# Bank of Hawaii Corp: Form 10-Q for the period ended Jun 30, 2023

- Company: [Bank of Hawaii Corp](/companies/boh.md) (CIK 46195)
- Form: 10-Q
- Filed: 2023-07-25
- Accepted by EDGAR: Jul 24, 2023, 21:46 ET
- Period: 2023-06-30
- Accession: 0000950170-23-034192
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/46195/000095017023034192/boh-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/46195/000095017023034192/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-04-01 to 2023-06-30 | $75.4m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-01-01 to 2023-06-30 | $127.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $15.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $30.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $46.1m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $92.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $1.12 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $2.26 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $1.12 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $2.27 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 39,317,521 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 39,382,359 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | −$19.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $5.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2023-01-01 to 2023-06-30 | $55.9m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2023-01-01 to 2023-06-30 | $13.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-06-30 | $1.67bn | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-06-30 | $24.95bn | us-gaap:Assets |
| Total liabilities | at 2023-06-30 | $23.59bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-06-30 | $1.36bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 83,671 characters.

The following MD&A is intended to help the reader understand the Company and its operations and is focused on our fiscal 2023 financial results, including comparisons of year-to-year performance, trends, and updates from the Company’s most recent 10-K filing. Discussion and analysis of our 2022 fiscal year, as well as the year-to-year comparison between fiscal 2022 and 2021, are included "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed with the SEC on March 1, 2023.

### Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts and may include statements concerning, among other things, the anticipated economic and business environment in our service area and elsewhere, credit quality and other financial and business matters in future periods, our future results of operations and financial position, our business strategy and plans and our objectives and future operations. We also may make forward-looking statements in our other documents filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”). In addition, our senior management may provide forward-looking statements orally to analysts, investors, representatives of the media and others. Our forward-looking statements are based on numerous assumptions, any of which could prove to be inaccurate, and actual results may differ materially from those projected because of a variety of risks and uncertainties, including, but not limited to: 1) general economic conditions either nationally, internationally, or locally may be different than expected, and particularly, any event that negatively impacts the tourism industry in Hawaii; 2) the lingering effects of the COVID-19 pandemic, including reduced tourism in Hawaii, volatility in the international and national economy and credit markets, inflation, worker absenteeism, quarantines or other travel or health-related restrictions, and the effect of government, business and individual actions intended to mitigate the effects of the COVID-19 pandemic; 3) changes in market interest rates that may affect credit markets and our ability to maintain our net interest margin; 4) disruptions, instability and failures in the banking industry; 5) inflationary pressures including Federal Reserve interest rate hikes; 6) the effect of potential recessionary conditions; 7) changes in our credit quality or risk profile that may increase or decrease the required level of our reserve for credit losses; 8) the impact of legislative and regulatory initiatives, particularly the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018; 9) changes to the amount and timing of proposed common stock repurchases; 10) unanticipated changes in the securities markets, public debt markets, and other capital markets in the U.S. and internationally, including, without limitation, the elimination of the London Interbank Offered Rate (“LIBOR”) as a benchmark interest rate; 11) changes in fiscal and monetary policies of the markets in which we operate; 12) the increased cost of maintaining or the Company’s ability to maintain adequate liquidity and capital, based on the requirements adopted by the Basel Committee on Banking Supervision and U.S. regulators; 13) changes in accounting standards; 14) changes in tax laws or regulations, including Public Law 115-97, commonly known as the Tax Cuts and Jobs Act, or the interpretation of such laws and regulations; 15) any failure in or breach of our operational systems, information systems or infrastructure, or those of our merchants, third party vendors and other service providers; 16) any interruption or breach of security of our information systems resulting in failures or disruptions in customer account management, general ledger processing, and loan or deposit systems; 17) natural disasters, public unrest or adverse weather, public health, disease outbreaks, and other conditions impacting us and our customers’ operations or negatively impacting the tourism industry in Hawaii; 18) competitive pressures in the markets for financial services and products; 19) actual or alleged conduct which could harm our reputation; and 20) the impact of litigation and regulatory investigations of the Company, including costs, expenses, settlements, and judgments. Given these risks and uncertainties, investors should not place undue reliance on any forward-looking statement as a prediction of our actual results. A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included under the section entitled “Risk Factors” in Part II of this report. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. We undertake no obligation to update forward-looking statements to reflect later events or circumstances, except as may be required by law.

For the reasons described above, we caution you against relying on any forward-looking statements. You should not consider any list of such factors to be an exhaustive statement of all of the risks, uncertainties, or potentially inaccurate assumptions that could cause our current expectations or beliefs to change. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by the federal securities laws.

### Investor Announcements

Investors and others should note that the Company intends to announce financial and other information to the Company’s investors using the Company’s investor relations website at https://ir.boh.com, social media channels, press releases, SEC filings and public conference calls and webcasts, all for purposes of complying with the Company’s disclosure obligations under Regulation FD. Accordingly, investors should monitor these channels, as information is updated and new information is posted.

### Critical Accounting Policies

Our Consolidated Financial Statements were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the industries in which we operate. The significant accounting policies we follow are presented in Note 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the Consolidated Financial Statements. These factors include among other things, whether the policy requires management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. The accounting policies which we believe to be most critical in preparing our Consolidated Financial Statements are presented in the section titled “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes in the Company’s application of critical accounting policies since December 31, 2022.

### Overview

We are a regional financial services company serving businesses, consumers, and governments in Hawaii, Guam, and other Pacific Islands. Our principal operating subsidiary, the Bank, was founded in 1897.

Our business strategy is to use our unique market knowledge, prudent management discipline and brand strength to deliver exceptional value to our stakeholders. Our business plan is balanced between growth and risk management while maintaining flexibility to adjust to economic changes. We will continue to focus on providing customers with best-in-class service and an innovative mix of products and services. We will also remain focused on continuing to deliver strong financial results while maintaining prudent risk and capital management strategies as well as our commitment to support our local communities.

#### Hawaii Economy

Hawaii’s visitor industry continues to perform well despite the delayed recovery in international visitors from Japan, with activity only slightly below pre-pandemic levels. The economy is also benefitting from a strong construction industry due to a high level of public sector projects which is expected to continue, and will help to support the impact of continuing high interest rates and a slowing U.S. economy. Hawaii’s unemployment rate was 3.0% in June 2023, which was below the U.S. unemployment rate of 3.6%.

For the first six months of 2023, the median price of single-family home sales and condominium sales on Oahu changed by -5.5% and -2.9%, respectively, compared to the same period in 2022. The volume of single-family home sales and condominiums sales on Oahu decreased 34.6% and 35.8%, respectively, for the first six months of 2023 compared with the same period in 2022. Despite these declines in the median price of single-family home sales and sales volume, as of June 30, 2023, inventory of single-family homes and condominiums on Oahu continues to remain low at 2.6 months and 2.8 months, respectively.

#### Earnings Summary

Net income for the second quarter of 2023 was $46.1 million, a decrease of $10.8 million or 19% compared to the same period in 2022. Diluted earnings per common share was $1.12 for the second quarter of 2023, a decrease of $0.26 or 19% compared to the same period in 2022.

- The return on average common equity for the second quarter of 2023 was 14.95% compared with 18.19% in the same period in 2022.
- Net interest income for the second quarter of 2023 was $124.3 million, a decrease of -6% from the same period in 2022. Net interest margin was 2.22% in the second quarter of 2023, a decrease of 25 basis points from the same period in 2022. The decrease in the net interest margin compared to the prior year was due to the higher funding costs and increased liquidity, partially offset by higher earning asset yields.
- The provision for credit losses was $2.5 million for the second quarter of 2023 compared with a net benefit of $2.5 million in the same period in 2022.
- Noninterest income was $43.3 million in the second quarter of 2023, an increase of 2.6% from the same period in 2022, primarily due to $1.5 million from the sale of a low-income housing tax credit investment in the second quarter of 2023.
- Noninterest expense was $104.0 million in the second quarter of 2023, an increase of 1% compared to the same period in 2022, primarily due to higher FDIC insurance expenses of $1.6 million.
- The effective tax rate for the second quarter of 2023 was 24.57% compared with 23.80% in the same period in 2022.
- Total non-performing assets were $11.5 million at June 30, 2023, a decrease of $4.0 million or -26% compared to June 30, 2022. Non-performing assets as percentage of total loans and leases and foreclosed real estate were 0.08% at June 30, 2023, a decrease of 4 basis points compared to June 30, 2022.
- Net loan and lease charge-offs during the second quarter of 2023 were $1.4 million or 0.04% annualized of total average loans and leases outstanding, comprised of charge-offs of $3.5 million partially offset by recoveries of $2.1 million. Compared to the second quarter of 2022, net loan and lease charge-offs increased by $0.7 million or 2 basis points annualized on total average loans and leases outstanding.
- The allowance for credit losses on loans and leases was $145.4 million at June 30, 2023, a decrease of $3.1 million from June 30, 2022. The ratio of the allowance for credit losses to total loans and leases outstanding was 1.04% at the end of the quarter, a decrease of 11 basis points from the end of the same period in 2022.

We maintained a strong balance sheet during the second quarter of 2023, with what we believe are appropriate reserves for credit losses and high levels of liquidity and capital.

- Total assets increased to $24.9 billion at June 30, 2023, an increase of 7.4% from December 31, 2022.
- The investment securities portfolio was $7.9 billion at June 30, 2023, a decrease of 4.9% from December 31, 2022. The portfolio remains largely comprised of securities issued by U.S. government agencies and U.S. government-sponsored enterprises.
- Total loans and leases were $13.9 billion at June 30, 2023, an increase of 2.0% from December 31, 2022, primarily due to growth in commercial and industrial, commercial mortgage, residential mortgage, and home equity loans.
- Total deposits were $20.5 billion at June 30, 2023, a decrease of 0.5% from December 31, 2022.
- No shares of common stock were repurchased under the share repurchase program in the second quarter of 2023. Total remaining buyback authority under the share repurchase program was $126.0 million at June 30, 2023.
- Cash dividends of $55.9 million on common shares, and $3.9 million on preferred shares, were distributed during the first six months of 2023.

### Analysis of Statements of Income

Average balances, related income and expenses, and resulting yields and rates are presented in Table 1. An analysis of the change in net interest income, on a taxable-equivalent basis, is presented in Table 2.

*(dollars in millions)*

| Average Balances and Interest Rates - Taxable-Equivalent Basis Earning Assets | Three Months Ended June 30, 2023 Average Balance | Income/ Expense | Yield/ Rate | Three Months Ended June 30, 2022 Average Balance | Income/ Expense | Yield/ Rate | Six Months Ended June 30, 2023 Average Balance | Income/ Expense | Yield/ Rate | Six Months Ended June 30, 2022 Average Balance | Table 1 Income/ Expense | Yield/ Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-Bearing Deposits in Other Banks | $5.1 | $— | 1.48% | $3.5 | $— | 0.59% | $3.4 | $— | 2.68% | $3.5 | $— | 0.52% |
| Funds Sold | 500.1 | 6.4 | 5.06 | 273.5 | 0.7 | 1.04 | 398.6 | 9.8 | 4.87 | 256.1 | 0.8 | 0.66 |
| Investment Securities |  |  |  |  |  |  |  |  |  |  |  |  |
| Available-for-Sale |  |  |  |  |  |  |  |  |  |  |  |  |
| Taxable | 2,741.1 | 23.2 | 3.39 | 4,123.1 | 18.0 | 1.74 | 2,780.4 | 47.0 | 3.40 | 4,260.6 | 35.1 | 1.65 |
| Non-Taxable | 9.6 | 0.1 | 4.40 | 2.9 | — | 1.99 | 9.6 | 0.2 | 4.39 | 3.0 | — | 1.96 |
| Held-to-Maturity |  |  | — |  |  |  |  |  |  |  |  |  |
| Taxable | 5,231.3 | 23.2 | 1.78 | 4,377.0 | 18.7 | 1.71 | 5,283.6 | 47.0 | 1.78 | 4,471.7 | 37.2 | 1.67 |
| Non-Taxable | 35.2 | 0.2 | 2.10 | 35.7 | 0.2 | 2.10 | 35.2 | 0.4 | 2.10 | 35.8 | 0.4 | 2.10 |
| Total Investment Securities | 8,017.2 | 46.7 | 2.33 | 8,538.7 | 36.9 | 1.73 | 8,108.8 | 94.6 | 2.34 | 8,771.1 | 72.7 | 1.66 |
| Loans Held for Sale | 2.7 | 0.0 | 5.50 | 6.3 | 0.1 | 4.06 | 2.1 | 0.1 | 5.42 | 10.0 | 0.2 | 3.19 |
| Loans and Leases 1 |  |  |  |  |  |  |  |  |  |  |  |  |
| Commercial and Industrial | 1,456.1 | 17.5 | 4.82 | 1,330.0 | 9.9 | 2.99 | 1,433.8 | 33.8 | 4.75 | 1,331.5 | 18.9 | 2.86 |
| Paycheck Protection Program | 14.5 | — | 1.30 | 38.7 | 0.5 | 5.26 | 15.7 | 0.1 | 1.86 | 63.7 | 2.3 | 7.39 |
| Commercial Mortgage | 3,814.9 | 49.3 | 5.19 | 3,357.2 | 26.2 | 3.13 | 3,776.2 | 94.5 | 5.04 | 3,258.5 | 48.0 | 2.97 |
| Construction | 246.8 | 3.5 | 5.70 | 222.6 | 2.4 | 4.39 | 263.5 | 7.4 | 5.68 | 225.1 | 4.5 | 4.03 |
| Commercial Lease Financing | 65.4 | 0.3 | 1.67 | 94.2 | 0.3 | 1.44 | 66.1 | 0.3 | 0.76 | 96.5 | 0.7 | 1.44 |
| Residential Mortgage | 4,704.0 | 41.2 | 3.50 | 4,445.7 | 36.4 | 3.26 | 4,685.2 | 81.0 | 3.46 | 4,394.8 | 71.2 | 3.24 |
| Home Equity | 2,272.3 | 19.0 | 3.35 | 2,032.9 | 14.4 | 2.85 | 2,255.9 | 37.2 | 3.33 | 1,966.3 | 27.7 | 2.84 |
| Automobile | 879.3 | 7.7 | 3.53 | 759.1 | 6.1 | 3.20 | 875.6 | 15.0 | 3.45 | 748.3 | 11.9 | 3.22 |
| Other 2 | 423.5 | 6.4 | 6.04 | 420.4 | 5.6 | 5.38 | 425.6 | 12.5 | 5.94 | 412.1 | 11.1 | 5.42 |
| Total Loans and Leases | 13,876.8 | 144.9 | 4.19 | 12,700.8 | 101.8 | 3.21 | 13,797.6 | 281.8 | 4.11 | 12,496.8 | 196.3 | 3.16 |
| Other | 94.8 | 2.2 | 8.94 | 38.1 | 0.3 | 3.70 | 81.00 | 2.7 | 6.70 | 37.4 | 0.6 | 2.97 |
| **Total Earning Assets 3** | 22,496.7 | 200.2 | 3.56 | 21,560.9 | 139.8 | 2.60 | 22,391.5 | 389.0 | 3.49 | 21,574.9 | 270.6 | 2.52 |
| Cash and Due From Banks | 316.6 |  |  | 238.4 |  |  | 317.8 |  |  | 235.8 |  |  |
| Other Assets | 1,301.1 |  |  | 1,091.9 |  |  | 1,281.3 |  |  | 1,058.8 |  |  |
| Total Assets | $24,114.4 |  |  | $22,891.2 |  |  | $23,990.6 |  |  | $22,869.5 |  |  |
| **Interest-Bearing Liabilities** |  |  |  |  |  |  |  |  |  |  |  |  |
| Interest-Bearing Deposits |  |  |  |  |  |  |  |  |  |  |  |  |
| Demand | $4,037.4 | $7.5 | 0.75% | $4,442.2 | $0.7 | 0.06% | $4,126.2 | $12.7 | 0.62% | $4,548.2 | $1.2 | 0.05% |
| Savings | 7,667.6 | 26.6 | 1.39 | 7,692.8 | 1.9 | 0.10 | 7,837.3 | 47.2 | 1.21 | 7,617.1 | 2.9 | 0.08 |
| Time | 2,296.1 | 19.7 | 3.44 | 950.4 | 0.9 | 0.40 | 2,044.4 | 31.7 | 3.12 | 960.9 | 1.8 | 0.37 |
| Total Interest-Bearing Deposits | 14,001.1 | 53.8 | 1.54 | 13,085.4 | 3.5 | 0.11 | 14,007.9 | 91.6 | 1.32 | 13,126.2 | 5.9 | 0.09 |
| Funds Purchased | 14.6 | 0.2 | 5.00 | 25.3 | — | 0.89 | 37.4 | 0.9 | 4.72 | 16.2 | 0.1 | 0.72 |
| Short-Term Borrowings | 195.2 | 2.5 | 5.09 | 34.5 | 0.1 | 1.06 | 229.9 | 5.7 | 4.94 | 17.3 | 0.1 | 1.06 |
| Securities Sold Under Agreements to Repurchase | 725.5 | 5.4 | 2.96 | 447.7 | 2.8 | 2.47 | 725.5 | 10.8 | 2.96 | 449.1 | 5.6 | 2.47 |
| Other Debt | 1,255.8 | 13.5 | 4.31 | 10.4 | 0.3 | 7.05 | 879.8 | 18.7 | 4.31 | 10.4 | 0.3 | 7.05 |
| **Total Interest-Bearing Liabilities** | 16,192.2 | 75.4 | 1.87 | 13,603.3 | 6.7 | 0.20 | 15,880.5 | 127.7 | 1.62 | 13,619.2 | 12.0 | 0.18 |
| Net Interest Income |  | $124.8 |  |  | $133.1 |  |  | $261.3 |  |  | $258.6 |  |
| Interest Rate Spread |  |  | 1.69% |  |  | 2.40% |  |  | 1.87% |  |  | 2.34% |
| Net Interest Margin |  |  | 2.22% |  |  | 2.47% |  |  | 2.34% |  |  | 2.41% |
| Noninterest-Bearing Demand Deposits | 6,017.5 |  |  | 7,484.0 |  |  | 6,215.7 |  |  | 7,371.9 |  |  |
| Other Liabilities | 541.6 |  |  | 413.3 |  |  | 546.3 |  |  | 399.2 |  |  |
| Shareholders’ Equity | 1,363.1 |  |  | 1,390.7 |  |  | 1,348.1 |  |  | 1,479.2 |  |  |
| **Total Liabilities and Shareholders’ Equity** | $24,114.4 |  |  | $22,891.3 |  |  | $23,990.6 |  |  | $22,869.5 |  |  |

1Non-performing loans and leases are included in the respective average loan and lease balances. Income, if any, on such loans and leases is recognized on a cash basis.

2Comprised of other consumer revolving credit, installment, and consumer lease financing.

3Interest income includes taxable-equivalent basis adjustments, based upon a federal statutory tax rate of 21%, of $0.5 million and $1.0 million for the three and six months ended June 30, 2023, and $0.2 million and $0.5 for the three and six months ended June 30, 2022.

*(dollars in millions)*

| Analysis of Change in Net Interest Income - Taxable-Equivalent Basis Change in Interest Income: | Six Months Ended June 30, 2023 Compared to June 30, 2022 Volume 1 | Rate 1 | Table 2 Total |
| --- | ---: | ---: | ---: |
| Funds Sold | $0.8 | $8.2 | $9.0 |
| Investment Securities |  |  |  |
| Available-for-Sale |  |  |  |
| Taxable | (15.4) | 27.3 | 11.9 |
| Non-Taxable | 0.1 | 0.1 | 0.2 |
| Held-to-Maturity |  |  |  |
| Taxable | 7.1 | 2.7 | 9.8 |
| Non-Taxable | — | — | - |
| Total Investment Securities | (8.2) | 30.1 | 21.9 |
| Loans Held for Sale | (0.2) | 0.1 | (0.1) |
| Loans and Leases |  |  |  |
| Commercial and Industrial | 1.6 | 13.3 | 14.9 |
| Paycheck Protection Program | (1.1) | (1.1) | (2.2) |
| Commercial Mortgage | 8.6 | 37.9 | 46.5 |
| Construction | 0.9 | 2.0 | 2.9 |
| Commercial Lease Financing | (0.3) | (0.1) | (0.4) |
| Residential Mortgage | 4.8 | 5.0 | 9.8 |
| Home Equity | 4.4 | 5.1 | 9.5 |
| Automobile | 2.2 | 0.9 | 3.1 |
| Other 2 | 0.3 | 1.1 | 1.4 |
| Total Loans and Leases | 21.4 | 64.1 | 85.5 |
| Other | 1.0 | 1.1 | 2.1 |
| **Total Change in Interest Income** | 14.8 | 103.6 | 118.4 |
| **Change in Interest Expense:** |  |  |  |
| Interest-Bearing Deposits |  |  |  |
| Demand | (0.1) | 11.6 | 11.5 |
| Savings | 0.1 | 44.2 | 44.3 |
| Time | 3.9 | 26.0 | 29.9 |
| Total Interest-Bearing Deposits | 3.9 | 81.8 | 85.7 |
| Funds Purchased | 0.2 | 0.6 | 0.8 |
| Short-Term Borrowings | 4.3 | 1.3 | 5.6 |
| Securities Sold Under Agreements to Repurchase | 3.9 | 1.3 | 5.2 |
| Other Debt | 18.6 | (0.2) | 18.4 |
| **Total Change in Interest Expense** | 30.9 | 84.8 | 115.7 |
| **Change in Net Interest Income** | $(16.1) | $18.8 | $2.7 |

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

2Comprised of other consumer revolving credit, installment, and consumer lease financing.

#### Net Interest Income

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

Yields on our earning assets increased by 96 basis points in the second quarter of 2023 and increased by 97 basis points in the first six months of 2023 compared to the same periods in 2022. This is primarily due to the higher rate environment in 2023 compared to the prior year.

Yields on our investment securities portfolio increased by 60 basis points in the second quarter of 2023 and by 68 basis points in the first six months of 2023 compared to the same periods in 2022 due to the higher rate environment and slower prepayments. Yields on funds sold increased by 402 basis points in the second quarter of 2023 and by 421 basis points in the first six months of 2023 compared to the same periods in 2022. Yields on our loan and lease portfolio increased by 98 basis points in the second quarter of 2023 and by 95 basis points in the first six months of 2023 compared to the same periods in 2022 due to an increase in yields on our floating rate loan portfolio and higher rates on loans that originated during the period.

Interest rates paid on our interest-bearing liabilities increased by 167 basis points in the second quarter of 2023 and by 144 basis points in the first six months of 2023 compared to the same periods in 2022. The interest rates on savings deposits increased by 129 basis points in the second quarter of 2023 and by 113 basis points in the first six months of 2023 compared to the same periods in 2022. Interest rates paid on time deposits increased by 304 basis points in the second quarter of 2023 and by 275 basis points in the first six months of 2023 compared to the same periods in 2022. The rates paid on securities sold under agreements to repurchase increased by 49 basis points in the second quarter of 2023 compared to the same period in 2022. Increases to our funding costs are primarily due to the higher interest rate environment and increased Federal Home Loan Bank advances.

The average balance of our earning assets increased by $0.9 billion or 4% in the second quarter of 2023 and by $0.8 billion or 4% in the first six months of 2023 compared to the same periods in 2022 primarily due to an increase in the average balances of our loan portfolio. The average balance of our funds sold increased by $226.6 million or 83% in the second quarter of 2023 and by $142.5 million or 56% in the first six months of 2023 compared to the same periods in 2022. The average balance of our investment securities decreased by $0.5 billion or 6% in the second quarter of 2023 and by $0.7 billion or 8% in the first six months of 2023 compared to the same periods in 2022. The average balance of our loan and lease portfolio increased by $1.2 billion or 9% in the second quarter of 2023 and by 10% in the first six months of 2023 compared to the same periods in 2022. The average balance of our commercial mortgage portfolio increased by $457.7 million or 14% in the second quarter of 2023 and by $517.7 million or 16% in the first six months of 2023 compared to the same periods in 2022 as a result of continued demand from new and existing customers. The average balance of our residential mortgage portfolio increased by $258.3 million or 6% in the second quarter of 2023 and by $290.4 million or 7% in the first six months of 2023 compared to the same period in 2022 primarily due to loan originations partially offset by lower payoff activity. The average balance of our home equity portfolio increased by $239.4 million or 12% in the second quarter of 2023 and by $289.6 million or 15% in the first six months of 2023 compared to the same period in 2022 mainly due to growth driven by ongoing promotions of our SmartRefi program.

The average balances of our interest-bearing liabilities for the three and six months ended June 30, 2023, increased by $2.6 billion or 19% and by $2.3 billion or 17%, respectively, compared to the same periods in 2022 primarily due to increased time deposits, borrowings and securities sold under repurchase agreements. The average balances of our core interest-bearing deposit products for the three months ended June 30, 2023, decreased by $430.0 million or 4% and decreased by $201.8 million or 2% for the six months ended June 30, 2023, compared to the same periods in 2022. The average balances of our interest-bearing deposits for the three and six months ended June 30, 2023, increased by $915.7 million or 7% and by $881.7 million or 7%, respectively, compared to the same periods in 2022. The average balance of our interest-bearing demand deposits for the three and six months ended June 30, 2023, decreased by $404.8 million or 9% and by $422.0 million or 9%, respectively, compared to the same periods in 2022. The average balance of our savings deposits decreased by $25.2 million for the three months ended June 30, 2023, and increased by $220.2 million or 2.9% was relatively unchanged compared to the same 2022 period, and the average balance for the six months ended June 30, 2023, increased by $220.2 million or 3% for the six months ended June 30, 2023, compared to the same period in 2022. The average balance of our time deposits for the three and six months ended June 30, 2023, increased by $1.3 billion or 142% and by $1.1 billion or 113%, respectively, compared to the same periods in 2022.

The average balances of our securities sold under agreements to repurchase for the three and six months ended June 30, 2023, increased by $277.8 million or 62% and by $276.4 million or 62% compared to the same periods in 2022. The increase was due to $300.0 million in repurchase agreements that originated in late 2022. The average balances of our other debt, which was comprised primarily of Federal Home Loan Bank (“FHLB”) advances, increased by $1.2 billion in the second quarter of 2023 and by $869.4 million for the six months ended June 30, 2023, compared to the same periods in 2022, primarily due to FHLB advances totaling $1.25 billion that originated during the current quarter, $100.0 million that originated during the first quarter of 2023, and $400.0 million that originated in the fourth quarter of 2022.

#### Noninterest Income

Table 3 presents the components of noninterest income.

*(dollars in thousands)*

| Noninterest Income | Three Months Ended June 30, 2023 | 2022 | Change | Six Months Ended June 30, 2023 | 2022 | Table 3 Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Trust and Asset Management | $11,215 | $11,457 | $(242) | $21,905 | $22,733 | $(828) |
| Mortgage Banking | 1,176 | 1,247 | (71) | 2,180 | 3,987 | (1,807) |
| Service Charges on Deposit Accounts | 7,587 | 7,309 | 278 | 15,324 | 14,581 | 743 |
| Fees, Exchange, and Other Service Charges | 14,150 | 14,193 | (43) | 27,958 | 27,145 | 813 |
| Investment Securities Gains (Losses), Net | (1,310) | (1,295) | (15) | (3,102) | (2,840) | (262) |
| Annuity and Insurance | 1,038 | 870 | 168 | 2,309 | 1,661 | 648 |
| Bank-Owned Life Insurance | 2,876 | 2,658 | 218 | 5,718 | 5,007 | 711 |
| Other Income | 6,523 | 5,719 | 804 | 11,700 | 13,435 | (1,735) |
| **Total Noninterest Income** | $43,255 | $42,158 | $1,097 | $83,992 | $85,709 | $(1,717) |

Trust and asset management income is comprised of fees earned from the management and administration of trusts and other customer assets. The management fees are largely based upon the market value of the assets and the fee rate charged to customers. Total trust assets under administration were $10.7 billion and $10.2 billion as of June 30, 2023, and June 30, 2022, respectively. Trust and asset management income decreased by $0.8 million or 4% for the first six months of 2023 compared to the same period in 2022 primarily due to a decrease in management and trust fees.

Mortgage banking income is highly influenced by mortgage interest rates, the housing market, and the amount of our loan sales. Mortgage banking income decreased by $1.8 million or 45% for the first six months of 2023 compared to the same period in 2022. This decrease was primarily due to a net valuation allowance recovery to our servicing rights during the first quarter of 2022.

Service charges on deposit accounts increased by $0.7 million or 5% for the first six months of 2023 compared to the same period in 2022. This increase was primarily due to an increase in overdraft fees compared to the same period in 2022.

Fees, exchange, and other service charges are primarily comprised of debit and credit card income, fees from ATMs, merchant service activity, and other loan fees and service charges. Fees, exchange, and other service charges increased by $0.8 million or 3% for the first six months of 2023 compared to the same period in 2022 primarily due to an increase in merchant income as a result of higher transaction volume.

Annuity and insurance income increased by $0.6 million or 39% for the first six months of 2023 compared to the same period in 2022 primarily due to increased fixed annuity and insurance income.

Bank-owned life insurance increased by $0.7 million or 14% for the first six months of 2023 compared to the same period in 2022 primarily due to an increase in death benefits received.

Other noninterest income increased by $0.8 million or 14% in the second quarter and decreased by $1.7 million or 13% for the first six months of 2023 compared to the same periods in 2022. The quarter-to-quarter increase was primarily due to a gain on sale of a low income housing investment, partially offset by a decrease in customer derivative fees. The year-over-year change was primarily due to a decrease in customer derivative fees, partially offset by an increase in income on foreign exchange contracts.

#### Noninterest Expense

Table 4 presents the components of noninterest expense.

*(dollars in thousands)*

| Noninterest Expense | Three Months Ended June 30, 2023 | 2022 | Change | Six Months Ended June 30, 2023 | 2022 | Table 4 Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Salaries | $37,962 | $36,721 | $1,241 | $76,579 | $71,653 | $4,926 |
| Incentive Compensation | 2,984 | 6,073 | (3,089) | 6,981 | 12,184 | (5,203) |
| Share-Based Compensation | 4,096 | 3,962 | 134 | 7,255 | 7,761 | (506) |
| Commission Expense | 775 | 1,232 | (457) | 1,422 | 2,873 | (1,451) |
| Retirement and Other Benefits | 3,489 | 4,036 | (547) | 9,377 | 8,729 | 648 |
| Payroll Taxes | 3,310 | 3,034 | 276 | 9,158 | 7,978 | 1,180 |
| Medical, Dental, and Life Insurance | 3,568 | 2,591 | 977 | 7,432 | 5,825 | 1,607 |
| Separation Expense | (9) | 120 | (129) | 3,059 | 690 | 2,369 |
| Total Salaries and Benefits | 56,175 | 57,769 | (1,594) | 121,263 | 117,693 | 3,570 |
| Net Occupancy | 9,991 | 9,930 | 61 | 19,863 | 19,756 | 107 |
| Net Equipment | 10,573 | 9,543 | 1,030 | 20,948 | 18,696 | 2,252 |
| Data Processing | 4,599 | 4,607 | (8) | 9,182 | 9,167 | 15 |
| Professional Fees | 4,651 | 3,542 | 1,109 | 8,534 | 6,800 | 1,734 |
| FDIC Insurance | 3,173 | 1,590 | 1,583 | 6,407 | 3,092 | 3,315 |
| Other Expense: |  |  |  |  |  |  |
| Advertising | 1,992 | 2,430 | (438) | 4,037 | 5,053 | (1,016) |
| Delivery and Postage Services | 1,646 | 1,788 | (142) | 3,327 | 3,294 | 33 |
| Broker's Charges | 1,009 | 1,251 | (242) | 1,858 | 2,714 | (856) |
| Merchant Transaction and Card Processing Fees | 1,579 | 1,484 | 95 | 3,232 | 2,937 | 295 |
| Mileage Program Travel | 1,094 | 1,156 | (62) | 2,187 | 2,352 | (165) |
| Other | 7,554 | 7,849 | (295) | 15,117 | 15,259 | (142) |
| Total Other Expense | 14,874 | 15,958 | (1,084) | 29,758 | 31,609 | (1,851) |
| **Total Noninterest Expense** | $104,036 | $102,939 | $1,097 | $215,955 | $206,813 | $9,142 |

Total salaries and benefits expense decreased by $1.6 million or 3% for the second quarter of 2023 and increased by $3.6 million or 3% for the first six months of 2023 compared to the same periods in 2022. The quarter-to-quarter decrease was primarily due to a decrease in incentive compensation, commission, and retirement and other benefits, partially offset by an increase in base salaries coupled with an increase in medical, dental, and life insurance expenses. The year-over-year change was primarily due to an increase in base salaries coupled with an increase in medical, dental, and life insurance and separation expenses, partially offset by a decrease in incentive compensation, commission, and retirement and other benefits.

Net equipment expense increased by $1.0 million or 11% for the second quarter of 2023 and by $2.3 million or 12% for the first six months compared to the same period in 2022. These increases were due to higher software license fees coupled with an increase in maintenance and depreciation expenses.

Professional fees increased by $1.1 million or 31% in the second quarter of 2023 and by $1.7 million or 26% for the first six months of 2023 compared to the same period in 2022 primarily due to an increase in legal fees coupled with an increase in outsourcing various administrative and support functions.

FDIC insurance expense increased by $1.6 million or 100% in the second quarter of 2023 and by $3.3 million or 107% for the first six months of 2023 compared to the same periods in 2022 primarily due to an increase in the initial base deposit insurance assessment rate. In May 2023, the FDIC issued a notice of proposed rulemaking (NPR). The NPR 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, 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 accrued and recognized as a loss in the period the rule is adopted.

Total other expense decreased by $1.1 million or 7% for the second quarter of 2023 and by $1.9 million or 6% for the first six months of 2023 compared to the same periods in 2022. These decreases were primarily due to lower broker charges, advertising, and telephone service expenses.

#### Provision for Income Taxes

Table 5 presents our provision for income taxes and effective tax rates.

*(dollars in thousands)*

| Provision for Income Taxes and Effective Tax Rates | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | Table 5 2022 |
| --- | ---: | ---: | ---: | ---: |
| Provision for Income Taxes | $15,006 | $17,759 | $30,937 | $33,365 |
| Effective Tax Rates | 24.57% | 23.80% | 24.98% | 23.00% |

The provision for income taxes was $15.0 million in the second quarter of 2023, a decrease of $2.8 million compared to the same period in 2022. The effective tax rate for the second quarter of 2023 was 24.57% , an increase from 23.80% for the same period in 2022. The higher effective tax rate in the second quarter of 2023 compared to the same period in 2022 was primarily due to a loss of tax benefits from exiting the leverage lease business and an increase in valuation allowance.

The provision for income taxes was $30.9 million in the first six months of 2023, a decrease of $2.4 million compared to the same period in 2022. The effective tax rate for the first six months of 2023 was 24.98%, an increase from 23.00% for the same period in 2022. The higher effective tax rate for the first six months of 2023 compared to the same period in 2022 was primarily due to a loss of tax benefits from exiting the leverage lease business, an increase in valuation allowance and tax deficiency on share-based compensation.

### Analysis of Statements of Condition

#### Investment Securities

The carrying value of our investment securities portfolio was $7.9 billion and $8.3 billion as of June 30, 2023, and December 31, 2022, respectively.

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 to. These evaluations may cause us to change the level of funds we deploy into investment securities, change the composition of our investment securities portfolio, and change the proportion of investments made into the available-for-sale and held-to-maturity investment categories.

Mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac are the largest concentration in our portfolio. As of June 30, 2023, these mortgage-backed securities were all AAA-rated, with a low probability of a change in their credit ratings in the near future.

Gross unrealized gains in our investment securities portfolio were $1.4 million as of June 30, 2023, and $1.9 million as of December 31, 2022. Gross unrealized losses in our investment securities portfolio were $1.1 billion as of June 30, 2023, and December 31, 2022. The gross unrealized losses were primarily related to mortgage-backed securities issued by U.S. government agencies or U.S. government-sponsored enterprises. See Note 3 to the Consolidated Financial Statements for more information.

#### Loans and Leases

Table 6 presents the composition of our loan and lease portfolio by major categories.

*(dollars in thousands)*

| Loan and Lease Portfolio Balances Commercial | June 30, 2023 | December 31, 2022 | Table 6 Change |
| --- | ---: | ---: | ---: |
| Commercial and Industrial | $1,502,676 | $1,389,066 | $113,610 |
| Paycheck Protection Program | 13,789 | 19,579 | (5,790) |
| Commercial Mortgage | 3,796,769 | 3,725,542 | 71,227 |
| Construction | 236,428 | 260,825 | (24,397) |
| Lease Financing | 62,779 | 69,491 | (6,712) |
| Total Commercial | 5,612,441 | 5,464,503 | 147,938 |
| Consumer |  |  |  |
| Residential Mortgage | 4,721,976 | 4,653,072 | 68,904 |
| Home Equity | 2,278,105 | 2,225,950 | 52,155 |
| Automobile | 878,767 | 870,396 | 8,371 |
| Other 1 | 423,600 | 432,499 | (8,899) |
| Total Consumer | 8,302,448 | 8,181,917 | 120,531 |
| **Total Loans and Leases** | $13,914,889 | $13,646,420 | $268,469 |

1Comprised of other revolving credit, installment, and lease financing.

Total loans and leases as of June 30, 2023, increased by $268.5 million or 2%, from December 31, 2022, primarily due to growth from commercial and industrial loans, commercial mortgage loans, residential mortgage loans, and home equity lines of credit.

Commercial loans and leases as of June 30, 2023, increased by $147.9 million or 3% from December 31, 2022. Commercial and industrial loans increased by $113.6 million or 8% from December 31, 2022, primarily due to higher corporate demand for funding from new and existing customers. PPP loans decreased by $5.8 million, or 30% from December 31, 2022, primarily due to paydowns. Commercial mortgage loans increased by $71.2 million or 2% from December 31, 2022, primarily due to demand from new and existing customers. Construction loans decreased by $24.4 million or 9% from December 31, 2022, primarily due to paydowns. Lease financing decreased by $6.7 million, or 10% from December 31, 2022, primarily due to paydowns.

Consumer loans and leases as of June 30, 2023, increased by $120.5 million or 1% from December 31, 2022. Residential mortgage loans increased by $68.9 million or 1% from December 31, 2022. While overall production has decreased due to the higher rate environment, payoffs remain low due to existing customers having lower interest rates. Home equity portfolio increased by $52.2 million or 2% from December 31, 2022, as a result of reduced payoff levels despite lower production levels. Automobile loans and other consumer loans remained relatively unchanged from December 31, 2022.

Table 7 presents the composition of our loan and lease portfolio by geographic area and by major categories.

*(dollars in thousands)*

| Geographic Distribution of Loan and Lease Portfolio June 30, 2023 Commercial | Hawaii | U.S. Mainland 1 | Guam | Other Pacific Islands | Table 7 Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial and Industrial | $1,271,098 | $145,453 | $70,005 | $16,120 | $1,502,676 |
| Paycheck Protection Program | 10,957 | 2,006 | 401 | 425 | 13,789 |
| Commercial Mortgage | 3,306,416 | 286,544 | 203,367 | 442 | 3,796,769 |
| Construction | 236,428 | — | — | — | 236,428 |
| Lease Financing | 62,082 | — | 697 | — | 62,779 |
| Total Commercial | 4,886,981 | 434,003 | 274,470 | 16,987 | 5,612,441 |
| Consumer |  |  |  |  |  |
| Residential Mortgage | 4,640,840 | 3,500 | 77,142 | 494 | 4,721,976 |
| Home Equity | 2,229,576 | 44 | 48,485 | — | 2,278,105 |
| Automobile | 679,719 | — | 154,122 | 44,926 | 878,767 |
| Other 2 | 360,701 | — | 52,431 | 10,468 | 423,600 |
| Total Consumer | 7,910,836 | 3,544 | 332,180 | 55,888 | 8,302,448 |
| **Total Loans and Leases** | $12,797,817 | $437,547 | $606,650 | $72,875 | $13,914,889 |
| **December 31, 2022** |  |  |  |  |  |
| Commercial |  |  |  |  |  |
| Commercial and Industrial | $1,182,706 | $127,302 | $66,686 | $12,372 | $1,389,066 |
| Paycheck Protection Program | 15,980 | 2,601 | 485 | 513 | 19,579 |
| Commercial Mortgage | 3,226,112 | 288,566 | 210,864 | — | 3,725,542 |
| Construction | 260,825 | — | — | — | 260,825 |
| Lease Financing | 66,321 | — | 3,170 | — | 69,491 |
| Total Commercial | 4,751,944 | 418,469 | 281,205 | 12,885 | 5,464,503 |
| Consumer |  |  |  |  |  |
| Residential Mortgage | 4,576,143 | — | 76,376 | 553 | 4,653,072 |
| Home Equity | 2,176,848 | 46 | 49,056 | — | 2,225,950 |
| Automobile | 663,608 | — | 160,694 | 46,094 | 870,396 |
| Other 2 | 366,744 | — | 54,107 | 11,648 | 432,499 |
| Total Consumer | 7,783,343 | 46 | 340,233 | 58,295 | 8,181,917 |
| **Total Loans and Leases** | $12,535,287 | $418,515 | $621,438 | $71,180 | $13,646,420 |

1For secured loans and leases, classification is made based on where the collateral is located. For unsecured loans and leases, classification is made based on the location where the majority of the borrower’s business operations are conducted.

2Comprised of other revolving credit, installment, and lease financing.

Our commercial and consumer lending activities are concentrated primarily in Hawaii and the Pacific Islands. Our commercial loan and lease portfolio to borrowers based on the U.S. Mainland includes participation in shared national credits for customers whose operations and assets extend beyond Hawaii.

#### Other Assets

Table 8 presents the major components of other assets.

*(dollars in thousands)*

| Other Assets | June 30, 2023 | December 31, 2022 | Table 8 Change |
| --- | ---: | ---: | ---: |
| Federal Home Loan Bank of Des Moines and Federal Reserve Bank Stock | $107,277 | $53,065 | $54,212 |
| Derivative Financial Instruments | 162,753 | 47,717 | 115,036 |
| Low-Income Housing and Other Equity Investments | 183,238 | 175,283 | 7,955 |
| Deferred Compensation Plan Assets | 53,202 | 47,755 | 5,447 |
| Prepaid Expenses | 22,483 | 18,651 | 3,832 |
| Accounts Receivable | 15,250 | 12,168 | 3,082 |
| Deferred Tax Assets | 178,841 | 177,713 | 1,128 |
| Other | 43,773 | 41,636 | 2,137 |
| **Total Other Assets** | $766,817 | $573,988 | $192,829 |

Total other assets increased by $192.8 million or 34% from December 31, 2022. This increase was due to a $115.0 million increase in derivative financial instruments, which was driven by the conversion of our interest rate swap portfolio from LIBOR to CME Term SOFR. CME Term SOFR swaps are not clearable via a central clearinghouse and do not require the exchange of daily payments. Previously, the exchange of these payments through a central clearinghouse would reduce the fair value of the associated derivative to approximately zero on a daily basis. The cessation of these daily payments resulted in these derivative being marked to fair value, which increased during the year due to prevailing interest rates. Federal Home Loan Bank of Des Moines stock increased by $54.2 million due to increase of stock activity. In addition, low-income housing and other equity investments increased by $8.0 million due to additional funding of existing projects.

#### Deposits

Table 9 presents the composition of our deposits by major customer categories.

*(dollars in thousands)*

| Deposits | June 30, 2023 | December 31, 2022 | Table 9 Change |
| --- | ---: | ---: | ---: |
| Consumer | $10,018,931 | $10,304,335 | $(285,404) |
| Commercial | 8,019,971 | 8,569,670 | (549,699) |
| Public and Other | 2,469,713 | 1,741,691 | 728,022 |
| **Total Deposits** | $20,508,615 | $20,615,696 | $(107,081) |

Total deposits were $20.5 billion as of June 30, 2023, a decrease of $107.1 million or 1% from December 31, 2022. Consumer deposits decreased by $285.4 million primarily due to a $740.7 million decrease in core deposits, partially offset by $455.3 million increase in time deposits. Commercial deposits decreased by $549.7 million due to a decrease of $627.4 million in core deposits, partially offset by an increase of $77.7 million in time deposits. Public and other deposits increased by $728.0 million primarily from increases of $302.1 million in core deposits and $425.9 million in time deposits.

Table 10 presents the composition of our savings deposits.

*(dollars in thousands)*

| Savings Deposits | June 30, 2023 | December 31, 2022 | Table 10 Change |
| --- | ---: | ---: | ---: |
| Money Market | $3,091,684 | $3,101,594 | $(9,910) |
| Regular Savings | 4,664,742 | 4,860,816 | (196,074) |
| **Total Savings Deposits** | $7,756,426 | $7,962,410 | $(205,984) |

53

The decrease in Money Market was primarily due to a decrease in consumer deposits of $44.6 million offset by $34.7 million increase in commercial deposits. The decrease in Regular Savings was due to a decrease in consumer deposits of $318.5 million partially offset by increase of $98.4 million and $24.1 million in public deposits and commercial deposits respectively.

Table 11 presents the maturity distribution of the estimated uninsured time deposits.

*(dollars in thousands)*

| Maturity Distribution of Estimated Uninsured Time Deposits Remaining maturity: | Table 11 June 30, 2023 |
| --- | ---: |
| Three months or less | $601,112 |
| After three through six months | 154,718 |
| After six through twelve months | 593,003 |
| After twelve months | 487,470 |
| **Total** | $1,836,303 |

Estimated uninsured deposits totaled $10.5 billion and $10.7 billion at June 30, 2023, and December 31, 2022, respectively. As of June 30, 2023, approximately $2.4 billion of uninsured deposits were collateralized by government-backed securities.

#### Securities Sold Under Agreements to Repurchase

Table 12 presents the composition of our securities sold under agreements to repurchase.

*(dollars in thousands)*

| Securities Sold Under Agreements to Repurchase | June 30, 2023 | December 31, 2022 | Table 12 Change |
| --- | ---: | ---: | ---: |
| Private Institutions | $725,000 | $725,000 | $— |
| Government Entities | 490 | 490 | — |
| **Total Securities Sold Under Agreements to Repurchase** | $725,490 | $725,490 | $— |

Securities sold under agreements to repurchase was $725.5 million as of June 30, 2023, and December 31, 2022. As of June 30, 2023, the weighted-average maturity was 1.36 years for our repurchase agreements with government entities and 3.20 years for our repurchase agreements with private institutions. As of June 30, 2023, the weighted-average interest rate for outstanding agreements with government entities and private institutions was 1.55% and 2.97%, respectively, with all rates being fixed. Each of our repurchase agreements is accounted for as a collateralized financing arrangement (i.e., a secured borrowing) and not as a sale and subsequent repurchase of securities.

#### Other Debt

Table 13 presents the composition of our other debt.

*(dollars in thousands)*

| Other Debt | June 30, 2023 | December 31, 2022 | Table 13 Change |
| --- | ---: | ---: | ---: |
| Federal Home Loan Bank Advances | $1,750,000 | $400,000 | $1,350,000 |
| Finance Lease Obligations | 10,243 | 10,294 | (51) |
| **Total** | $1,760,243 | $410,294 | $1,349,949 |

The FHLB advances increased by $1.4 billion from December 31, 2022, due to borrowing additional funds from the FHLB, which provided a form of fixed-rate funding that mitigates the risk of higher, longer term interest rates. As of June 30, 2023, FHLB advances totaled $1.75 billion with a weighted-average interest rate of 4.26% and weighted average maturity of 2.96 years.

### Analysis of Business Segments

Our business segments are defined as Consumer Banking, Commercial Banking, and Treasury and Other.

Table 14 summarizes net income from our business segments. Additional information about segment performance is presented in Note 10 to the Consolidated Financial Statements.

*(dollars in thousands)*

| Business Segment Net Income | Three Months Ended June 30, 2023 | 2022 1 | Six Months Ended June 30, 2023 | Table 14 2022 1 |
| --- | ---: | ---: | ---: | ---: |
| Consumer Banking | $36,446 | $18,913 | $67,243 | $33,036 |
| Commercial Banking | 31,615 | 30,889 | 65,888 | 59,767 |
| **Total** | 68,061 | 49,802 | 133,131 | 92,803 |
| Treasury and Other | (22,000) | 7,060 | (40,228) | 18,893 |
| **Consolidated Total** | $46,061 | $56,862 | $92,903 | $111,696 |
| 1 Certain prior period information has been reclassified to conform to current presentation. |  |  |  |  |

#### Consumer Banking

Net income increased by $17.5 million or 93% in the second quarter of 2023 compared to the same period in 2022 primarily due to an increase in net interest income and a decrease in noninterest expense. This was partially offset by an increase in the provision for credit losses. The increase in net interest income was primarily due to higher deposit spreads and higher loan balances, partially offset by lower loan spreads and lower deposit balances. The decrease in noninterest expense was primarily due to lower allocated expense related to support units. The increase in the provision for credit losses was primarily due to lower recoveries in the residential mortgage portfolio and higher net charge-offs in the installment loan portfolio, partially offset by higher recoveries in the home equity portfolio.

Net income increased by $34.2 million or 104% in the first six months of 2023 compared to the same period in 2022 primarily due to an increase in net interest income. This was partially offset by an increase in the provision for credit losses, an increase in noninterest expense, and a decrease in noninterest income. The increase in net interest income was primarily due to higher deposit spreads and higher loan balances, partially offset by lower loan spreads and lower deposit balances. The increase in the provision for credit losses was primarily due to lower recoveries in the residential mortgage portfolio and higher net charge-offs in the installment loan and automobile loan portfolios. The increase in noninterest expense was primarily due to higher salaries and benefits expense. The decrease in noninterest income was primarily due to a decrease in mortgage banking income, related to a net valuation recovery to our servicing rights during the first quarter of 2022.

#### Commercial Banking

Net income increased by $1.2 million in the second quarter of 2023 compared to the same period in 2022 primarily due to an increase in interest income, partially offset by a decrease to noninterest income and an increase in noninterest expense and an increased tax provision. The increase in interest income is primarily due to higher spreads on noninterest bearing and time deposits, and larger average balances on time deposits and commercial mortgage loans. The increase in interest income was partially offset by a decrease in interest bearing and savings deposit spreads. The decrease in noninterest income is primarily due to decreases in loan fees, customer derivative program revenue, and account analysis fees. The decrease was partially offset by an increase in fees earned on money market sweep balances. The increase in noninterest expense was driven by higher allocated expenses from support units and increased salaries and benefits.

Net income decreased by $6.1 million in the first six months of 2023 compared to the same period in 2022 primarily due to an increase in interest income, partially offset by a decrease to noninterest income, an increase in noninterest expense, and an increased tax provision. The increase in interest income is primarily due to higher spreads on noninterest bearing and time deposits, and larger average balances on savings and time deposits and commercial mortgage loans. The increase in interest income was partially offset by a decrease in commercial and industrial spreads as well as interest bearing deposit balances and spreads. The decrease in noninterest income is primarily due to decreases in customer derivative program revenue, loan fees, and account analysis fees. The decrease was partially offset by an increase in merchant income and fees earned on money market sweep balances. The increase in noninterest expense was driven by higher allocated expenses from support units, increased salaries and benefits, and higher merchant transaction fees.

#### Treasury and Other

Net income decreased by $29.1 million in the second quarter of 2023 compared to the same period in 2022 primarily due to lower net interest income and higher provision for credit losses. This was partially offset by a lower provision for income taxes. The decrease in net interest income was primarily due to higher funding costs, partially offset by an increase in interest income from higher asset yields. The increase in the Provision was primarily due to management’s best estimate of losses over the life of loans and leases in our portfolio in accordance with the CECL approach, given the economic outlook. The provision for income taxes in this business segment represents the residual amount to arrive at the total tax expense for the Company.

Net income decreased by $59.1 million in the first six months of 2023 compared to the same period in 2022 primarily due to lower net interest income and higher provision for credit losses. This was partially offset by a lower provision for income taxes. The decrease in net interest income was primarily due to higher funding costs, partially offset by an increase in interest income from higher asset yields. The increase in the Provision was primarily due to management’s best estimate of losses over the life of loans and leases in our portfolio in accordance with the CECL approach, given the economic outlook. The provision for income taxes in this business segment represents the residual amount to arrive at the total tax expense for the Company.

### Corporate Risk Profile

#### Credit Risk

As of June 30, 2023, our overall credit risk profile remains strong and reflects the continued recovery of Hawaii’s economy.

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

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

Table 15 presents information on non-performing assets (“NPAs”) and accruing loans and leases past due 90 days or more.

*(dollars in thousands)*

| Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More Non-Performing Assets Non-Accrual Loans and Leases Commercial | June 30, 2023 | December 31, 2022 | Table 15 Change |
| --- | ---: | ---: | ---: |
| Commercial and Industrial | $17 | $37 | $(20) |
| Commercial Mortgage | 3,107 | 3,309 | (202) |
| Total Commercial | 3,124 | 3,346 | (222) |
| Consumer |  |  |  |
| Residential Mortgage | 3,504 | 4,239 | (735) |
| Home Equity | 3,809 | 4,022 | (213) |
| Total Consumer | 7,313 | 8,261 | (948) |
| Total Non-Accrual Loans and Leases | 10,437 | 11,607 | (1,170) |
| Foreclosed Real Estate | 1,040 | 1,040 | — |
| **Total Non-Performing Assets** | $11,477 | $12,647 | $(1,170) |
| **Accruing Loans and Leases Past Due 90 Days or More** |  |  |  |
| Consumer |  |  |  |
| Residential Mortgage | $3,560 | $2,429 | $1,131 |
| Home Equity | 2,022 | 1,673 | 349 |
| Automobile | 577 | 589 | (12) |
| Other 1 | 633 | 683 | (50) |
| Total Consumer | 6,792 | 5,374 | 1,418 |
| **Total Accruing Loans and Leases Past Due 90 Days or More** | $6,792 | $5,374 | $1,418 |
| **Total Loans and Leases** | $13,914,889 | $13,646,420 | $268,469 |
| Ratio of Non-Accrual Loans and Leases to Total Loans and Leases | 0.08% | 0.09% | (0.01)% |
| Ratio of Non-Performing Assets to Total Loans and Leases and Foreclosed Real Estate | 0.08% | 0.09% | (0.01)% |
| Ratio of Non-Performing Assets to Total Assets | 0.04% | 0.05% | (0.01)% |
| Ratio of Commercial Non-Performing Assets to Total Commercial Loans and Leases and Commercial Foreclosed Real Estate | 0.06% | 0.06% | — |
| Ratio of Consumer Non-Performing Assets to Total Consumer Loans and Leases and Consumer Foreclosed Real Estate | 0.10% | 0.11% | (0.01)% |
| Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More to Total Loans and Leases and Foreclosed Real Estate | 0.13% | 0.13% | — |
| **Changes in Non-Performing Assets** |  |  |  |
| **Balance as of December 31, 2022** | $12,647 |  |  |
| Additions | 1,668 |  |  |
| Reductions |  |  |  |
| Payments | (1,004) |  |  |
| Return to Accrual Status | (1,824) |  |  |
| Sales of Foreclosed Real Estate |  |  |  |
| Charge-offs/Write-downs | (10) |  |  |
| Total Reductions | (2,838) |  |  |
| **Balance as of June 30, 2023** | $11,477 |  |  |

1Comprised of other revolving credit, installment, and lease financing.

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

Residential mortgage non-accrual loans were $3.5 million as of June 30, 2023, a decrease of $735 thousand from December 31, 2022. As of June 30, 2023, our residential mortgage non-accrual loans were comprised of 17 loans with a weighted average current loan-to-value ratio of 63%.

Foreclosed real estate represents property acquired as the result of borrower defaults on loans. Foreclosed real estate is recorded at fair value, less estimated selling costs, at the time of foreclosure. On an ongoing basis, properties are appraised as required by market conditions and applicable regulations. Foreclosed real estate was $1.0 million as of June 30, 2023.

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

Loans and leases in this category are 90 days or more past due, as to principal or interest, and are still accruing interest because they are well secured and in the process of collection. Loans and leases past due 90 days or more and still accruing interest were $6.8 million as of June 30, 2023, a $1.4 million or 26% increase from December 31, 2022. The increase was primarily in residential mortgage and home equity.

#### Reserve for Credit Losses

Table 16 presents the activity in our reserve for credit losses.

*(dollars in thousands)*

| Reserve for Credit Losses | Three Months Ended June 30, 2023 | 2022 | Six Months Ended June 30, 2023 | Table 16 2022 |
| --- | ---: | ---: | ---: | ---: |
| **Balance at Beginning of Period** | $150,579 | $157,264 | $151,247 | $164,297 |
| Loans and Leases Charged-Off |  |  |  |  |
| Commercial |  |  |  |  |
| Commercial and Industrial | (203) | (233) | (464) | (582) |
| Commercial Mortgage | — | — | — | — |
| Consumer |  |  |  |  |
| Residential Mortgage | (6) | (80) | (6) | (80) |
| Home Equity | (5) | (22) | (55) | (90) |
| Automobile | (1,293) | (1,157) | (2,956) | (2,687) |
| Other 1 | (2,004) | (1,854) | (4,339) | (3,815) |
| **Total Loans and Leases Charged-Off** | (3,511) | (3,346) | (7,820) | (7,254) |
| Recoveries on Loans and Leases Previously Charged-Off |  |  |  |  |
| Commercial |  |  |  |  |
| Commercial and Industrial | 103 | 51 | 153 | 420 |
| Consumer |  |  |  |  |
| Residential Mortgage | 58 | 920 | 119 | 974 |
| Home Equity | 578 | 416 | 762 | 931 |
| Automobile | 777 | 684 | 1,449 | 1,423 |
| Other 1 | 618 | 644 | 1,292 | 1,389 |
| **Total Recoveries on Loans and Leases Previously Charged-Off** | 2,134 | 2,715 | 3,775 | 5,137 |
| Net Charged-Off - Loans and Leases | (1,377) | (631) | (4,045) | (2,117) |
| Net Charged-Off - Accrued Interest Receivable | — | — | — | (47) |
| Provision for Credit Losses: |  |  |  |  |
| Loans and Leases | 3,167 | (2,885) | 4,973 | (7,192) |
| Accrued Interest Receivable | — | — | — | (367) |
| Unfunded Commitments | (667) | 350 | (473) | (476) |
| Total Provision for Credit Losses | 2,500 | (2,535) | 4,500 | (8,035) |
| **Balance at End of Period** | $151,702 | $154,098 | $151,702 | $154,098 |
| **Components** |  |  |  |  |
| Allowance for Credit Losses - Loans and Leases | $145,367 | $148,512 | $145,367 | $148,512 |
| Reserve for Unfunded Commitments | 6,335 | 5,586 | 6,335 | 5,586 |
| **Total Reserve for Credit Losses** | $151,702 | $154,098 | $151,702 | $154,098 |
| **Average Loans and Leases Outstanding** | $13,876,754 | $12,700,825 | $13,797,559 | $12,496,747 |
| Ratio of Net Loans and Leases Charged-Off to Average Loans and Leases Outstanding (annualized) | 0.04% | 0.02% | 0.06% | 0.03% |
| Ratio of Allowance for Credit Losses to Loans and Leases Outstanding 2 | 1.04% | 1.15% | 1.04% | 1.15% |

1Comprised of other revolving credit, installment, and lease financing.

2The numerator comprises the Allowance for Credit Losses – Loans and Leases.

#### Allowance for Credit Losses - Loans and Leases

As of June 30, 2023, the Allowance was $145.4 million or 1.04% of total loans and leases outstanding (1.05% excluding PPP loans), compared with an Allowance of $144.4 million or 1.06% of total loans and leases outstanding (1.08% excluding PPP loans) as of December 31, 2022. The Allowance as of June 30, 2023, continues to include a qualitative overlay to account for economic uncertainty and downside risk of a recession.

Net charge-offs on loans and leases were $1.4 million or 0.04% of total average loans and leases on an annualized basis, in the second quarter of 2023 compared to net charge-offs of $0.6 million or 0.02% of total average loans and leases on an annualized basis, in the second quarter of 2022. The increase in net charge-offs on loans and leases was primarily due to lower recoveries in 2023.

#### Reserve for Unfunded Commitments

The Unfunded Reserve was $6.3 million as of June 30, 2023, a decrease of $0.5 million or 7% from December 31, 2022, primarily driven by higher utilization of commercial and industrial commitments. The reserve for unfunded commitments is recorded in other liabilities in the consolidated statements of condition.

#### Provision for Credit Losses

For the first six months of 2023, the provision for credit losses was $4.5 million compared to a net benefit of $8.0 million during the same period in 2022. The increase in the provision was primarily due to reduction in the allowance for credit losses in 2022 and higher net charge-offs in 2023.

### Market Risk

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

Our primary market risk exposure is interest rate risk.

#### Interest Rate Risk

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

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

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

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

Our use of derivative financial instruments, as detailed in Note 11 to the Consolidated Financial Statements, has generally been limited. This is due to natural on-balance sheet hedges arising out of offsetting interest rate exposures from loans and investment securities with deposits and other interest-bearing liabilities. In particular, the investment securities portfolio is utilized to manage the interest rate exposure and sensitivity to within the guidelines and limits established by the ALCO. We utilize natural and offsetting economic hedges in an effort to reduce the need to employ off-balance sheet derivative financial instruments to hedge interest rate risk exposures. Expected movements in interest rates are also considered in managing interest rate risk. Thus, as interest rates change, we may use different techniques to manage interest rate risk.

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

We utilize net interest income simulations to analyze income sensitivities to changes in interest rates. Table 17 presents, as of June 30, 2023, and December 31, 2022, an estimate of the change in net interest income that would result from a gradual and immediate change in interest rates, moving in a parallel shock over the entire yield curve, relative to the measured base case scenario. The base case scenario assumes the statement of condition and interest rates are generally unchanged. Based on our net interest income simulation as of June 30, 2023, net interest income is expected to increase as interest rates rise. In addition, rising interest rates would drive higher rates on loans and investment securities, as well as induce a slower pace of premium amortization on certain securities within our investment portfolio. However, lower interest rates would likely cause a decline in net interest income as lower rates would lead to lower yields on loans and investment securities, as well as drive higher premium amortization on existing investment securities. Based on our net interest income simulation as of June 30, 2023, net interest income sensitivity to changes in interest rates as of June 30, 2023, was more sensitive in comparison to the sensitivity profile as of December 31, 2022.

*(dollars in thousands)*

| Net Interest Income Sensitivity Profile Gradual Change in Interest Rates (basis points) | Impact on Future Annual Net Interest Income June 30, 2023 |  | December 31, 2022 | Table 17 |
| --- | ---: | ---: | ---: | ---: |
| +200 | $9,756 | 1.9% | $13,943 | 2.4% |
| +100 | 4,439 | 0.9 | 7,673 | 1.3 |
| -100 | (6,317) | (1.2) | (4,365) | (0.7) |
| **Immediate Change in Interest Rates (basis points)** |  |  |  |  |
| +200 | $19,444 | 3.8% | $22,100 | 3.8% |
| +100 | 8,669 | 1.7 | 11,627 | 2.0 |
| -100 | (15,023) | (2.9) | (8,659) | (1.5) |

61

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

#### Other Market Risks

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

### Liquidity Risk Management

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

In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities. We have access to immediate liquid resources in the form of cash which is primarily on deposit with the FRB. Potential sources of liquidity also include investment securities in our available-for-sale securities portfolio, our ability to sell loans in the secondary market, and to secure borrowings from the FRB and FHLB. Our held-to-maturity securities, while not intended for sale, may also be utilized to secure borrowings from the FRB and FHLB, or in repurchase agreements. Our core deposits have historically provided us with a long-term source of stable and relatively low cost source of funding. Additional funding is available through the issuance of long-term debt or equity.

Maturities and payments on outstanding loans and investment securities also provide a steady flow of funds. Liquidity is further enhanced by our ability to pledge loans to access secured borrowings from the FHLB and FRB. As of June 30, 2023, we had additional borrowing capacity of $5.2 billion from the FRB and $1.4 billion from the FHLB based on the amount of collateral pledged. As of June 30, 2023, cash and cash equivalents were $1.7 billion, the carrying value of our available-for-sale investment securities was $2.7 billion, and total deposits were $20.5 billion. As of June 30, 2023, our available-for-sale investment securities portfolio was comprised of securities with an average base duration of approximately 3.80 years.

### Capital Management

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

The Company and the Bank are each subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements could cause certain mandatory and discretionary actions by regulators that, if undertaken, would likely have a material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures. These measures were established by regulation intended to ensure capital adequacy. Capital ratios are calculated using the regulatory capital rule that allows a five-year transition period related to the adoption of CECL. As of June 30, 2023, the Company’s capital levels remained characterized as “well-capitalized.” 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. The Company’s regulatory capital ratios are presented in Table 18 below.

Table 18 presents our regulatory capital and ratios as of June 30, 2023, and December 31, 2022.

*(dollars in thousands)*

| Regulatory Capital and Ratios Regulatory Capital | June 30, 2023 | Table 18 December 31, 2022 |
| --- | ---: | ---: |
| Total Common Shareholders’ Equity | $1,182,792 | $1,141,508 |
| Add: CECL Transitional Amount | 4,749 | 7,124 |
| Less: Goodwill, Net of Deferred Tax Liabilities | 28,746 | 28,746 |
| Postretirement Benefit Liability Adjustments | (24,910) | (25,078) |
| Net Unrealized Losses on Investment Securities 1 | (398,521) | (409,579) |
| Other | (198) | (198) |
| Common Equity Tier 1 Capital | 1,582,424 | 1,554,741 |
| Preferred Stock, Net of Issuance Cost | 175,487 | 175,487 |
| Tier 1 Capital | 1,757,911 | 1,730,228 |
| Allowable Reserve for Credit Losses | 147,673 | 145,202 |
| **Total Regulatory Capital** | $1,905,584 | $1,875,430 |
| **Risk-Weighted Assets** | $14,391,943 | $14,238,798 |
| **Key Regulatory Capital Ratios** |  |  |
| Common Equity Tier 1 Capital Ratio | 11.00% | 10.92% |
| Tier 1 Capital Ratio | 12.21 | 12.15 |
| Total Capital Ratio | 13.24 | 13.17 |
| Tier 1 Leverage Ratio | 7.21 | 7.37 |

1 Includes unrealized gains and losses related to the Company’s reclassification of available-for-sale investment securities to the held-to-maturity category.

2 Regulatory capital ratios as of June 30, 2023 are preliminary.

As of June 30, 2023, shareholders’ equity was $1.4 billion, an increase of $41.3 million or 3% from December 31, 2022. For the first six months of 2023, net income of $92.9 million, other comprehensive income of $11.2 million, share-based compensation of $7.7 million, and common stock issuances of $3.2 million were offset by cash dividends paid of $55.9 million on common shares, common stock repurchased of $13.9 million, and cash dividends declared of $3.9 million on preferred shares. No shares of common stock were repurchased under the share repurchase program in the second quarter of 2023. We repurchased 150,000 shares under our share repurchase program in the first quarter of 2023. These shares were repurchased at an average cost per share of $65.69 and a total cost of $9.9 million. From the beginning of our share repurchase program in July 2001 through June 30, 2023, we repurchased a total of 58.2 million shares of our common stock and returned a total of $2.4 billion to our shareholders at an average cost of $41.24 per share.

In January 2023, the Board of Directors authorized an additional $100.0 million for the share repurchase program. Remaining buyback authority under our share repurchase program was $126.0 million as of June 30, 2023. The actual amount and timing of future share repurchases, if any, will depend on market and economic conditions, regulatory rules, applicable SEC rules, and various other factors.

In July 2023, the Parent’s Board of Directors declared a quarterly dividend payment of its Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, of $10.94 per share, equivalent to $0.2735 per depositary share. The dividend will be payable on August 1, 2023, to shareholders of record of the preferred stock at the close of business on July 17, 2023.

In July 2023, the Parent’s Board of Directors declared a quarterly cash dividend of $0.70 per share on the Parent’s outstanding common shares. The dividend will be payable on September 15, 2023, to shareholders of record of the common stock at the close of business on August 31, 2023.

### Operational Risk

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

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

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

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

#### Off-Balance Sheet Arrangements

We hold interests in several unconsolidated variable interest entities (“VIEs”). These unconsolidated VIEs are primarily low-income housing partnerships and solar energy partnerships. Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in an entity’s net asset value. The primary beneficiary consolidates the VIE. We have determined that the Company is not the primary beneficiary of these entities. As a result, we do not consolidate these VIEs.

#### Credit Commitments and Contractual Obligations

Our credit commitments and contractual obligations have not changed materially since previously reported in our Annual Report on Form 10-K for the year ended December 31, 2022.

## Controls and procedures

As filed, 1,511 characters.

#### 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 U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of 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.

## Risk factors

As filed, 2,102 characters.

There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, except as described below.

### Risks Related to Recent Events Impacting the Financial Services Industry

Recent events impacting the financial services industry, including the failure of Silicon Valley Bank, Signature Bank and First Republic Bank, have resulted in decreased confidence in banks among consumer and commercial depositors, other counterparties and investors, as well as significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events occurred during a period of rapidly rising interest rates which, among other things, has resulted in unrealized losses in longer duration securities and loans held by banks, more competition for bank deposits and may increase the risk of a potential recession. These recent events have, and could continue to, adversely impact the market price and volatility of the Company’s common stock.

These recent events may also result in potentially adverse changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our business. Inability to access short-term funding, loss of client deposits or changes in our credit ratings could increase the cost of funding, limit access to capital markets or negatively impact our overall liquidity or capitalization. We may be impacted by concerns regarding the soundness or creditworthiness of other financial institutions, which can cause substantial and cascading disruption within the financial markets and increased expenses. The cost of resolving the recent bank failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments, which could have a material negative impact on our profitability and our business.

Filed Jul 25, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-034192. Last ingested by Listed: Oct 26, 2026, 17:06 ET. No prices; not investment advice.