2.14
39.6
25.9
77.0
1.59
91.1
6.2
1.62
24.5
2.00
1.92
24.3
1.42
532.1
545.4
2.26
1,137.2
1.99
1,007.4
909.6
127.0
1,036.6
917.2
208.0
1,347.2
1.50
165.5
1.38
1,720.7
1.49
1,522.2
Debt securities issued by state and political subdivisions
10.2
43.8
2.27
48.0
Total held-to-maturity securities as of June 30, 2023
273.9
1.55
2,894.6
1,011.9
1.91
4,180.4
3,697.3
The carrying value of our investment securities portfolio was $7.1 billion as of June 30, 2023, a decrease of $382.0 million or 5% compared to December 31, 2022. 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. Our held-to-maturity investment securities are carried at amortized cost.
During the year ended December 31, 2022, we reclassified at fair value $4.6 billion in available-for-sale investment securities to the held-to-maturity category. The related total unrealized after-tax losses of approximately $372.4 million remained in accumulated other comprehensive loss to be amortized over the estimated remaining life of the securities as an adjustment of yield, offsetting the related accretion of the discount on the transferred securities. No gains or losses were recognized at the time of reclassification. In addition, we consider the held-to-maturity classification of these investment securities to be appropriate as there is both the positive intent and ability to hold these securities to maturity. There were no securities transferred from available-for-sale investment securities to the held-to-maturity category during the three and six months ended June 30, 2023.
As of June 30, 2023, we maintained all of our investment securities in either the available-for-sale category (recorded at fair value) or the held-to-maturity category (recorded at amortized cost) in the unaudited interim consolidated balance sheets, with $3.8 billion invested in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac. Our investment securities portfolio also included $2.8 billion in mortgage-backed securities issued by Ginnie Mae, Freddie Mac, Fannie Mae, Municipal Housing Authorities and non-agency entities, $240.6 million in collateralized loan obligations, $214.3 million in debt securities issued by the U.S. Treasury, government agencies (U.S. International Development Finance Corporation bonds) and government-sponsored enterprises and $54.0 million in debt securities issued by states and political subdivisions.
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We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability and the level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities and change the composition of our investment securities portfolio.
Gross unrealized gains in our investment securities portfolio were $0.2 million and $0.1 million as of June 30, 2023 and December 31, 2022, respectively. Gross unrealized losses in our investment securities portfolio were $870.8 million and $904.3 million as of June 30, 2023 and December 31, 2022, respectively. The lower gross unrealized loss position was primarily due to paydowns in our investment securities portfolio.
For our available-for-sale investment securities, we conduct a regular assessment of our investment securities portfolio to determine whether any securities are impaired. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through the allowance for credit losses is recognized in other comprehensive income. For the three and six months ended June 30, 2023, we did not record any credit losses related to our available-for-sale investment securities portfolio.
For our held-to-maturity investment securities, we utilize the Current Expected Credit Loss (“CECL”) approach to estimate lifetime expected credit losses. Substantially all of our held-to-maturity securities are issued by the U.S. Government, its agencies and government-sponsored enterprises. These securities have a long history of no credit losses and carry the explicit or implicit guarantee of the U.S. government. Therefore, as of June 30, 2023, we did not record an allowance for credit losses related to our held-to-maturity 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 June 30, 2023 and December 31, 2022, we held $26.1 million and $10.1 million in FHLB stock, respectively, which is recorded as a component of other assets in our unaudited interim consolidated balance sheets.
See “Note 2. Investment Securities” contained in our unaudited interim consolidated financial statements for more information on our investment securities portfolio.
Table 14 presents the composition of our loan and lease portfolio by major categories as of June 30, 2023 and December 31, 2022:
Table 14
Commercial and industrial:
Commercial and industrial excluding Paycheck Protection Program loans
2,175,841
2,217,604
Paycheck Protection Program loans
11,990
18,293
Total commercial and industrial
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Total loans and leases were $14.4 billion as of June 30, 2023, an increase of $270.8 million or 2% from December 31, 2022. The increase in total loans and leases was primarily due to increases in commercial real estate loans, construction loans, residential real estate loans and lease financing, partially offset by decreases in commercial and industrial loans and consumer loans.
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 $2.2 billion as of June 30, 2023, a decrease of $48.1 million or 2% from December 31, 2022.
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 and owner-occupied property is cash flow from the property and operating cash flow from the business, respectively. Commercial real estate loans were $4.3 billion as of June 30, 2023, an increase of $158.6 million or 4% from December 31, 2022. This increase was primarily due to $130.0 million in completed construction loans that were converted to commercial real estate loans during the six months ended June 30, 2023.
Construction loans are for the purchase or construction of a property for which repayment will be generated by the property. Loans in this portfolio are primarily for the purchase of land, as well as for the development of commercial properties, single family homes and condominiums. We classify loans as construction until the completion of the construction phase. Following completion of the construction phase, if a loan is retained by the Bank, the loan is converted to the commercial real estate or residential real estate classes of loans. Construction loans were $913.8 million as of June 30, 2023, an increase of $69.2 million or 8% from December 31, 2022. The increase in construction loans was primarily due to draws on existing lines, partially offset by the completion of $130.0 million in construction loans mentioned above during the six months ended June 30, 2023.
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. Decisions are primarily based on LTV ratios, debt-to-income (“DTI”) ratios, liquidity and credit scores. LTV ratios generally do not exceed 80%, although higher levels are permitted with mortgage insurance. We offer fixed rate mortgage products and variable rate mortgage products including HELOC. Since our transition from LIBOR, which commenced in late 2021, we now offer variable rate mortgage products based on SOFR with interest rates that are subject to change every six months, after the third, fifth, seventh or tenth year, depending on the product. Prior to this, we offered variable rate mortgage products based on LIBOR with interest rates that were subject to change every year, after the first, third, fifth or tenth year, depending on the product. Variable rate residential mortgage loans are underwritten at fully-indexed interest rates. We generally do not offer interest-only, payment-option facilities, Alt-A loans or any product with negative amortization. Residential real estate loans were $5.5 billion as of June 30, 2023, an increase of $97.6 million or 2% from December 31, 2022.
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 $1.2 billion as of June 30, 2023, a decrease of $40.8 million or 3% from December 31, 2022.
Lease financing consists of commercial single investor leases and leveraged leases. Underwriting of new lease transactions is based on our lending policy, including but not limited to an analysis of customer cash flows and secondary sources of repayment, including the value of leased equipment, the guarantors’ cash flows and/or other credit enhancements. No new leveraged leases are being added to the portfolio and all remaining leveraged leases are running off. Lease financing was $332.4 million as of June 30, 2023, an increase of $34.3 million or 12% from December 31, 2022. The increase was primarily due to the closing of several large lease transactions during the six months ended June 30, 2023.
See “Note 3. Loans and Leases” and “Note 4. Allowance for Credit Losses” contained in our unaudited interim consolidated financial statements and the discussion in “Analysis of Financial Condition — Allowance for Credit Losses” of this MD&A for more information on our loan and lease portfolio.
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The Company’s loan and lease portfolio includes adjustable-rate loans, primarily tied to SOFR, LIBOR and Prime, 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 or the remaining life of the loan. Table 15 presents the recorded investment in our loan and lease portfolio as of June 30, 2023 by rate type:
Loans and Leases by Rate Type
Table 15
Adjustable Rate
Hybrid
Fixed
Prime
LIBOR
SOFR
BSBY
292,241
286,841
788,781
115,406
375,311
1,858,580
28,482
300,769
431,662
1,000,614
1,336,117
145,369
873,752
3,787,514
138,663
364,771
98,684
159,981
423,556
50,775
15,582
748,590
6,574
158,673
18,120
98,508
15,816
140,697
71,866
345,007
505,339
3,467,191
1,028
1,120
879,345
257,698
19,148
15,908
346,127
1,384,684
3,724,889
328,934
1,059
207
1,169
331,369
3,735
847,012
1,170,669
1,545,944
16,979
2,689,151
311,757
1,337,680
7,072,180
1,562,138
5,728,514
% by rate type at June 30, 2023
100
Tables 16 and 17 present the geographic distribution of our loan and lease portfolio as of June 30, 2023 and December 31, 2022:
Geographic Distribution of Loan and Lease Portfolio
Table 16
U.S.
Guam &
Foreign &
Hawaii
Mainland(1)
Saipan
901,775
1,171,086
81,245
33,725
2,361,587
1,553,816
375,545
430,732
470,476
12,629
4,167,606
437
149,494
1,097,437
479
40,247
5,265,043
916
189,741
839,522
39,877
300,462
115,754
200,036
16,610
9,914,413
3,436,207
976,232
35,980
Percentage of Total Loans and Leases
69%
24%
6%
1%
100%
80
Table 17
917,232
1,192,766
98,601
27,298
2,306,075
1,435,512
390,722
361,899
475,744
7,000
4,152,272
452
150,064
1,020,538
34,813
5,172,810
184,877
877,550
41,647
300,324
3,413
90,755
193,423
13,912
9,726,321
3,339,544
995,436
30,711
23%
7%
Our lending activities are concentrated primarily in Hawaii. However, we also have lending activities on the U.S. mainland, Guam and Saipan. Our commercial lending activities on the U.S. mainland include automobile dealer flooring activities in California, participation in the Shared National Credits Program and selective commercial real estate projects based on existing customer relationships. Our lease financing portfolio includes commercial leveraged and single investor lease financing activities both in Hawaii and on the U.S. mainland. However, no new leveraged leases are being added to the portfolio and all remaining leveraged leases are running off. Our consumer lending activities are concentrated primarily in Hawaii and, to a smaller extent, in Guam and Saipan.
Table 18 presents the contractual maturities of our loan and lease portfolio by major categories and the sensitivities to changes in interest rates as of June 30, 2023:
Maturities for Loan and Lease Portfolio(1)
Table 18
Due in One
Due After One
Due After Five
Due After
Year or Less
to Five Years
to Fifteen Years
Fifteen Years
802,498
1,042,674
267,043
75,616
722,273
1,988,044
1,560,590
20,041
221,969
554,994
95,325
41,549
16,009
40,791
462,237
3,798,500
14,663
112,112
166,599
844,789
30,672
152,903
628,836
4,643,289
167,657
782,680
231,779
19,325
154,410
133,826
24,839
1,964,394
4,675,705
2,917,399
4,805,334
Total of loans and leases with:
Adjustable interest rates
1,759,899
3,396,120
1,647,098
269,063
Hybrid interest rates
38,816
187,943
152,243
1,183,136
Fixed interest rates
165,679
1,091,642
1,118,058
3,353,135
81
Credit Quality
We perform an internal loan review and grading or scoring procedures on an ongoing basis. The review provides management with periodic information as to the quality of the loan portfolio and effectiveness of our lending policies and procedures. The objective of the loan review and grading or scoring procedures is to identify, in a timely manner, existing or emerging credit quality issues so that appropriate steps can be initiated to avoid or minimize future losses.
For purposes of managing credit risk and estimating the ACL, management has identified three portfolio segments (commercial, residential and consumer) that we use to develop our systematic methodology to determine the ACL. The categorization of loans for the evaluation of credit risk is specific to our credit risk evaluation process and these loan categories are not necessarily the same as the loan categories used for other evaluations of our loan portfolio. See “Note 4. Allowance for Credit Losses” contained in our unaudited interim consolidated financial statements for more information about our approach to estimating the ACL.
The following tables and discussion address non-performing assets and loans and leases that are 90 days past due but are still accruing interest.
Non-Performing Assets and Loans and Leases Past Due 90 Days or More and Still Accruing Interest
Table 19 presents information on our non-performing assets and accruing loans and leases past due 90 days or more as of June 30, 2023 and December 31, 2022:
Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More
Table 19
Non-Performing Assets
Non-Accrual Loans and Leases
Commercial Loans:
Total Commercial Loans
1,942
Residential Loans:
Total Residential Loans
12,204
9,963
Total Non-Accrual Loans and Leases
Other Real Estate Owned ("OREO")
Total Non-Performing Assets
11,996
Accruing Loans and Leases Past Due 90 Days or More
1,218
Total Accruing Loans and Leases Past Due 90 Days or More
Ratio of Non-Accrual Loans and Leases to Total Loans and Leases
Ratio of Non-Performing Assets to Total Loans and Leases and OREO
Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More to Total Loans and Leases and OREO
0.11
82
Table 20 presents the activity in Non-Performing Assets (“NPAs”) for the six months ended June 30, 2023 and 2022:
Table 20
7,257
Additions
5,500
2,461
Reductions
(2,099)
(619)
Return to accrual status
(1,805)
Sales of other real estate owned
(91)
(175)
Charge-offs/write-downs
(273)
(305)
Total Reductions
(4,268)
(1,859)
7,859
The level of NPAs represents an indicator of the potential for future credit losses. NPAs consist of non-accrual loans and leases and other real estate owned (“OREO”). 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 OREO 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 $13.2 million as of June 30, 2023, an increase of $1.2 million or 10% from December 31, 2022. The ratio of our NPAs to total loans and leases and OREO was 0.09% as of both June 30, 2023 and December 31, 2022. The increase in NPAs during the six months ended June 30, 2023, was primarily due to increases in home equity line non-accrual loans of $2.3 million, partially offset by decreases in commercial real estate non-accrual loans of $0.7 million and commercial and industrial non-accrual loans of $0.2 million.
The largest component of our NPAs is typically residential mortgage loans. The level of these NPAs can remain elevated due to a lengthy judicial foreclosure process in Hawaii. As of June 30, 2023, residential mortgage non-accrual loans were $6.1 million, a decrease of $0.1 million or 1% from December 31, 2022. This decrease was due to payments of $0.9 million and returns to accrual status of $0.5 million, partially offset by additions of residential mortgage non-accrual loans totaling $1.3 million. As of June 30, 2023, our residential mortgage non-accrual loans were comprised of 34 loans with a weighted average current LTV ratio of 37%.
As of June 30, 2023, home equity line non-accrual loans were $6.1 million, an increase of $2.3 million or 61% from December 31, 2022. This increase was due to additions in home equity lines totaling $4.2 million, partially offset by returns to accrual status of $1.3 million, payments of $0.3 million and charge-offs of $0.3 million.
OREO represents property acquired as the result of borrower defaults on loans. OREO is recorded at fair value, less estimated selling costs, at the time of foreclosure. On an ongoing basis, properties are appraised as required by market conditions and applicable regulations. There was no OREO held as of June 30, 2023. OREO was $0.1 million as of December 31, 2022, which comprised of one residential property.
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 $3.3 million as of June 30, 2023, a nominal increase from December 31, 2022. This increase was comprised of increases in commercial real estate loans of $0.6 million and commercial and industrial loans of $0.3 million, offset by a decrease in consumer loans of $0.9 million, that were past due 90 days or more and still accruing interest.
83
Allowance for Credit Losses for Loans and Leases & Reserve for Unfunded Commitments
Table 21 presents an analysis of our ACL for the periods indicated:
Allowance for Credit Losses and Reserve for Unfunded Commitments
Table 21
Balance at Beginning of Period
183,321
179,238
177,735
187,584
Loans and Leases Charged-Off
(394)
Total Loans and Leases Charged-Off
Recoveries on Loans and Leases Previously Charged-Off
361
428
89
383
293
427
Total Recoveries on Loans and Leases Previously Charged-Off
Net Loans and Leases Charged-Off
(2,338)
(6,755)
(4,937)
Balance at End of Period
184,780
177,900
Components:
Reserve for Unfunded Commitments
Total Allowance for Credit Losses and Reserve for Unfunded Commitments
Average Loans and Leases Outstanding
14,283,222
13,058,558
14,181,842
12,939,745
Ratio of Net Loans and Leases Charged-Off to Average Loans and Leases Outstanding(1)
Ratio of Allowance for Credit Losses for Loans and Leases to Loans and Leases Outstanding
1.12
Ratio of Allowance for Credit Losses for Loans and Leases to Non-accrual Loans and Leases
11.23x
18.95x
84
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 June 30, 2023 and December 31, 2022:
Allocation of the Allowance for Credit Losses by Loan and Lease Category
Table 22
Allocated
Loan
ACL as
category as
% of loan or
% of total
lease
loans and
category
leases
0.63
15.23
0.93
29.87
1.08
6.36
0.44
Total commercial
65,015
0.84
53.78
0.76
30.06
1.04
7.92
44,609
0.82
37.98
100.00
Table 23
0.65
15.87
29.31
0.69
65,768
0.88
53.30
30.53
7.49
43,471
0.81
38.02
2.83
8.68
Table 24 presents the net charge-offs (recoveries) to average loans and leases by category during the three and six months ended June 30, 2023 and 2022:
Net Charge-Offs (Recoveries) to Average Loans and Leases By Category(1)
Table 24
(0.01)
(0.10)
(0.05)
0.04
0.02
(0.02)
0.39
0.21
0.57
0.61
85
As of June 30, 2023, the ACL was $148.6 million or 1.03% of total loans and leases outstanding, compared with an ACL of $143.9 million or 1.02% of total loans and leases outstanding as of December 31, 2022. The reserve for unfunded commitments was $36.2 million as of June 30, 2023, compared to $33.8 million as of December 31, 2022.
Net charge-offs of loans and leases were $3.5 million or 0.10% of total average loans and leases, on an annualized basis, for the three months ended June 30, 2023, compared to net charge-offs of $2.3 million or 0.07% for the three months ended June 30, 2022. Net charge-offs in our commercial lending portfolio were $0.7 million for the three months ended June 30, 2023, compared to net recoveries of $0.1 million for the three months ended June 30, 2022. Net charge-offs in our residential lending portfolio were nil and $0.7 million for the three months ended June 30, 2023 and 2022, respectively. Net charge-offs in our consumer lending portfolio were $2.8 million and $1.7 million for the three months ended June 30, 2023 and 2022, 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 $6.8 million or 0.10% of total average loans and leases on an annualized basis, for the six months ended June 30, 2023, compared to $4.9 million or 0.08% of total average loans and leases, on an annualized basis, for the six months ended June 30, 2022. Net charge-offs in our commercial lending portfolio were $1.3 million and $0.5 million for the six months ended June 30, 2023 and 2022, respectively. Net charge-offs in our residential lending portfolio were $0.1 million and $0.7 million for the six months ended June 30, 2023 and 2022, respectively. Net charge-offs in our consumer lending portfolio were $5.4 million and $3.7 million for the six months ended June 30, 2023 and 2022, 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.
Although we determine the amount of each component of the ACL separately, the ACL as a whole was considered appropriate by management as of June 30, 2023 and December 31, 2022. Furthermore, as of June 30, 2023, while the allocation of our ACL to the commercial portfolio segment was lower as compared to December 31, 2022, 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. The ACL anticipates cyclical losses consistent with a recession and includes a qualitative overlay for potential macroeconomic impacts. We will continue to monitor factors that drive expected credit losses including the uncertainty of the economy, inflation and geopolitical instability. See “Note 4. Allowance for Credit Losses” contained in our unaudited interim consolidated financial statements for more information on the ACL.
Goodwill was $995.5 million as of both June 30, 2023 and December 31, 2022. Our goodwill originated from the acquisition of the Company by BNP Paribas in December of 2001. Goodwill generated in that acquisition was recorded on the balance sheet of the Bank as a result of push down accounting treatment, and remains on our consolidated balance sheets.
The Company’s policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment is the condition that exists when the carrying amount of a reporting unit exceeds its fair value. There was no impairment in our goodwill for the three and six months ended June 30, 2023. Future events, including geopolitical concerns, inflation concerns, global supply chain issues, and other factors affecting the economy, 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.
86
Other assets were $813.1 million as of June 30, 2023, an increase of $16.2 million or 2% from December 31, 2022. The increase in other assets was primarily due to increases of $18.4 million in municipal advances, $18.2 million in interest rate swap agreements and $16.0 million in FHLB stock. This was partially offset by decreases of $14.8 million in prepaid assets, $12.3 million in LIHTC investments and $8.1 million in mutual funds.
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 25 presents the composition of our deposits as of June 30, 2023 and December 31, 2022:
Table 25
Demand
5,438,653
5,957,368
3,511,904
3,714,244
3,097,843
2,265,163
Foreign(1):
397,322
425,542
255,888
251,179
209,929
210,887
Total Deposits(2)
Total deposits were $21.1 billion as of June 30, 2023, a decrease of $610.9 million or 3% from December 31, 2022. The decrease in deposit balances stemmed primarily from a $698.6 million decrease in non-public demand deposit balances, a $333.4 million decrease in non-public savings deposit balances, a $213.5 million decrease in public savings deposit balances and a $205.5 million decrease in non-public money market deposit balances. These decreases were partially offset by a $558.2 million increase in public time deposit balances and a $273.5 million increase in non-public time deposit balances.
As of June 30, 2023 and December 31, 2022, the amount of uninsured deposits that exceeded FDIC insurance limits were estimated to be $10.7 billion, or 51% of total deposits, and $11.1 billion, or 51% of total deposits, respectively. At June 30, 2023 and December 31, 2022, the Company had $2.2 billion and $1.9 billion, respectively, of public deposits, all of which were fully collateralized with investment securities. As of June 30, 2023 and December 31, 2022, the amount of uninsured deposits excluding public deposits that exceeded FDIC insurance limits were estimated to be $8.5 billion, or 40% of total deposits, and $9.2 billion, or 42% of total deposits, respectively. As of June 30, 2023 and December 31, 2022, deposit accounts above $250,000 were estimated to be $12.5 billion and $13.3 billion, respectively.
Table 26 presents the estimated amount of time deposits that were in excess of the FDIC insurance limit, further segregated by time remaining until maturity, as of June 30, 2023:
Uninsured Time Deposits
Table 26
989,052
667,010
401,666
Over twelve months
81,520
2,139,248
Short-term and Long-term Borrowings
As of June 30, 2023, the Company had no short-term borrowings as the remaining short-term FHLB repo advance matured in April 2023. As of December 31, 2022, the Company’s short-term borrowings consisted of $75.0 million in federal funds purchased with a 4.35% annual interest rate that matured in January 2023.
Long-term borrowings were $500.0 million as of June 30, 2023. The Company’s long-term borrowings consisted of $500.0 million in FHLB fixed-rate advances with a weighted average interest rate of 4.71% and maturity dates in September 2024. There were no long-term borrowings as of December 31, 2022. Long-term borrowings mature in excess of one year from the unaudited interim consolidated balance sheet date.
As of June 30, 2023 and December 31, 2022, the Company had a remaining line of credit of $2.9 billion and $2.5 billion available from the FHLB, respectively. The FHLB fixed-rate advances and remaining borrowing capacity were secured by commercial real estate and residential real estate loan collateral as of June 30, 2023. The FHLB borrowing capacity was secured by residential real estate loan collateral as of December 31, 2022.
Pension and Postretirement Plan Obligations
We have a noncontributory qualified defined benefit pension plan, an unfunded supplemental executive retirement plan (“SERP”), a directors’ retirement plan (a non-qualified pension plan for eligible directors) and a postretirement benefit plan providing life insurance and healthcare benefits that we offer to our directors and employees, as applicable. The noncontributory qualified defined benefit pension plan, the unfunded supplemental executive retirement plan and the directors’ retirement plan are all frozen to new participants. On March 11, 2019, the Company’s board of directors approved an amendment to the SERP to freeze the SERP. As a result of such amendment, effective July 1, 2019, there are no new accruals of benefits, including service accruals. To calculate annual pension costs, we use the following key variables: (1) size of the employee population, length of service and estimated compensation increases; (2) actuarial assumptions and estimates; (3) expected long-term rate of return on plan assets; and (4) discount rate.
Pension and postretirement benefit plan obligations, net of pension plan assets, were $93.5 million as of June 30, 2023, a nominal decrease from December 31, 2022. This decrease was primarily due to payments of $4.2 million, offset by net periodic benefit costs for the six months ended June 30, 2023 of $3.8 million.
See “Note 16. Noninterest Income and Noninterest Expense” contained in our unaudited interim consolidated financial statements for more information on our pension and postretirement benefit plans.
The bank regulators currently use a combination of risk-based ratios and a leverage ratio to evaluate capital adequacy. The Company and the Bank are subject to the federal bank regulators’ final rules implementing Basel III and various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Capital Rules”).
The Capital Rules, among other things impose a capital measure called CET1, to which most deductions/adjustments to regulatory capital must be made. In addition, the Capital Rules specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain specified requirements.
Under the Capital Rules, the minimum capital ratios are as follows:
The Capital Rules also require a 2.5% capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is composed entirely of CET1, on top of these minimum risk weighted asset ratios, effectively resulting in minimum ratios of (i) 7% CET1 to risk-weighted assets, (ii) 8.5% Tier 1 capital to risk-weighted assets, and (iii) 10.5% total capital to risk-weighted assets.
As of June 30, 2023, 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 27 below. There have been no conditions or events since June 30, 2023 that management believes have changed either the Company’s or the Bank’s capital classifications. CET1 was 12.05% as of June 30, 2023, an increase of 23 basis points from December 31, 2022. The increase in CET1 was primarily due to earnings for the six months ended June 30, 2023, partially offset by the dividends declared and paid to the Company’s stockholders and an increase in risk-weighted assets driven by an increase in loans and leases.
Regulatory Capital
Table 27
Less:
Common Equity Tier 1 Capital and Tier 1 Capital
Add:
Qualifying allowance for credit losses and reserve for unfunded commitments
Total Capital
Risk-Weighted Assets
16,408,132
16,182,743
Key Regulatory Capital Ratios
Total stockholders’ equity was $2.4 billion as of June 30, 2023, an increase of $90.7 million or 4% from December 31, 2022. The increase in stockholders’ equity was primarily due to earnings for the period of $129.3 million, net unrealized gains in our investment securities portfolio, net of tax, of $26.2 million, partially offset by dividends declared and paid to the Company’s stockholders of $66.3 million during the six months ended June 30, 2023.
In January 2023, the Company announced a stock repurchase program for up to $40.0 million of its outstanding common stock during 2023. The Company has not repurchased any common stock outstanding under this stock repurchase program during the six months ended June 30, 2023 and, as a result, $40.0 million remained of the $40.0 million total repurchase amount authorized under the stock repurchase program for 2023 as of June 30, 2023. The timing and exact amount of stock repurchases, if any, will be subject to management’s discretion and various factors, including the Company’s capital position and financial performance, as well as market conditions. The stock repurchase program may be suspended, terminated or modified at any time for any reason.
In July 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.26 per share on our outstanding shares. The dividend will be paid on September 1, 2023 to shareholders of record at the close of business on August 21, 2023.
Future Application of Accounting Pronouncements
For a discussion of the expected impact of accounting pronouncements recently issued but not adopted by us as of June 30, 2023, see “Note 1. Organization and Basis of Presentation — Recent Accounting Pronouncements” to the unaudited interim consolidated financial statements for more information.
Risk Governance and Quantitative and Qualitative Disclosures About Market Risk
Managing risk is an essential part of successfully operating our business. Management believes that the most prominent risk exposures for the Company are credit risk, market risk, liquidity risk management, capital management and operational risk. See “Analysis of Financial Condition — Liquidity and Capital Resources” and “—Capital” sections of this MD&A for further discussions of liquidity risk management and capital management, respectively.
Credit Risk
Credit risk is the risk that borrowers or counterparties will be unable or unwilling to repay their obligations in accordance with the underlying contractual terms. We manage and control credit risk in the loan and lease portfolio by adhering to well-defined underwriting criteria and account administration standards established by management. Written credit policies document underwriting standards, approval levels, exposure limits and other limits or standards deemed necessary and prudent. Portfolio diversification at the obligor, industry, product, and/or geographic location levels is actively managed to mitigate concentration risk. In addition, credit risk management includes an independent credit review process that assesses compliance with commercial, real estate and consumer credit policies, risk ratings and other critical credit information. In addition to implementing risk management practices that are based upon established and sound lending practices, we adhere to sound credit principles. 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 ACL: commercial, residential and consumer.
Commercial lending is further categorized into four distinct classes based on characteristics relating to the borrower, transaction and collateral. These classes are: commercial and industrial, commercial real estate, construction and lease financing. Commercial and industrial loans are primarily for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes by medium to larger Hawaii based corporations, as well as U.S. mainland and international companies. Commercial and industrial loans are typically secured by non-real estate assets whereby the collateral is trading assets, enterprise value or inventory. As with many of our customers, our commercial and industrial loan customers are heavily dependent on tourism, government expenditures and real estate values. Commercial real estate loans are secured by real estate, including but not limited to structures and facilities to support activities designated as retail, health care, general office space, warehouse and industrial space. Our Bank’s underwriting policy generally requires that net cash flows from the property be sufficient to service the debt while still maintaining an appropriate amount of reserves. Commercial real estate loans in Hawaii are characterized by having a limited supply of real estate at commercially attractive locations, long delivery time frames for development and high interest rate sensitivity. 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. 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. Market feasibility analysis is typically performed by assessing market comparables, market conditions and demand in the specific lending area and general community. We require presales of finished inventory prior to loan funding. However, because this analysis is typically performed on a forward looking basis, real estate construction projects typically present a higher risk profile in our lending activities. Lease financing activities include commercial single investor leases and leveraged leases used to purchase items ranging from computer equipment to transportation equipment. Underwriting of new leasing arrangements typically includes analyzing customer cash flows, evaluating secondary sources of repayment, such as the value of the leased asset, the guarantors’ net cash flows as well as other credit enhancements provided by the lessee.
90
Residential lending is further categorized into the following classes: residential mortgages (loans secured by 1-4 family residential properties and home equity loans) and home equity lines of credit. Our Bank’s underwriting standards typically require LTV ratios of not more than 80%, although higher levels are permitted with accompanying mortgage insurance. First mortgage loans secured by residential properties generally carry a moderate level of credit risk, with an average loan size of approximately $395,000. Residential mortgage loan production is added to our loan portfolio or is sold in the secondary market, based on management’s evaluation of our liquidity, capital and loan portfolio mix as well as market conditions. Changes in interest rates, the economic environment and other market factors have impacted, and will likely continue to impact, the marketability and value of collateral and the financial condition of our borrowers which impacts the level of credit risk inherent in this portfolio, although we remain in a supply constrained housing environment in Hawaii. Geographic concentrations exist for this portfolio as nearly all residential mortgage loans and home equity lines of credit are for residences located in Hawaii, Guam or Saipan. These island locales are susceptible to a wide array of potential natural disasters including, but not limited to, hurricanes, floods, tsunamis and earthquakes. We offer home equity lines of credit with variable rates; fixed rate lock options may be available post-closing. All lines are underwritten at 2% over the fully indexed rate. Our procedures for underwriting home equity lines of credit include an assessment of an applicant’s overall financial capacity and repayment ability. Decisions are primarily based on repayment ability via debt-to-income ratios, LTV ratios and an evaluation of credit history.
Consumer lending is further categorized into the following classes of loans: credit cards, automobile loans and other consumer-related installment loans. Consumer loans are either unsecured or secured by the borrower’s personal assets. The average loan size is generally small, and risk is diversified among many borrowers. We offer a wide array of credit cards for business and personal use. In general, our customers are attracted to our credit card offerings on the basis of price, credit limit, reward programs and other product features. Credit card underwriting decisions are generally based on repayment ability of our borrower via DTI ratios, credit bureau information, including payment history, debt burden and credit scores, such as FICO, and analysis of financial capacity. Automobile lending activities include loans and leases secured by new or used automobiles. We originate the majority of our automobile loans and leases on an indirect basis through selected dealerships. Our procedures for underwriting automobile loans include an assessment of an applicant’s overall financial capacity and repayment ability, credit history and the ability to meet existing obligations and payments on the proposed loan or lease. Although an applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the collateral security to the proposed loan amount. We require borrowers to maintain full coverage automobile insurance on automobile loans and leases, with the Bank listed as either the loss payee or additional insured. Installment loans consist of open and closed end facilities for personal and household purchases. We seek to maintain reasonable levels of risk in installment lending by following prudent underwriting guidelines which include an evaluation of personal credit history and cash flow.
Market Risk
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. When the value of an instrument is tied to such external factors, the holder faces market risk. We are exposed to market risk primarily from interest rate risk, which is defined as the risk of loss of net interest income or net interest margin because of changes in interest rates.
The potential cash flows, sales or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates. In the banking industry, changes in interest rates can significantly impact earnings and the safety and soundness of an entity.
Interest rate risk arises primarily from our core business activities of extending loans and accepting deposits. This occurs when our interest earning loans and interest-bearing deposits mature or reprice at different times, on a different basis or in unequal amounts. Interest rates may also affect loan demand, credit losses, mortgage origination volume, pre- payment speeds and other items affecting earnings.
Many factors affect our exposure to changes in interest rates, such as general economic and financial conditions, customer preferences, historical pricing relationships and repricing characteristics of financial instruments. Our earnings are affected not only by general economic conditions, but also by the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve. The monetary policies of the Federal Reserve can influence the overall growth of loans, investment securities and deposits and the level of interest rates earned on assets and paid for liabilities.
Market Risk Measurement
We primarily use net interest income simulation analysis to measure and analyze interest rate risk. We run various hypothetical interest rate scenarios and compare these results against a measured base case scenario. Our net interest income simulation analysis incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results. These assumptions include: (1) the timing of changes in interest rates, (2) shifts or rotations in the yield curve, (3) re-pricing characteristics for market rate sensitive instruments on and off-balance sheet, (4) differing sensitivities of financial instruments due to differing underlying rate indices and (5) varying loan prepayment speeds for different interest rate scenarios. 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 28 presents, for the twelve months subsequent to June 30, 2023 and December 31, 2022, an estimate of the changes in net interest income that would result from ramps (gradual changes) and shocks (immediate changes) in market interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario. Ramp scenarios assume interest rates move gradually in parallel across the yield curve relative to the base case scenario. Shock scenarios assume an immediate and sustained parallel shift in interest rates across the entire yield curve, relative to the base case scenario. The base case scenario assumes that the balance sheet and interest rates are generally unchanged. We evaluate the sensitivity by using a static forecast, where the balance sheets as of June 30, 2023 and December 31, 2022 are held constant.
Net Interest Income Sensitivity Profile - Estimated Percentage Change Over 12 Months
Table 28
Static Forecast
Gradual Change in Interest Rates (basis points)
+100
+50
1.6
(50)
(1.7)
(100)
Immediate Change in Interest Rates (basis points)
(3.1)
(6.1)
(6.3)
The table above shows the effects of a simulation which estimates the effect of a gradual and immediate sustained parallel shift in the yield curve of −100, −50, +50 and +100 basis points in market interest rates over a twelve-month period on our net interest income.
Currently, our interest rate profile, assuming a constant balance sheet, 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. Other factors such as changes in balance sheet composition or deposit rate behavior could result in a change in repricing sensitivity.
Under the static balance sheet forecast as of June 30, 2023, our net interest income sensitivity profile is relatively unchanged in higher and lower interest rate scenarios compared to similar forecasts as of December 31, 2022. The sensitivity outcomes described above are primarily due to the impact of holding a similar asset repricing balance as of June 30, 2023 as compared with December 31, 2022.
The comparisons above provide insight into the potential effects of changes in interest rates on net interest income. The Company believes that its approach to interest rate risk has appropriately considered its susceptibility to both rising and falling rates and has adopted strategies which minimize the impact of such risks.
We also have longer term interest rate risk exposures which may not be appropriately measured by net interest income simulation analysis. We use market value of equity (“MVE”) sensitivity analysis to study the impact of long-term cash flows on earnings and capital. MVE involves discounting present values of all cash flows of on-balance sheet and off-balance sheet items under different interest rate scenarios. The discounted present value of all cash flows represents our MVE. MVE analysis requires modifying the expected cash flows in each interest rate scenario, which will impact the discounted present value. The amount of base case measurement and its sensitivity to shifts in the yield curve allow management to measure longer term repricing option risk in the balance sheet.
Limitations of Market Risk Measures
The results of our simulation analyses are hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from those projected, our net interest income might vary significantly. Non parallel yield curve shifts such as a flattening or steepening of the yield curve or changes in interest rate spreads would also cause our net interest income to be different from that depicted. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term liabilities re-price faster than expected or faster than our assets re-price. Actual results could differ from those projected if we grow assets and liabilities faster or slower than estimated if we experience a net outflow of deposits or if our mix of assets and liabilities otherwise changes. For example, while we maintain relatively high levels of liquidity, a faster than expected withdrawal of deposits out of the bank may cause us to seek higher cost sources of funding. Actual results could also differ from those projected if we experience substantially different prepayment speeds in our loan portfolio than those assumed in the simulation analyses. Finally, these simulation results do not consider all the actions that we may undertake in response to potential or actual changes in interest rates, such as changes to our loan, investment, deposit, funding or hedging strategies.
Market Risk Governance
We seek to achieve consistent growth in net interest income and capital while managing volatility arising from changes in market interest rates. The objective of our interest rate risk management process is to increase net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.
To manage the impact on net interest income, we manage our exposure to changes in interest rates through our asset and liability management activities within guidelines established by our ALCO and approved by our board of directors. The ALCO has the responsibility for approving and ensuring compliance with the ALCO management policies, including interest rate risk exposures. The objective of our interest rate risk management process is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.
Through review and oversight by the ALCO, we attempt to engage in strategies that neutralize interest rate risk as much as possible. Our use of derivative financial instruments, as detailed in “Note 12. Derivative Financial Instruments” to the unaudited interim consolidated financial statements, has generally been limited. This is due to natural on balance sheet hedges arising out of offsetting interest rate exposures from loans and investment securities with deposits and other interest-bearing liabilities. In particular, the investment securities portfolio is utilized to manage the interest rate exposure and sensitivity to within the guidelines and limits established by the ALCO. We utilize natural and offsetting economic hedges in an effort to reduce the need to employ off-balance sheet derivative financial instruments to hedge interest rate risk exposures. Expected movements in interest rates are also considered in managing interest rate risk. Thus, as interest rates change, we may use different techniques to manage interest rate risk.
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.
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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. According to the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, U.S. Dollar LIBOR settings have ceased to be provided or ceased to be representative after June 30, 2023. The publication of all other LIBOR settings ceased to be provided or ceased to be representative as of December 31, 2021. We transitioned our financial instruments associated to LIBOR currencies and tenors that ceased or became nonrepresentative on December 31, 2021, to alternative reference rates (collectively, “Alternative Rates”), with limited exceptions. As such, effective December 31, 2021, we have ceased the use of U.S Dollar LIBOR as a reference rate on all new contracts and continue to increase the usage of Alternative Rates such as the Secured Overnight Financing Rate (“SOFR”). A working group of key stakeholders from throughout the Company has been working to spearhead the transition from LIBOR to Alternative Rates. There are risks inherent with the transition to any Alternative Rate as the rate may behave differently than LIBOR in reaction to monetary, market and economic events.
Our LIBOR transition plan included work 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. We have already implemented certain Prime Rate, SOFR and BSBY conventions as we transitioned our products and transaction agreements to reference rates other than LIBOR. Commercial loans and investment securities will be transitioned to SOFR rates at the first reset date post June 30, 2023 and expected to fully transition off LIBOR before the end of the third quarter in 2023. Residential mortgages with adjustable rates will also transition to SOFR at the first reset date post June 30, 2023 but will fully transition off LIBOR during the fourth quarter of 2024 as resets occur six months prior to the effective date for terms up to 12 months. To see the recorded investment in our loan and lease portfolio by rate type, refer to Table 15 in the section titled “Loans and Leases” in this MD&A.
For a further discussion of the various risks the Company faces in connection with the expected replacement of LIBOR on its operations, see “Risk Factors—Market Risks—Certain of our businesses, our funding and financial products may be adversely affected by changes or the discontinuance of LIBOR” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023.
Operational Risk
Operational risk is the risk of loss arising from inadequate or failed processes, people or systems, external events (such as natural disasters), or compliance, reputational or legal matters, including the risk of loss resulting from fraud, litigation and breaches in data security. Operational risk is inherent in all of our business ventures and the management of that risk is important to the achievement of our objectives. We have a framework in place that includes the reporting and assessment of any operational risk events, and the assessment of our mitigating strategies within our key business lines. This framework is implemented through our policies, processes and reporting requirements. We measure and report operational risk using the seven operational risk event types projected by the Basel Committee on Banking Supervision in Basel II: (1) external fraud; (2) internal fraud; (3) employment practices and workplace safety; (4) clients, products and business practices; (5) damage to physical assets; (6) business disruption and system failures; and (7) execution, delivery and process management. Our operational risk review process is also a core part of our assessment of material new products or activities.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Governance and Quantitative and Qualitative Disclosures About Market Risk.”
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of June 30, 2023. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2023.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company operates in a highly regulated environment. From time to time, the Company is party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels.
ITEM 1A. RISK FACTORS
Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on February 24, 2023 contain a discussion of our risk factors. Except to the extent that additional factual information disclosed in this Quarterly Report on Form 10-Q relates to such risk factors, there are no material changes from the risk factors as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.
ITEM 5. OTHER INFORMATION
During the three months ended June 30, 2023, none of the Company’s directors or officers (as defined in Rule 16a-1(f) under the Exchange Act) adopted or terminated any contract, instruction or written plan for the purchase or sale of the Company’s securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement,” as defined in Item 408(c) of Regulation S-K.
ITEM 6. EXHIBITS
A list of exhibits to this Form 10-Q is set forth on the Exhibit Index and is incorporated herein by reference.
Exhibit Number
10.1
Separation Agreement, between Ralph M. Mesick, First Hawaiian, Inc. and First Hawaiian Bank, dated June 28, 2023.
Separation Agreement, between Lance A. Mizumoto, First Hawaiian, Inc. and First Hawaiian Bank, dated June 28, 2023.
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Amended, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Amended, Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
104
Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 7, 2023
By:
/s/ Robert S. Harrison
Robert S. Harrison
Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer)
/s/ James M. Moses
James M. Moses
Vice Chairman and Chief Financial Officer