# Bank of Hawaii Corp: Form 10-Q for the period ended Sep 30, 2023 - Company: [Bank of Hawaii Corp](/companies/boh.md) (CIK 46195) - Form: 10-Q - Filed: 2023-10-25 - Accepted by EDGAR: Oct 25, 2023, 13:30 ET - Period: 2023-09-30 - Accession: 0000950170-23-055092 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/46195/000095017023055092/boh-20230930.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/46195/000095017023055092/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2023-09-30. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $91.0m | us-gaap:InterestExpense | | Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $218.8m | us-gaap:InterestExpense | | Income tax | 3 months, 2023-07-01 to 2023-09-30 | $15.8m | us-gaap:IncomeTaxExpenseBenefit | | Income tax | 9 months, 2023-01-01 to 2023-09-30 | $46.7m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2023-07-01 to 2023-09-30 | $47.9m | us-gaap:NetIncomeLoss | | Net income | 9 months, 2023-01-01 to 2023-09-30 | $140.8m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $1.17 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $3.42 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $1.17 | us-gaap:EarningsPerShareBasic | | Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $3.44 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 39,420,531 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 39,392,433 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $124.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $5.5m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $83.8m | us-gaap:PaymentsOfDividendsCommonStock | | Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $14.1m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Cash and equivalents | at 2023-09-30 | $652.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Total assets | at 2023-09-30 | $23.55bn | us-gaap:Assets | | Total liabilities | at 2023-09-30 | $22.19bn | us-gaap:Liabilities | | Shareholders' equity | at 2023-09-30 | $1.36bn | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 94,269 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 and in our Annual Report on Form 10-K for the year ended December 31, 2022. 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. #### Maui Wildfires On August 8, 2023, wildfires broke out in West Maui destroying the historic town of Lahaina as well as structures and farmland in Kula in Upcountry Maui and North Kihei. Roughly 2,200 structures were lost in the fire, 86% of which were homes. To support those impacted by the Maui wildfires, Bank of Hawaii Foundation donated $100,000 to Hawaii Community Foundation's Maui Strong Fund. We also temporarily suspended surcharge fees for all Maui ATM users beginning August 10, 2023, and we continue to offer various emergency relief loans and repayment options to affected residents and businesses. Emergency relief programs include the following options: - Consumer loans - Loan forbearance for up to 180 days for residential mortgages, home equity loans and home equity lines - Loan extension for up to 90 days for personal loans and auto loans - Commercial loans - Principal deferrals for up to 180 days for customers that continue to make interest payments - Interest deferrals or principal and interest deferrals for up to 90 days for all other customers As of September 30, 2023, loans to our customers impacted by the Maui wildfires represented $169.2 million or 1% of our total loan portfolio, of which $70.7 million is secured by properties or other assets not destroyed in the wildfires, $86.2 million is secured by properties or other assets that were destroyed, and $12.3 million is unsecured. Out of the $86.2 million in credit facilities secured by properties destroyed in the fires, we estimate $66.3 million are adequately covered by insurance, and $15.3 million are adequately covered by insurance and the value of the underlying land, with the remaining $4.6 million representing the estimated potential loss. Out of the $12.3 million in unsecured credit facilities, conservatively half of this exposure, $6.2 million, represents the estimated potential loss. Based on the foregoing, our overall estimated potential loss exposure from the fire-impacted areas is $10.8 million. Whether the wildfires resulted in damage to or loss of our customers’ home, job, or business, we are taking significant steps to support them and help the community navigate through this tragic event. As of September 30, 2023, we had $136.4 million in outstanding credit facilities that were under loan payment deferrals as part of our Maui Wildfire emergency relief program. #### Hawaii Economy In the wake of the wildfires, Maui experienced a severe economic disruption. Visitor arrivals declined and thousands of families have been displaced. Until substantial rebuilding can be accomplished, housing displaced residents as well as recovery workers will strain the already tight and expensive Maui housing market. The fires destroyed the vast majority of businesses and jobs in Lahaina, and across Maui, local businesses are struggling from the lower visitor numbers. As a result, the unemployment rate in Maui is expected to increase through the fourth quarter of 2023. Although the Maui recovery effort is generating an impressive inflow of funds from philanthropy, FEMA disaster relief, other government assistance, and usual and supplemental support for the unemployed, it only partially offsets the losses in property and economic activity. While visitor arrivals to Maui have been impacted, tourism to Central and South Maui has begun to recover and West Maui resorts unaffected by the wildfires reopened on October 8, 2023. We also expect visitors to redirect their travel plans to other islands, predominantly Oahu, Kauai, or the Big Island. The Japanese visitor market continues to show an ongoing gradual recovery towards pre-COVID levels. Visitor arrivals to the state overall remained at or above pre-pandemic levels. While the wildfires will lead to significant economic losses on Maui, spillover to the broader Hawaii economy is expected to be limited. The economic environment on the other Hawaiian Islands showed continued improvement with the unemployment rate on Oahu falling from 3.3% in December 2022 to 2.2% in September 2023. For the state overall, job growth is expected to slow throughout 2024 because of the current direct loss of Maui economic activity but is expected to rebound in 2025 as rebuilding efforts begin. Construction in other counties will have to compete with Maui recovery demands potentially causing delays in some planned public and private sector projects and will likely lead to upward pressure on costs. Hawaii’s unemployment rate was 2.8% in September 2023, which was below the U.S. unemployment rate of 3.8%. High interest rates have slowed the home resale market both because of the cost of first-time home purchases and the “lock-in effect” of the low rates many homeowners have on their current mortgage. For the first nine months of 2023, the median price of single-family home sales and condominium sales on Oahu decreased 5.4% and 1.0%, respectively, compared to the same period in 2022. The volume of single-family home sales and condominiums sales on Oahu decreased 30.5% and 31.2%, respectively, for the first nine 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 September 30, 2023, inventory of single-family homes and condominiums on Oahu continues to remain low at 2.7 months and 3.0 months, respectively. #### Earnings Summary Net income for the third quarter of 2023 was $47.9 million, a decrease of $4.9 million or 9% compared to the same period in 2022. Diluted earnings per common share was $1.17 for the third quarter of 2023, a decrease of $0.11 or 9% compared to the same period in 2022. - The return on average common equity for the third quarter of 2023 was 15.38% compared with 16.98% in the same quarter of 2022. - Net interest income for the third quarter of 2023 was $120.9 million, a decrease of 15% from the same quarter of 2022. The decrease in net interest income in the third quarter of 2023 was primarily due to higher funding costs, partially offset by higher earning asset yields. The net interest margin was 2.13% in the third quarter of 2023, a decrease of 47 basis points from the same period in 2022. - The provision for credit losses was $2.0 million for the third quarter of 2023 compared to no provision for credit losses in the same period of 2022. - Noninterest income was $50.3 million in the third quarter of 2023, an increase of 64% from the same period in 2022. - Noninterest expense was $105.6 million in the third quarter of 2023, comparable to the same quarter of 2022. - The effective tax rate for the third quarter of 2023 was 24.76% compared with 20.68% during the same quarter of 2022. We maintained a strong balance sheet during the third quarter of 2023, with what we believe are appropriate reserves for credit losses and high levels of liquidity and capital. - Total non-performing assets were $11.5 million as of September 30, 2023, down $2.3 million from September 30, 2022. Non-performing assets as a percentage of total loans and leases and foreclosed real estate were 0.08% at the end of the quarter, a decrease of 2 basis points from the same quarter of 2022. - Net loan and lease charge-offs during the third quarter of 2023 were $2.0 million or 6 basis points annualized of total average loans and leases outstanding. Net loan and lease charge-offs for the third quarter of 2023 were comprised of charge-offs of $3.6 million partially offset by recoveries of $1.6 million. Compared to the same quarter of 2022, net loan and lease charge-offs increased by $0.9 million or 3 basis points annualized on total average loans and leases outstanding. - The allowance for credit losses on loans and leases was $145.3 million as of September 30, 2023, an increase of $0.8 million from December 31, 2022. The ratio of the allowance for credit losses to total loans and leases outstanding was 1.04% at the end of the quarter, down 6 basis points from the same quarter of 2022. - Total assets were $23.5 billion as of September 30, 2023, a decrease of 0.2% from December 31, 2022. - The investment securities portfolio was $7.5 billion as of September 30, 2023, a decrease of 9% from December 31, 2022. The investment 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 as of September 30, 2023, an increase of 2% from December 31, 2022. - Total deposits were$20.8 billion as of September 30, 2023, an increase of 0.9% from December 31, 2022. - Total shareholders’ equity was $1.4 billion as of September 30, 2023, an increase of 3.6% from December 31, 2022. - No shares of common stock were repurchased under the share repurchase program in the third quarter of 2023. Total remaining buyback authority under the share repurchase program was $126.0 million as of September 30, 2023. - The Company’s Board of Directors declared a quarterly cash dividend of $0.70 per share on the Company’s outstanding common shares. The dividend will be payable on December 14, 2023 to shareholders of record at the close of business on November 30, 2023. - On October 5, 2023, the Company announced that the Board of Directors declared the quarterly dividend payment of $10.94 per share, equivalent to $0.2735 per depositary share, on its preferred stock. The depositary shares representing the Series A Preferred Stock are traded on the NYSE under the symbol “BOH.PRA.” The dividend will be payable on November 1, 2023 to shareholders of record of the preferred stock as of the close of business on October 17, 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 September 30, 2023 Average Balance | Income/ Expense | Yield/ Rate | Three Months Ended September 30, 2022 Average Balance | Income/ Expense | Yield/ Rate | Nine Months Ended September 30, 2023 Average Balance | Income/ Expense | Yield/ Rate | Nine Months Ended September 30, 2022 Average Balance | Table 1 Income/ Expense | Yield/ Rate | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Interest-Bearing Deposits in Other Banks | $2.9 | $— | 2.40% | $2.9 | $— | 1.32% | $3.2 | $0.1 | 2.60% | $3.3 | $— | 0.76% | | Funds Sold | 944.8 | 12.8 | 5.31 | 411.8 | 2.3 | 2.22 | 582.7 | 22.6 | 5.11 | 308.6 | 3.2 | 1.36 | | Investment Securities | | | | | | | | | | | | | | Available-for-Sale | | | | | | | | | | | | | | Taxable | 2,605.4 | 23.5 | 3.60 | 3,481.9 | 17.0 | 1.95 | 2,721.5 | 70.6 | 3.46 | 3,998.2 | 52.0 | 1.74 | | Non-Taxable | 3.5 | — | 3.21 | 2.5 | — | 1.56 | 7.6 | 0.2 | 4.22 | 2.8 | — | 1.84 | | Held-to-Maturity | | | | | | | | | | | | | | Taxable | 5,118.6 | 22.7 | 1.77 | 4,645.7 | 20.1 | 1.73 | 5,227.8 | 69.7 | 1.78 | 4,530.4 | 57.4 | 1.69 | | Non-Taxable | 35.0 | 0.2 | 2.10 | 35.6 | 0.2 | 2.10 | 35.2 | 0.6 | 2.10 | 35.7 | 0.6 | 2.10 | | Total Investment Securities | 7,762.5 | 46.4 | 2.39 | 8,165.7 | 37.3 | 1.82 | 7,992.1 | 141.1 | 2.36 | 8,567.1 | 110.0 | 1.71 | | Loans Held for Sale | 3.8 | 0.1 | 6.28 | 4.3 | 0.1 | 4.46 | 2.7 | 0.1 | 5.82 | 8.1 | 0.2 | 3.43 | | Loans and Leases 1 | | | | | | | | | | | | | | Commercial and Industrial | 1,515.0 | 18.9 | 4.96 | 1,353.8 | 12.5 | 3.66 | 1,461.2 | 52.7 | 4.82 | 1,339.0 | 31.4 | 3.13 | | Paycheck Protection Program | 13.1 | — | 1.32 | 28.0 | 0.2 | 3.02 | 14.8 | 0.2 | 1.70 | 51.7 | 2.5 | 6.59 | | Commercial Mortgage | 3,792.6 | 51.1 | 5.35 | 3,530.9 | 33.3 | 3.74 | 3,781.7 | 145.6 | 5.15 | 3,350.3 | 81.3 | 3.25 | | Construction | 241.9 | 3.7 | 6.09 | 233.0 | 2.8 | 4.81 | 256.2 | 11.1 | 5.81 | 227.7 | 7.3 | 4.30 | | Commercial Lease Financing | 62.6 | 0.3 | 1.84 | 89.1 | 0.4 | 1.58 | 64.9 | 0.5 | 1.11 | 94.0 | 1.0 | 1.49 | | Residential Mortgage | 4,715.3 | 42.8 | 3.62 | 4,526.6 | 37.4 | 3.30 | 4,695.4 | 123.8 | 3.51 | 4,439.1 | 108.6 | 3.26 | | Home Equity | 2,283.5 | 20.1 | 3.49 | 2,144.8 | 16.4 | 3.04 | 2,265.2 | 57.3 | 3.38 | 2,026.5 | 44.1 | 2.91 | | Automobile | 868.0 | 8.2 | 3.75 | 795.5 | 6.4 | 3.19 | 873.0 | 23.2 | 3.55 | 764.2 | 18.4 | 3.21 | | Other 2 | 411.2 | 6.5 | 6.24 | 425.0 | 5.9 | 5.48 | 420.8 | 19.0 | 6.04 | 416.5 | 17.0 | 5.44 | | Total Loans and Leases | 13,903.2 | 151.6 | 4.34 | 13,126.7 | 115.3 | 3.49 | 13,833.2 | 433.4 | 4.19 | 12,709.0 | 311.6 | 3.27 | | Other | 91.6 | 1.5 | 6.40 | 36.9 | 0.3 | 3.49 | 84.60 | 4.1 | 6.59 | 37.2 | 0.9 | 3.14 | | **Total Earning Assets 3** | 22,708.8 | 212.4 | 3.72 | 21,748.3 | 155.3 | 2.84 | 22,498.5 | 601.4 | 3.57 | 21,633.3 | 425.9 | 2.63 | | Cash and Due From Banks | 289.8 | | | 233.5 | | | 308.4 | | | 235.0 | | | | Other Assets | 1,388.8 | | | 1,154.0 | | | 1,317.5 | | | 1,090.9 | | | | Total Assets | $24,387.4 | | | $23,135.8 | | | $24,124.4 | | | $22,959.2 | | | | **Interest-Bearing Liabilities** | | | | | | | | | | | | | | Interest-Bearing Deposits | | | | | | | | | | | | | | Demand | $3,929.7 | $6.6 | 0.67% | $4,286.0 | $1.4 | 0.13% | $4,060.0 | $19.3 | 0.64% | $4,459.9 | $2.6 | 0.08% | | Savings | 7,952.6 | 39.1 | 1.95 | 7,962.0 | 6.6 | 0.33 | 7,876.1 | 86.3 | 1.46 | 7,733.3 | 9.5 | 0.16 | | Time | 2,767.8 | 26.5 | 3.79 | 1,146.9 | 2.3 | 0.79 | 2,288.2 | 58.1 | 3.40 | 1,023.6 | 4.1 | 0.53 | | Total Interest-Bearing Deposits | 14,650.1 | 72.2 | 1.95 | 13,394.9 | 10.3 | 0.30 | 14,224.3 | 163.7 | 1.54 | 13,216.8 | 16.2 | 0.16 | | Funds Purchased | — | — | 0.00 | 4.9 | 0.1 | 3.2 | 24.8 | 0.9 | 4.72 | 12.4 | 0.1 | 1.05 | | Short-Term Borrowings | — | — | — | — | — | — | 152.4 | 5.7 | 4.94 | 11.5 | 0.1 | 1.06 | | Securities Sold Under Agreements to Repurchase | 528.5 | 4.0 | 2.99 | 425.5 | 2.7 | 2.52 | 659.1 | 14.8 | 2.97 | 441.1 | 8.3 | 2.48 | | Other Debt | 1,365.7 | 14.8 | 4.31 | 10.3 | 0.2 | 7.05 | 1,043.6 | 33.7 | 4.31 | 10.3 | 0.6 | 7.05 | | **Total Interest-Bearing Liabilities** | 16,544.3 | 91.0 | 2.18 | 13,835.6 | 13.3 | 0.38 | 16,104.2 | 218.8 | 1.81 | 13,692.1 | 25.3 | 0.25 | | Net Interest Income | | $121.4 | | | $142.0 | | | $382.6 | | | $400.6 | | | Interest Rate Spread | | | 1.54% | | | 2.46% | | | 1.76% | | | 2.38% | | Net Interest Margin | | | 2.13% | | | 2.60% | | | 2.27% | | | 2.47% | | Noninterest-Bearing Demand Deposits | 5,842.0 | | | 7,468.8 | | | 6,089.8 | | | 7,404.5 | | | | Other Liabilities | 636.0 | | | 463.5 | | | 576.6 | | | 420.9 | | | | Shareholders’ Equity | 1,365.1 | | | 1,367.9 | | | 1,353.8 | | | 1,441.7 | | | | **Total Liabilities and Shareholders’ Equity** | $24,387.4 | | | $23,135.8 | | | $24,124.4 | | | $22,959.2 | | | 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 $0.4 million and $1.4 million for the three and nine months ended September 30, 2023, and $0.3 million and $0.8 million for the three and nine months ended September 30, 2022. *(dollars in millions)* | Analysis of Change in Net Interest Income - Taxable-Equivalent Basis Change in Interest Income: | Nine Months Ended September 30, 2023 Compared to September 30, 2022 Volume 1 | Rate 1 | Table 2 Total | | --- | ---: | ---: | ---: | | Interest-Bearing Deposits in Other Banks | $0.1 | $- | $0.1 | | Funds Sold | 4.7 | 14.7 | 19.4 | | Investment Securities | | | | | Available-for-Sale | | | | | Taxable | (20.6) | 39.2 | 18.6 | | Non-Taxable | 0.1 | 0.1 | 0.2 | | Held-to-Maturity | | | | | Taxable | 9.2 | 3.1 | 12.3 | | Non-Taxable | — | — | — | | Total Investment Securities | (11.3) | 42.4 | 31.1 | | Loans Held for Sale | (0.2) | 0.1 | (0.1) | | Loans and Leases | | | | | Commercial and Industrial | 3.1 | 18.2 | 21.3 | | Paycheck Protection Program | (1.2) | (1.1) | (2.3) | | Commercial Mortgage | 11.6 | 52.7 | 64.3 | | Construction | 1.0 | 2.8 | 3.8 | | Commercial Lease Financing | (0.4) | (0.1) | (0.5) | | Residential Mortgage | 6.5 | 8.7 | 15.2 | | Home Equity | 5.6 | 7.6 | 13.2 | | Automobile | 2.7 | 2.1 | 4.8 | | Other 2 | 0.1 | 1.9 | 2.0 | | Total Loans and Leases | 29.0 | 92.8 | 121.8 | | Other | 1.7 | 1.5 | 3.2 | | **Total Change in Interest Income** | 24.0 | 151.5 | 175.5 | | **Change in Interest Expense:** | | | | | Interest-Bearing Deposits | | | | | Demand | (0.3) | 17.0 | 16.7 | | Savings | 0.2 | 76.6 | 76.8 | | Time | 10.0 | 44.0 | 54.0 | | Total Interest-Bearing Deposits | 9.9 | 137.6 | 147.5 | | Funds Purchased | 0.2 | 0.6 | 0.8 | | Short-Term Borrowings | 4.3 | 1.3 | 5.6 | | Securities Sold Under Agreements to Repurchase | 4.7 | 1.8 | 6.5 | | Other Debt | 33.4 | (0.3) | 33.1 | | **Total Change in Interest Expense** | 52.5 | 141.0 | 193.5 | | **Change in Net Interest Income** | $(28.5) | $10.5 | $(18.0) | 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 88 basis points in the third quarter of 2023 and increased by 94 basis points in the first nine 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 57 basis points in the third quarter of 2023 and by 65 basis points in the first nine 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 309 basis points in the third quarter of 2023 and by 375 basis points in the first nine months of 2023 compared to the same periods in 2022 also due to the higher rates. Yields on our loan and lease portfolio increased by 85 basis points in the third quarter of 2023 and by 92 basis points in the first nine 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 180 basis points in the third quarter of 2023 and by 156 basis points in the first nine months of 2023 compared to the same periods in 2022. The interest rates on savings deposits increased by 162 basis points in the third quarter of 2023 and by 130 basis points in the first nine months of 2023 compared to the same periods in 2022. Interest rates paid on time deposits increased by 300 basis points in the third quarter of 2023 and by 287 basis points in the first nine months of 2023 compared to the same periods in 2022. The rates paid on securities sold under agreements to repurchase increased by 47 basis points in the third 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 $1.0 billion or 4% in the third quarter of 2023 and by $0.9 billion or 4% in the first nine 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 $533.0 million or 129% in the third quarter of 2023 and by $274.1 million or 89% in the first nine months of 2023 compared to the same periods in 2022. The average balance of our investment securities decreased by $0.4 billion or 5% in the third quarter of 2023 and by $0.6 billion or 7% in the first nine months of 2023 compared to the same periods in 2022. The average balance of our loan and lease portfolio increased by $0.8 billion or 6% in the third quarter of 2023 and by 9% in the first nine months of 2023 compared to the same periods in 2022. The average balance of our commercial mortgage portfolio increased by $261.7 million or 7% in the third quarter of 2023 and by $431.4 million or 13% in the first nine 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 $188.7 million or 4% in the third quarter of 2023 and by $256.3 million or 6% in the first nine 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 $138.7 million or 6% in the third quarter of 2023 and by $238.7 million or 12% in the first nine 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 nine months ended September 30, 2023, increased by $2.7 billion or 20% and by $2.4 billion or 18%, respectively, compared to the same periods in 2022 primarily due to increased time deposits and borrowings from the Federal Home Loan Bank. The average balances of our core interest-bearing deposit products for the three months ended September 30, 2023, decreased by $365.7 million or 3% and decreased by $257.1 million or 2% for the nine months ended September 30, 2023, compared to the same periods in 2022 as customers moved their funds into higher rate time deposits. The average balances of our interest-bearing deposits for the three and nine months ended September 30, 2023, increased by $1,255.2 million or 9% and by $1,007.5 million or 8%, respectively, compared to the same periods in 2022. The average balance of our interest-bearing demand deposits for the three and nine months ended September 30, 2023, decreased by $356.3 million or 8% and by $399.9 million or 9%, respectively, compared to the same periods in 2022. The average balance of our savings deposits decreased by $9.4 million for the three months ended September 30, 2023, and increased by $142.8 million or 1.8% for the nine months ended September 30, 2023compared to the same 2022 period. The average balance of our time deposits for the three and nine months ended September 30, 2023, increased by $1.6 billion or 141% and by $1.3 billion or 124%, respectively, compared to the same periods in 2022 due to the higher rate environment. The average balances of our securities sold under agreements to repurchase for the three and nine months ended September 30, 2023, increased by $103.0 million or 24% and by $218.0 million or 49% compared to the same periods in 2022. The increase was due to $300.0 million in repurchase agreements that originated in late 2022, offset by terminations of $575 million in the third quarter of 2023. The average balances of our other debt, which was comprised primarily of Federal Home Loan Bank (“FHLB”) advances, increased by $1.4 billion in the third quarter of 2023 and by $1.0 billion for the nine months ended September 30, 2023, compared to the same periods in 2022, primarily due to FHLB advances totaling $1.25 billion that originated during the second quarter of 2023, $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 September 30, 2023 | 2022 | Change | Nine Months Ended September 30, 2023 | 2022 | Table 3 Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Trust and Asset Management | 10,548 | $10,418 | $130 | 32,453 | $33,151 | $(698) | | Mortgage Banking | 1,059 | 1,002 | 57 | 3,239 | 4,989 | (1,750) | | Service Charges on Deposit Accounts | 7,843 | 7,526 | 317 | 23,167 | 22,107 | 1,060 | | Fees, Exchange, and Other Service Charges | 13,824 | 13,863 | (39) | 41,782 | 41,008 | 774 | | Investment Securities Gains (Losses), Net | (6,734) | (2,147) | (4,587) | (9,836) | (4,987) | (4,849) | | Annuity and Insurance | 1,156 | 1,034 | 122 | 3,465 | 2,695 | 770 | | Bank-Owned Life Insurance | 2,749 | 2,486 | 263 | 8,467 | 7,493 | 974 | | Other Income | 19,889 | (3,522) | 23,411 | 31,589 | 9,913 | 21,676 | | **Total Noninterest Income** | $50,334 | $30,660 | $19,674 | $134,326 | $116,369 | $17,957 | 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 $10.6 billion and $10.1 billion as of September 30, 2023, and September 30, 2022, respectively. Although total assets under administration increased, trust and asset management income decreased by $0.7 million or 2% for the first nine months of 2023 compared to the same period in 2022 primarily due to a decline in the asset values of customers' accounts that comprise the largest segment in our portfolio. 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 35% for the first nine months of 2023 compared to the same period in 2022, 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 $1.1 million or 5% for the first nine 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 2% for the first nine 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. Investment securities losses increased by $4.6 million in the third quarter and $4.9 million in the first nine months of 2023 compared to the same periods in 2022. The net losses in 2023 were primarily due to $4.6 million net losses on sales of investment securities. Although the Company had the ability to hold its investment securities until maturity, during the three months ended September 30, 2023, it made the strategic decision to reduce the size of its AFS portfolio by selling various corporate and municipal bonds which resulted in a realized loss of $4.6 million. Annuity and insurance income increased by $0.8 million or 29% for the first nine 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 $1.0 million or 13% for the first nine months of 2023 compared to the same period in 2022 primarily due to an increase in death benefits received. Other noninterest income increased by $23.4 million or 665% in the third quarter and $21.7 million or 219% for the first nine months of 2023 compared to the same periods in 2022 primarily due to a $14.7 million gain on the extinguishment of repurchase agreements in September 2023 combined with a $6.9 million loss on the sale of leased assets that was recognized in the prior year. #### Noninterest Expense Table 4 presents the components of noninterest expense. *(dollars in thousands)* | Noninterest Expense | Three Months Ended September 30, 2023 | 2022 | Change | Nine Months Ended September 30, 2023 | 2022 | Table 4 Change | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Salaries | $39,426 | $37,792 | $1,634 | $116,005 | $109,445 | $6,560 | | Incentive Compensation | 2,956 | 5,885 | (2,929) | 9,937 | 18,069 | (8,132) | | Share-Based Compensation | 4,072 | 3,558 | 514 | 11,327 | 11,319 | 8 | | Commission Expense | 676 | 1,005 | (329) | 2,098 | 3,878 | (1,780) | | Retirement and Other Benefits | 3,809 | 4,448 | (639) | 13,186 | 13,177 | 9 | | Payroll Taxes | 2,921 | 2,826 | 95 | 12,079 | 10,804 | 1,275 | | Medical, Dental, and Life Insurance | 2,835 | 2,605 | 230 | 10,267 | 8,430 | 1,837 | | Separation Expense | 2,130 | 1,819 | 311 | 5,189 | 2,509 | 2,680 | | Total Salaries and Benefits | 58,825 | 59,938 | (1,113) | 180,088 | 177,631 | 2,457 | | Net Occupancy | 10,327 | 10,186 | 141 | 30,190 | 29,942 | 248 | | Net Equipment | 9,477 | 9,736 | (259) | 30,425 | 28,432 | 1,993 | | Data Processing | 4,706 | 4,616 | 90 | 13,888 | 13,783 | 105 | | Professional Fees | 3,846 | 3,799 | 47 | 12,380 | 10,599 | 1,781 | | FDIC Insurance | 3,361 | 1,680 | 1,681 | 9,768 | 4,772 | 4,996 | | Other Expense: | | | | | | | | Advertising | 1,894 | 2,376 | (482) | 5,931 | 7,429 | (1,498) | | Delivery and Postage Services | 1,800 | 1,596 | 204 | 5,127 | 4,890 | 237 | | Broker's Charges | 959 | 837 | 122 | 2,817 | 3,551 | (734) | | Merchant Transaction and Card Processing Fees | 1,654 | 1,538 | 116 | 4,886 | 4,475 | 411 | | Mileage Program Travel | 1,098 | 1,185 | (87) | 3,285 | 3,537 | (252) | | Other | 7,654 | 8,262 | (608) | 22,771 | 23,521 | (750) | | Total Other Expense | 15,059 | 15,794 | (735) | 44,817 | 47,403 | (2,586) | | **Total Noninterest Expense** | $105,601 | $105,749 | $(148) | $321,556 | $312,562 | $8,994 | Total salaries and benefits expense decreased by $1.1 million or 2% for the third quarter of 2023 and increased by $2.5 million or 1% for the first nine months of 2023 compared to the same periods in 2022. The decrease in the third quarter 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 share-based compensation, medical, dental, and life insurance and separation expenses. The increase in the first nine months of 2023 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 and commission expense. Net equipment expense increased by $2.0 million or 7% for the first nine months compared to the same period in 2022. This increase was due to higher software license fees coupled with an increase in maintenance expense. Professional fees increased by $1.8 million or 17% for the first nine 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 $1.7 million or 100% in the third quarter of 2023 and by $5.0 million or 105% for the first nine 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 $0.7 million or 5% for the third quarter of 2023 and by $2.6 million or 5% for the first nine months of 2023 compared to the same periods in 2022. These decreases were primarily due to lower advertising, education and recruitment, 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 September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | Table 5 2022 | | --- | ---: | ---: | ---: | ---: | | Provision for Income Taxes | $15,767 | $13,765 | $46,704 | $47,130 | | Effective Tax Rates | 24.76% | 20.68% | 24.91% | 22.27% | The provision for income taxes was $15.8 million in the third quarter of 2023, an increase of $2.0 million compared to the same period in 2022. The effective tax rate for the third quarter of 2023 was 24.76%, an increase from 20.68% for the same period in 2022. The higher effective tax rate in the third 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, an increase in valuation allowance, and a decrease of tax benefits from low-income housing investments related to an investment in Lahaina. The provision for income taxes was $46.7 million in the first nine months of 2023, a decrease of $0.4 million compared to the same period in 2022. The effective tax rate for the first nine months of 2023 was 24.91%, an increase from 22.27% for the same period in 2022. The higher effective tax rate for the first nine 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 a decrease of tax benefits from low-income housing investments related to an investment in Lahaina. ### Analysis of Statements of Condition #### Investment Securities The carrying value of our investment securities portfolio was $7.5 billion and $8.3 billion as of September 30, 2023, and December 31, 2022, respectively. The decrease is due to sales of investment securities and cash flows from the portfolio not being reinvested into securities. 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 September 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 $0.5 million as of September 30, 2023, and $1.9 million as of December 31, 2022. Gross unrealized losses in our investment securities portfolio were $1.3 billion as of September 30, 2023, and $1.1 billion as of 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 | September 30, 2023 | December 31, 2022 | Table 6 Change | | --- | ---: | ---: | ---: | | Commercial and Industrial | $1,569,572 | $1,389,066 | $180,506 | | Paycheck Protection Program | 12,529 | 19,579 | (7,050) | | Commercial Mortgage | 3,784,339 | 3,725,542 | 58,797 | | Construction | 251,507 | 260,825 | (9,318) | | Lease Financing | 61,522 | 69,491 | (7,969) | | Total Commercial | 5,679,469 | 5,464,503 | 214,966 | | Consumer | | | | | Residential Mortgage | 4,699,140 | 4,653,072 | 46,068 | | Home Equity | 2,285,974 | 2,225,950 | 60,024 | | Automobile | 856,113 | 870,396 | (14,283) | | Other 1 | 398,795 | 432,499 | (33,704) | | Total Consumer | 8,240,022 | 8,181,917 | 58,105 | | **Total Loans and Leases** | $13,919,491 | $13,646,420 | $273,071 | 1Comprised of other revolving credit, installment, and lease financing. Total loans and leases as of September 30, 2023, increased by $273.1 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 September 30, 2023, increased by $215.0 million or 4% from December 31, 2022. Commercial and industrial loans increased by $180.5 million or 13% from December 31, 2022, primarily due to higher corporate demand for funding from new and existing customers. PPP loans decreased by $7.1 million, or 36% from December 31, 2022, primarily due to paydowns. Commercial mortgage loans increased by $58.8 million or 2% from December 31, 2022, primarily due to demand from new and existing customers. Construction loans decreased by $9.3 million or 4% from December 31, 2022, primarily due to paydowns and loans converted to commercial mortgages. Lease financing decreased by $8.0 million, or 11% from December 31, 2022, primarily due to paydowns. Consumer loans and leases as of September 30, 2023, increased by $58.1 million or 1% from December 31, 2022. Residential mortgage loans increased by $46.1 million or 1% from December 31, 2022. While overall production has decreased significantly due to the higher rate environment, overall loan balances increased primarily due to a shift in consumer preference to Adjustable Rate Mortgages for new home purchases. Payoffs remain low due to existing customers having lower interest rates deterring refinances. Home equity portfolio increased by $60.0 million or 3% from December 31, 2022, as a result of reduced payoff levels despite lower production levels. Automobile loans decreased by $14.3 million or 2% from December 31, 2022, as a result of decrease in production resulting from higher interest rates. Other consumer loans decreased by $33.7 million or 8% from December 31, 2022. due to slowdown in installment loan originations and continued paydown of installment loans and automobile leases. 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 September 30, 2023 Commercial | Hawaii | U.S. Mainland 1 | Guam | Other Pacific Islands | Table 7 Total | | --- | ---: | ---: | ---: | ---: | ---: | | Commercial and Industrial | $1,349,892 | $140,188 | $63,831 | $15,661 | $1,569,572 | | Paycheck Protection Program | 10,018 | 1,771 | 359 | 381 | 12,529 | | Commercial Mortgage | 3,302,771 | 285,679 | 195,449 | 440 | 3,784,339 | | Construction | 251,507 | — | — | — | 251,507 | | Lease Financing | 60,665 | — | 857 | — | 61,522 | | Total Commercial | 4,974,853 | 427,638 | 260,496 | 16,482 | 5,679,469 | | Consumer | | | | | | | Residential Mortgage | 4,619,557 | 3,479 | 75,639 | 465 | 4,699,140 | | Home Equity | 2,237,136 | 44 | 48,794 | — | 2,285,974 | | Automobile | 661,438 | — | 151,649 | 43,026 | 856,113 | | Other 2 | 340,086 | — | 48,714 | 9,995 | 398,795 | | Total Consumer | 7,858,217 | 3,523 | 324,796 | 53,486 | 8,240,022 | | **Total Loans and Leases** | $12,833,070 | $431,161 | $585,292 | $69,968 | $13,919,491 | | **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 | September 30, 2023 | December 31, 2022 | Table 8 Change | | --- | ---: | ---: | ---: | | Federal Home Loan Bank of Des Moines and Federal Reserve Bank Stock | $59,400 | $53,065 | $6,335 | | Derivative Financial Instruments | 210,734 | 47,717 | 163,017 | | Low-Income Housing and Other Equity Investments | 188,431 | 175,283 | 13,148 | | Deferred Compensation Plan Assets | 51,435 | 47,755 | 3,680 | | Prepaid Expenses | 21,611 | 18,651 | 2,960 | | Accounts Receivable | 21,510 | 12,168 | 9,342 | | Deferred Tax Assets | 191,743 | 177,713 | 14,030 | | Other | 41,059 | 41,636 | (577) | | **Total Other Assets** | $785,923 | $573,988 | $211,935 | Total other assets increased by $211.9 million or 37% from December 31, 2022. This increase was due to a $163.0 million increase in derivative financial instruments, which was driven by the conversion of our interest rate swap portfolio from LIBOR to CME Term SOFR. Collateral payments received for our LIBOR swap portfolio were considered legal settlements of the derivatives’ exposure in accordance with the rules of the central clearinghouses that were used for settlement purposes. These payments were required to be presented as a contra asset, which reduced the balance of our derivative financial instruments. Currently, our CME Term SOFR swaps are not clearable via a central clearinghouse. Thus, collateral payments received are treated as collateral rather than legal settlements of the derivatives’ exposure and are presented in Other Liabilities in the consolidated statements of condition. Federal Home Loan Bank of Des Moines stock increased by $6.3 million due to increase of stock activity. In addition, low-income housing and other equity investments increased by $13.1 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 | September 30, 2023 | December 31, 2022 | Table 9 Change | | --- | ---: | ---: | ---: | | Consumer | $10,036,261 | $10,304,335 | $(268,074) | | Commercial | 8,564,536 | 8,569,670 | (5,134) | | Public and Other | 2,201,512 | 1,741,691 | 459,821 | | **Total Deposits** | $20,802,309 | $20,615,696 | $186,613 | Total deposits were $20.8 billion as of September 30, 2023, an increase of $186.6 million or 1% from December 31, 2022. Consumer deposits decreased by $268.1 million primarily due to a $945.7 million decrease in core deposits, partially offset by $677.6 million increase in time deposits. Commercial deposits decreased by $5.1 million due to a decrease of $231.6 million in core deposits, partially offset by an increase of $226.5 million in time deposits. Public and other deposits increased by $459.8 million primarily from increases of $410.7 million in core deposits and $49.1 million in time deposits. Table 10 presents the composition of our savings deposits. *(dollars in thousands)* | Savings Deposits | September 30, 2023 | December 31, 2022 | Table 10 Change | | --- | ---: | ---: | ---: | | Money Market | $3,686,824 | $3,101,594 | $585,230 | | Regular Savings | 4,843,560 | 4,860,816 | (17,256) | | **Total Savings Deposits** | $8,530,384 | $7,962,410 | $567,974 | 55 The increase in Money Market was primarily due to an increase in commercial deposits of $653.0 million offset by $67.8 million decrease in consumer deposits. The decrease in Regular Savings was due to a decrease in consumer deposits of $357.2 million partially offset by increases of $270.6 million and $69.3 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 September 30, 2023 | | --- | ---: | | Three months or less | $490,126 | | After three through six months | 444,734 | | After six through twelve months | 232,454 | | After twelve months | 487,955 | | **Total** | $1,655,269 | Estimated uninsured deposits as calculated pursuant to regulatory guidance and reported in our Call Report include deposits that were collateralized by government-backed securities and intercompany deposits of wholly-owned subsidiaries. The table below presents a reconciliation of our estimated uninsured deposits reported in our Call Report to our adjusted uninsured deposits. We believe the adjusted uninsured deposits provides useful information about our overall credit risk related to our customers’ deposits. *(dollars in millions)* | Uninsured Deposits Reconciliation | September 30, 20231 | Table 11a December 31, 2022 | | --- | ---: | ---: | | Estimated Uninsured Deposits, as Reported in our Call Report1 | $10,949 | $10,486 | | Less: | | | | Deposits Collaterized by Government-Backed Securities | (2,103) | (1,630) | | Intercompany Deposits of Wholly-Owned Subsidiaries | (94) | (63) | | Other | (29) | (4) | | **Adjusted Uninsured Deposits** | $8,723 | $8,789 | 1Balances presented as of September 30, 2023 are preliminary. #### 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 | September 30, 2023 | December 31, 2022 | Table 12 Change | | --- | ---: | ---: | ---: | | Private Institutions | $150,000 | $725,000 | $(575,000) | | Government Entities | 490 | 490 | — | | **Total Securities Sold Under Agreements to Repurchase** | $150,490 | $725,490 | $(575,000) | In September 2023, the Company terminated repurchase agreements with three private institutions, with an aggregate outstanding balance of $425.0 million. The termination of these repurchase agreements resulted in a $14.7 million gain on debt extinguishment, which is reflected in other noninterest income in the consolidated statements of income. In August 2023, a private institution exercised their call right on two repurchase agreements, resulting in their termination, which had an outstanding balance of $150.0 million. Securities sold under agreements to repurchase was $150.5 million and $725.5 million as of September 30, 2023, and December 31, 2022, respectively. As of September 30, 2023, the weighted-average maturity was 1.11 years for our repurchase agreements with government entities and 5.46 years for our repurchase agreements with private institutions. As of September 30, 2023, the weighted-average interest rate for outstanding agreements with government entities and private institutions was 1.55% and 3.80%, 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 | September 30, 2023 | December 31, 2022 | Table 13 Change | | --- | ---: | ---: | ---: | | Federal Home Loan Bank Advances | $550,000 | $400,000 | $150,000 | | Finance Lease Obligations | 10,217 | 10,294 | (77) | | **Total** | $560,217 | $410,294 | $149,923 | Although FHLB Advances increased by only $150.0 million as of September 30, 2023 compared to December 31, 2022, we borrowed $1.4 billion from the FHLB during the first six months of 2023 in an effort to provide additional fixed-rate liquidity during that period and to serve as a short-term natural hedge in an environment where interest rates are expected to remain higher for a longer period of time. During the quarter ended September 30, 2023, our deposits increased significantly, providing us with more liquidity, and we also entered into more pay-fixed interest rate swaps, which manages our exposure to a higher interest rate environment. These events allowed us to terminate $1.2 billion in FHLB advances during the quarter ended September 30, 2023. ### 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 September 30, 2023 | 2022 1 | Nine Months Ended September 30, 2023 | Table 14 2022 1 | | --- | ---: | ---: | ---: | ---: | | Consumer Banking | $36,007 | $24,009 | $103,222 | $57,026 | | Commercial Banking | 32,308 | 28,805 | 98,197 | 88,576 | | **Total** | 68,315 | 52,814 | 201,419 | 145,602 | | Treasury and Other | (20,412) | (13) | (60,613) | 18,895 | | **Consolidated Total** | $47,903 | $52,801 | $140,806 | $164,497 | | 1 Certain prior period information has been reclassified to conform to current presentation. | | | | | #### Consumer Banking Net income increased by $12.0 million or 50% in the third 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 and lower salaries and benefits expense. The increase in the provision for credit losses was primarily due to lower recoveries in the home equity portfolio and higher net charge-offs in the automobile loan portfolio. Net income increased by $46.2 million or 81% in the first nine 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. 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 and home equity portfolios and higher net charge-offs in the installment loan and automobile loan portfolios. #### Commercial Banking Net income increased by $3.5 million in the third quarter of 2023 compared to the same period in 2022 primarily due to an increase in noninterest income, partially offset by a decrease to interest income, an increase in noninterest expense, and an increased tax provision. The increase in noninterest income is primarily due to a one-time pre-tax charge of $6.9 million in the third quarter of 2022 related to our agreement to sell assets which terminated certain leveraged leases, along with increased customer derivative program revenue. The decrease to interest income is primarily due to lower spreads on interest bearing and savings deposits along with commercial and industrial and construction loans. The decrease in interest income was partially offset by increased spreads on noninterest bearing deposits and larger average balances on time deposits and commercial mortgage loans. The increase in noninterest expense was driven by increased salaries and benefits, broker charges related to customer derivative program revenue, and higher allocated expenses. Net income increased by $9.6 million in the first nine months of 2023 compared to the same period in 2022 primarily due to an increase in interest income and noninterest income, partially offset by 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, along with larger average balances on savings, time deposits and commercial mortgage loans. The increase in interest income was partially offset by decreased spreads on commercial and industrial and construction loans, as well as interest bearing deposit and savings spreads. The increase in noninterest income is primarily due to a one-time pre-tax charge of $6.9 million in the third quarter of 2022 related to our agreement to sell assets which terminated certain leveraged leases, along with increases in customer derivative program revenue, merchant income, and fees earned on money market sweep balances. The increase was partially offset by a decrease in account analysis and loan fee revenue. The increase in noninterest expense was driven by increased salaries and benefits, merchant transaction fees, and higher allocated expenses. #### Treasury and Other Net income decreased by $20.4 million in the third quarter of 2023 compared to the same period in 2022 primarily due to lower net interest income. This was partially offset by higher noninterest income and 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 noninterest income is primarily due to gains on the extinguishment of repurchase agreements, partially offset by realized losses on the sale of available-for-sale investment securities. 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 $79.6 million in the first nine 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 and higher noninterest income. 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 for credit losses 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. The increase in noninterest income is primarily due to gains on the extinguishment of repurchase agreements, partially offset by realized losses on the sale of available-for-sale investment securities. ### Corporate Risk Profile #### Credit Risk As of September 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 | September 30, 2023 | December 31, 2022 | Table 15 Change | | --- | ---: | ---: | ---: | | Commercial and Industrial | $43 | $37 | $6 | | Commercial Mortgage | 2,996 | 3,309 | (313) | | Total Commercial | 3,039 | 3,346 | (307) | | Consumer | | | | | Residential Mortgage | 3,706 | 4,239 | (533) | | Home Equity | 3,734 | 4,022 | (288) | | Total Consumer | 7,440 | 8,261 | (821) | | Total Non-Accrual Loans and Leases | 10,479 | 11,607 | (1,128) | | Foreclosed Real Estate | 1,040 | 1,040 | — | | **Total Non-Performing Assets** | $11,519 | $12,647 | $(1,128) | | **Accruing Loans and Leases Past Due 90 Days or More** | | | | | Consumer | | | | | Residential Mortgage | $3,519 | $2,429 | $1,090 | | Home Equity | 2,172 | 1,673 | 499 | | Automobile | 393 | 589 | (196) | | Other 1 | 643 | 683 | (40) | | Total Consumer | 6,727 | 5,374 | 1,353 | | **Total Accruing Loans and Leases Past Due 90 Days or More** | $6,727 | $5,374 | $1,353 | | **Total Loans and Leases** | $13,919,491 | $13,646,420 | $273,071 | | 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 | 0.05% | 0.05% | (0.00)% | | Ratio of Commercial Non-Performing Assets to Total Commercial Loans and Leases and Commercial Foreclosed Real Estate | 0.05% | 0.06% | (0.01)% | | 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 | 2,986 | | | | Reductions | | | | | Payments | (2,021) | | | | Return to Accrual Status | (2,083) | | | | Sales of Foreclosed Real Estate | | | | | Charge-offs/Write-downs | (10) | | | | Total Reductions | (4,114) | | | | **Balance as of September 30, 2023** | $11,519 | | | 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 $3.7 million as of September 30, 2023, a decrease of $533 thousand from December 31, 2022. As of September 30, 2023, our residential mortgage non-accrual loans were comprised of 18 loans with a weighted average current loan-to-value ratio of 59%. 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 September 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 $6.7 million as of September 30, 2023, a $1.4 million or 25% 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 September 30, 2023 | 2022 | For the Nine Months Ended September 30, 2023 | Table 16 2022 | | --- | ---: | ---: | ---: | ---: | | **Balance at Beginning of Period** | $151,702 | $154,098 | $151,247 | $164,297 | | Loans and Leases Charged-Off | | | | | | Commercial | | | | | | Commercial and Industrial | (294) | (147) | (758) | (729) | | Commercial Mortgage | — | — | — | — | | Consumer | | | | | | Residential Mortgage | — | — | (6) | (80) | | Home Equity | (13) | — | (68) | (90) | | Automobile | (1,353) | (794) | (4,309) | (3,481) | | Other 1 | (1,957) | (1,924) | (6,296) | (5,739) | | **Total Loans and Leases Charged-Off** | (3,617) | (2,865) | (11,437) | (10,119) | | Recoveries on Loans and Leases Previously Charged-Off | | | | | | Commercial | | | | | | Commercial and Industrial | 72 | 45 | 225 | 465 | | Consumer | | | | | | Residential Mortgage | 69 | 156 | 188 | 1,130 | | Home Equity | 131 | 367 | 893 | 1,298 | | Automobile | 721 | 441 | 2,170 | 1,864 | | Other 1 | 575 | 709 | 1,867 | 2,098 | | **Total Recoveries on Loans and Leases Previously Charged-Off** | 1,568 | 1,718 | 5,343 | 6,855 | | Net Charged-Off - Loans and Leases | (2,049) | (1,147) | (6,094) | (3,264) | | Net Charged-Off - Accrued Interest Receivable | — | — | — | (47) | | Provision for Credit Losses: | | | | | | Loans and Leases | 1,945 | (929) | 6,918 | (8,121) | | Accrued Interest Receivable | — | — | — | (367) | | Unfunded Commitments | 55 | 905 | (418) | 429 | | Total Provision for Credit Losses | 2,000 | (24) | 6,500 | (8,059) | | **Balance at End of Period** | $151,653 | $152,927 | $151,653 | $152,927 | | **Components** | | | | | | Allowance for Credit Losses - Loans and Leases | $145,263 | $146,436 | $145,263 | $146,436 | | Reserve for Unfunded Commitments | 6,390 | 6,491 | 6,390 | 6,491 | | **Total Reserve for Credit Losses** | $151,653 | $152,927 | $151,653 | $152,927 | | **Average Loans and Leases Outstanding** | $13,903,214 | $13,126,717 | $13,833,164 | $12,709,045 | | Ratio of Net Loans and Leases Charged-Off to Average Loans and Leases Outstanding (annualized) | 0.06% | 0.03% | 0.06% | 0.03% | | Ratio of Allowance for Credit Losses to Loans and Leases Outstanding 2 | 1.04% | 1.10% | 1.04% | 1.10% | 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 September 30, 2023, the Allowance was $145.3 million or 1.04% of total loans and leases outstanding, compared with an Allowance of $144.4 million or 1.06% of total loans and leases outstanding as of December 31, 2022. The Allowance as of September 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 $2.0 million or 0.06% of total average loans and leases on an annualized basis, in the third quarter of 2023 compared to net charge-offs of $1.1 million or 0.03% of total average loans and leases on an annualized basis, in the third quarter of 2022. The increase in net charge-offs on loans and leases was primarily due to the Company experiencing a low rate of charge-offs in recent years and charge-offs returning closer to historical rates. #### Reserve for Unfunded Commitments The Unfunded Reserve was $6.4 million as of September 30, 2023, a decrease of $0.4 million or 6% from December 31, 2022, primarily driven by lower 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 nine months of 2023, the provision for credit losses was $6.5 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 managing volatility to an acceptable level. 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. We utilize two management guidelines to measure our interest rate risk exposure: 1) net interest income (NII) sensitivity, and 2) economic value of equity (“EVE”) sensitivity. NII and EVE sensitivities measure the estimated percentage change in 12-month forward looking net-interest income and economic value, respectively, under instantaneous parallel shocks of the yield curve that range from -400 basis points to +400 basis points. The analysis assumes a static balance sheet and interest rates. The results are measured relative to established guidelines that ensure that fluctuation in income and valuation in both up and down rate shocks remain within levels approved by the Asset and Liability Management Committee (“ALCO”) and the Board of Directors. For the quarter ended September 30, 2023, we remained within applicable guidelines. While we recognize that instantaneous parallel shocks of the entire yield curve are unrealistic, we believe that the application of immediate shocks ranging from -400 basis points to + 400 basis points provides us with a sufficient range of potential outcomes to frame our risk exposures. 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, including mix and duration, of the investment securities portfolio; and - using derivative financial instruments. Changes in interest rates may have a material impact on earnings and valuation as a result of balance sheet cash flow, maturity structure and repricing frequency. The investment portfolio and loan portfolio has significant repricing volumes and cash flows from maturities and paydowns, providing us with the opportunity to redeploy funds in order to respond to the changing rate environment. These assets are primarily funded by deposit balances, which have an indeterminate life. Historically, our deposit base has consisted primarily of core consumer and commercial deposit relationships. While we strive to position our balance sheet to organically reduce volatility in earnings and valuation, primarily through our funding and investment portfolio positioning, as well as product pricing strategies, we have also established a hedging program designed to allow us to adjust the duration of our earning assets synthetically. As of September 30, 2023, our hedging program consisted primarily of pay-fixed interest rate swaps. As interest rates change, we may use different instruments to manage interest rate risk, including caps, floors, swaptions and other commonly utilized derivative instruments. See Note 11 to the Consolidated Financial Statements. 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 assets and liabilities in various interest rate environments. This model is used to estimate and measure our balance sheet sensitivity to changes in interest rates. Given the structure of our balance sheet, model results are particularly sensitive to changes in prepayment rates on mortgage-related assets and interest-bearing deposit repricing behavior. We utilize a model to estimate the prepayment behavior of our mortgage-related assets, which considers the characteristics of the underlying mortgage loans, including rate (used to gauge refinance incentive), seasoning or age, and seasonality. The model’s forecasted results are regularly tested against historical prepayment behavior and is, in the ordinary course, recalibrated if the difference between actual and projected prepayments exceed established guidelines. Separate models are utilized to project interest-bearing deposit repricing behavior in various interest rate environments. These models were developed based upon our historical repricing behavior over several interest rate cycles. The models’ forecast results are periodically tested against historical pricing and have been and may continue to be recalibrated. Table 17 presents, as of September 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. *(dollars in thousands)* | Net Interest Income Sensitivity Profile Gradual Change in Interest Rates (basis points) | Impact on Future Annual Net Interest Income September 30, 2023 | | December 31, 2022 | Table 17 | | --- | ---: | ---: | ---: | ---: | | +200 | $13,143 | 2.6% | $13,943 | 2.4% | | +100 | 6,379 | 1.3 | 7,673 | 1.3 | | -100 | (6,920) | (1.4) | (4,365) | (0.7) | | **Immediate Change in Interest Rates (basis points)** | | | | | | +200 | $26,650 | 5.3% | $22,100 | 3.8% | | +100 | 13,258 | 2.6 | 11,627 | 2.0 | | -100 | (16,201) | (3.2) | (8,659) | (1.5) | Based on our net interest income simulation as of September 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 September 30, 2023, net interest income sensitivity to changes in interest rates as of September 30, 2023, was more sensitive in comparison to the sensitivity profile as of December 31, 2022. The increase in sensitivity was due to the addition of pay-fixed interest rate swaps, partially offset by an increase in deposit sensitivity. 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 refinancing, 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. We maintain access to ample sources of readily available contingent liquidity. As of September 30, 2023, we had pledged loans and investment securities to the Federal Reserve Discount Window and the Bank Term Funding Program (“BTFP”) and had remaining borrowing capacity of $6.1 billion. The BTFP enables depository institutions to pledge eligible investment securities, primarily government and agency securities, to the Federal Reserve with borrowing capacity based upon the par value, not the fair value, of collateral. While we have pledged securities to the BTFP as a contingent funding source, we have not accessed the facility. We are also a member of the Federal Home Loan Bank (“FHLB”) Des Moines. As of September 30, 2023, we had remaining borrowing capacity of $2.5 billion. In addition, we utilize our investment securities portfolio as collateral to secure deposits of public entities as well as repurchase agreements with private institution counterparties. The high-quality nature of our investment securities portfolio, which consists primarily of government and agency securities, facilitates the use of these assets for pledging purposes. Other sources of liquidity also include investment securities in our available-for-sale securities portfolio and our ability to sell loans in the secondary market. Our core deposits have historically provided us with a long-term source of stable and relatively low-cost source of funding. Additional funding is also available through the issuance of long-term debt or equity. General market and economic conditions will impact our ability to borrow funds from external sources, as well as the cost of such borrowing both in terms of rate as well as haircuts on collateral pledged to support such borrowings. Although a significant portion of our investment securities were in an unrealized loss position as of September 30, 2023, we believe we have sufficient access to various forms of liquidity that would alleviate the need to liquidate these investment securities and realize the losses. ### 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 September 30, 2023, the Company’s capital levels remained characterized as “well-capitalized.” There have been no conditions or events since September 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 September 30, 2023, and December 31, 2022. *(dollars in thousands)* | Regulatory Capital and Ratios Regulatory Capital | September 30, 2023 | Table 18 December 31, 2022 | | --- | ---: | ---: | | Total Common Shareholders’ Equity | $1,188,353 | $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 | (24,826) | (25,078) | | Net Unrealized Losses on Investment Securities 1 | (416,784) | (409,579) | | Other | (198) | (198) | | Common Equity Tier 1 Capital | 1,606,164 | 1,554,741 | | Preferred Stock, Net of Issuance Cost | 175,487 | 175,487 | | Tier 1 Capital | 1,781,651 | 1,730,228 | | Allowable Reserve for Credit Losses | 147,624 | 145,202 | | **Total Regulatory Capital** | $1,929,275 | $1,875,430 | | **Risk-Weighted Assets** | $14,222,825 | $14,238,798 | | **Key Regulatory Capital Ratios** | | | | Common Equity Tier 1 Capital Ratio | 11.29% | 10.92% | | Tier 1 Capital Ratio | 12.53 | 12.15 | | Total Capital Ratio | 13.56 | 13.17 | | Tier 1 Leverage Ratio | 7.22 | 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 September 30, 2023, are preliminary. As of September 30, 2023, shareholders’ equity was $1.4 billion, an increase of $46.8 million or 4% from December 31, 2022. For the first nine months of 2023, net income of $140.8 million, share-based compensation of $12.0 million, and common stock issuances of $4.8 million were offset by cash dividends paid of $83.8 million on common shares, common stock repurchased of $14.1 million, other comprehensive loss of $7.0 million, and cash dividends declared of $5.9 million on preferred shares. No shares of common stock were repurchased under the share repurchase program in the third 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 September 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 September 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 October 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 November 1, 2023, to shareholders of record of the preferred stock at the close of business on October 17, 2023. In October 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 December 14, 2023, to shareholders of record of the common stock at the close of business on November 30, 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, 1,526 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 September 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 September 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 September 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 Oct 25, 2023. Source: SEC EDGAR, the filing index for accession 0000950170-23-055092. Last ingested by Listed: Oct 26, 2026, 17:06 ET. No prices; not investment advice.