Bank of Hawaii Corp: Form 10-Q for the period ended Sep 30, 2024

The following MD&A is intended to help the reader understand the Company and its operations and is focused on our fiscal 2024 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 2023 fiscal year, as well as the year-to-year comparison between fiscal years 2023 and 2022, are included in "Management's Discussion and Analysis of Financial Condition and Results of Operations," Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 29, 2024.

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 Hawai‘i; (2) the compounding effects of the COVID-19 pandemic, including reduced tourism in Hawai‘i, the duration and scope of government mandates or other limitations of or restrictions on travel, volatility in the international and national economy and credit markets, inflation, worker absenteeism, quarantines or other travel or health-related restrictions, the length and severity of the COVID-19 pandemic, the pace of recovery following the COVID-19 pandemic, 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) changes in our credit quality or risk profile that may increase or decrease the required level of our reserve for credit losses; (5) 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; (6) changes to the amount and timing of proposed common stock repurchases; (7) unanticipated changes in the securities markets, public debt markets, and other capital markets in the U.S. and internationally, (8) changes in fiscal and monetary policies of the markets in which we operate; (9) 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; (10) changes in accounting standards; (11) 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; (12) 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; (13) 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; (14) 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 Hawai‘i; (15) competitive pressures in the markets for financial services and products; (16) actual or alleged conduct which could harm our reputation; and (17) the impact of litigation and regulatory investigations of the Company, including costs, expenses, settlements, and judgments. 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.

Given these risks and uncertainties, you should not place undue reliance on any forward-looking statement as a prediction of our actual results. The risks and uncertainties that could cause actual results to differ materially from our historical experience and our expectations and projections include but are not limited to those described in Item 1A, “Risk Factors,” Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in our most recent Annual Report on Form 10-K and in subsequent SEC filings. 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 Unaudited 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, 2023. 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 critical accounting policies by management. Several factors are considered in determining whether or not a policy is critical in the preparation of the Consolidated Financial Statements. Factors include, among other things, whether the policy requires management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and whether it is likely that materially different results would be reported under different conditions or different assumptions. The accounting policies we believe are 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, 2023. There have been no significant changes in the Company’s application of critical accounting policies since December 31, 2023.

Overview

We are a regional financial services company serving businesses, consumers, and governments in Hawai‘i, 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 delivering strong financial results while maintaining prudent risk and capital management strategies and affirming our commitment to support our local communities.

Hawai’i Economy

Global economic conditions remain broadly favorable for the local economy. The Maui economy continues its gradual post-wildfire recovery while the visitor industry for the rest of the Hawai’i is expected to operate at a high level. Overall construction will continue at a high level supported by Maui rebuilding, other housing developments, and federal military projects. Hawai‘i’s unemployment rate was 2.9% in September 2024, which was below the U.S. unemployment rate of 4.1%.

For the first nine months of 2024, the median price of single-family home and condominium sales on Oahu increased by 4.8% and 1.0%, respectively, compared to the same period in 2023. The volume of single-family homes sales on Oahu increased 5.8% and condominium sales decreased 5.6% compared to the same period in 2023. Inventory of single-family homes and condominiums on Oahu was 3.4 months and 5.2 months, respectively.

Earnings Summary

Net income for the third quarter of 2024 was $40.4 million, a decrease of $7.5 million or 16% compared to the same period in 2023. Diluted earnings per common share was $0.93 for the third quarter of 2024, a decrease of $0.24 or 21% compared to the same period in 2023.

• The return on average common equity for the third quarter of 2024 was 11.50% compared with 15.38% in the same quarter of 2023.
• Net interest income for the third quarter of 2024 was $117.6 million, a decrease of 3% compared to the same period last year.
• Net interest margin was 2.18% in the third quarter of 2024, a increase of 5 basis points from the same period in 2023.
• The provision for credit losses for the third quarter of 2024 and 2023 was $3.0 million and $2.0 million, respectively.
• Noninterest income was $45.1 million in the third quarter of 2024, a decrease of 10% compared to the same period last year.
• Noninterest expense was $107.1 million in the third quarter of 2024, an increase of 1% compared to the same period last year.
• The effective tax rate for the third quarter of 2024 was 23.33% compared with 24.76% compared to the same period last year.

We maintained a strong balance sheet during the third quarter of 2024, with what we believe are appropriate reserves for credit losses and strong capital.

• Total assets were $23.8 billion as of September 30, 2024, a decrease of 0.3% from December 31, 2023.
• Total loans and leases were $13.9 billion as of September 30, 2024, a decrease of 0.3% from December 31, 2023.
• The allowance for credit losses on loans and leases was $147.3 million as of September 30, 2024, an increase of $0.9 million from December 31, 2023. The ratio of the allowance for credit losses to total loans and leases outstanding was 1.06% at the end of the quarter, up 1 basis point from December 31, 2023.
• Net loan and lease charge-offs during the third quarter of 2024 were $3.8 million or 11 basis points annualized of total average loans and leases outstanding. Net loan and lease charge-offs for the third quarter of 2024 were comprised of charge-offs of $5.3 million partially offset by recoveries of $1.5 million. Compared to the same quarter of 2023, net loan and lease charge-offs increased by $1.8 million or 5 basis points annualized on total average loans and leases outstanding.
• Total non-performing assets ("NPAs") were $19.8 million as of September 30, 2024, up $8.0 million from December 31, 2023. NPAs were 14 basis points of total loans and leases and foreclosed real estate at the end of the quarter, up 6 basis points from December 31, 2023.
• The investment securities portfolio was $7.3 billion as of September 30, 2024, a decrease of 2% from December 31, 2023. The investment portfolio remains largely comprised of securities issued by U.S. government agencies and U.S. government-sponsored enterprises.
• Total deposits were $21.0 billion as of September 30, 2024 and $21.1 billion as of December 31, 2023.
• Total shareholders’ equity was $1.7 billion as of September 30, 2024, an increase of 18% from December 31, 2023 due to the issuance of Series B Preferred Stock in the second quarter of 2024.
• No shares of common stock were repurchased under the share repurchase program in the third quarter of 2024. Total remaining buyback authority under the share repurchase program was $126.0 million at September 30, 2024.
• 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 13, 2024 to shareholders of record at the close of business on November 29, 2024.
• On October 4, 2024, the Company announced that the Board of Directors declared quarterly dividend payments of $10.94 per share, equivalent to $0.2735 per depositary share, on its preferred stock, Series A, and $20.00 per share, equivalent to $0.5000 per depositary share, on its preferred stock, Series B. The depositary shares representing the Series A Preferred Stock and Series B Preferred Stock are traded on the NYSE under the symbol “BOH.PRA” and “BOH.PRB”, respectively. The dividends on the Series A Preferred Stock and Series B Preferred Stock will be payable on November 1, 2024 to shareholders of record of the preferred stock as of the close of business on October 17, 2024.

Analysis of Unaudited 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)

1Due to rounding, the amounts presented in this table may not tie to other amounts presented elsewhere in this report.

2Interest income includes taxable-equivalent basis adjustments, based upon a federal statutory tax rate of 21%, of $1.0 million and $2.5 million for the three and nine months ended September 30, 2024, respectively, and $0.4 million and $1.4 million for the three and nine months ended September 30, 2023, respectively.

3Non-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.

4Comprised of other consumer revolving credit, installment, and consumer lease financing.

(dollars in millions)

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.

The average balance of our earning assets for the three and nine months ended September 30, 2024 decreased by $952.3 million or 4% and $821.0 million or 4%, respectively, compared to the same periods in 2023. These decreases were due to actions taken to reduce our wholesale and non-core funding in the third quarter of 2023 and second quarter of 2024. As compared to the same periods last year, yields on our investment securities portfolio increased by 7 and 6 basis points during the three and nine months ended September 30, 2024, respectively, primarily due to income earned from interest rate swaps that hedge a portion of our AFS securities portfolio. Yields on our loan and lease portfolio increased by 48 and 55 basis points during the three and nine months ended September 30, 2024, respectively, due to yield increases on our floating rate loan portfolio, higher rates on loans originated during the period, and income earned from interest rate swaps that hedge a portion of our residential mortgage portfolio.

The average balance of our interest-bearing liabilities for the three and nine months ended September 30, 2024 decreased by $696.5 million or 4% and $369.1 million or 2%, respectively, compared to the same periods in 2023 due to the termination of $1.2 billion in FHLB advances during the quarter ended September 30, 2023 and the termination of $625.0 million in repurchase agreements ($575.0 million in 2023 and $50.0 million in May 2024). As compared to the same periods last year, the cost of our interest-bearing liabilities increased by 41 and 72 basis points during the three and nine months ended September 30, 2024, respectively, primarily driven by customer migration to higher rate deposit products. The cost of our interest-bearing deposits increased by 57 basis points in the third quarter of 2024 and by 92 basis points in the first nine months of 2024 compared to the same periods in 2023.

Noninterest Income

Table 3 presents the components of noninterest income.

(dollars in thousands)

Fees, exchange, and other service charges increased by $1.1 million or 8% in the third quarter of 2024 and by $1.1 million or 3% for the first nine months of 2024 compared to the same periods in 2023, primarily due to an increase in fee income earned, coupled with an increase in merchant income as a result of higher card related transaction volumes. 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.

Trust and asset management income increased by $1.4 million or 13% in the third quarter of 2024 and by $2.9 million or 9% for the first nine months of 2024 compared to the same periods in 2023 primarily due to an increase in the asset values of our customers' accounts. Trust and asset management income is comprised of fees earned from the management and administration of trusts and other customer assets. These fees are largely based upon the market value of the assets and the fee rate charged to customers. Total trust assets under management were $13.0 billion and $10.6 billion as of September 30, 2024 and 2023, respectively.

Bank-owned life insurance increased by $0.8 million or 29% in the third quarter of 2024 and by $1.8 million or 21% for the first nine months of 2024 compared to the same periods last year. The increase in the third quarter was primarily due to an increase in the yield on the underlying assets coupled with an increase in death benefits. The increase for the first nine months of 2024 was primarily due to an increase in the yield on the underlying assets, partially offset by lower death benefits.

Investment securities losses decreased by $5.6 million in the third quarter of 2024 and for the first nine months of 2024 compared to the same periods in 2023 primarily due to $4.6 million net losses on sales of investment securities and higher fees paid to counterparties for Visa Class B share conversion rate expense during the third quarter of 2023.

Other noninterest income decreased by $14.8 million or 74% in the third quarter of 2024 and by $17.4 million or 55% for the first nine months of 2024 compared to the same periods last year primarily due to a $14.7 million gain on the extinguishments of repurchase agreements during 2023 coupled with a decrease in customer derivative fees.

Noninterest Expense

Table 4 presents the components of noninterest expense.

(dollars in thousands)

Total salaries and benefits expense decreased by $6.2 million or 3% during the nine months ended September 30, 2024 compared to the same period last year, primarily due to a decrease in separation expense coupled with a decrease in payroll taxes and retirement and other benefits, partially offset by an increase in incentive compensation.

Net occupancy expense increased by $0.5 million or 5% in the third quarter of 2024 and by $1.6 million or 5% for the first nine months of 2024 compared to the same periods in 2023 due to an increase in vacancies of subleased properties and an increase in common area maintenance charges assessed by our lessors.

Professional fees increased by $0.9 million or 23% in the third quarter of 2024 and by $0.3 million or 2% for the first nine months of 2024 compared to the same periods in 2023 primarily due to an increase in consulting fees and various outsourced support functions.

FDIC insurance expense increased by $4.4 million or 45% for the first nine months of 2024 compared to the same period in 2023 primarily due to an increase in an industry-wide non-recurring FDIC special assessment.

Total other expense decreased by $1.6 million or 4% for the first nine months ended September 30, 2024, compared to the same period in 2023 primarily due to lower broker's charges as a result of fewer customer swaps during the current period.

Provision for Income Taxes

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

(dollars in thousands)

49

The provision for income taxes was $12.3 million in the third quarter of 2024, a decrease of $3.5 million compared to the same period in 2023. The effective tax rate for the third quarter of 2024 was 23.33%, a decrease from 24.76% for the same period in 2023. The lower effective tax rate in the third quarter of 2024 compared to the same period in 2023 was primarily due to an increase in tax-exempt income.

The provision for income taxes was $35.5 million in the first nine months of 2024, a decrease of $11.2 million compared to the same period in 2023. The effective tax rate for the first nine months of 2024 was 24.25%, a decrease from 24.91% for the same period in 2023. The lower effective tax rate for the first nine months of 2024 compared to the same period in 2023 was due to an increase in tax-exempt income and an increase in benefits from low-income housing investments.

Analysis of Unaudited Statements of Condition

Investment Securities

The carrying value of our investment securities portfolio was $7.3 billion and $7.4 billion as of September 30, 2024 and December 31, 2023, respectively. The decrease is primarily due to cash flows from the portfolio not being reinvested into securities in the first and second quarters of 2024.

We continually evaluate our investment securities portfolio in conjunction with our 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 AFS and HTM 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, 2024, these mortgage-backed securities were all AAA-rated, with a low probability of a change in their credit ratings in the near future.

Net unrealized losses in our investment securities portfolio were $0.9 billion as of September 30, 2024 and $1.0 billion as of December 31, 2023. See Note 3 to the unaudited 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)

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

Total loans and leases as of September 30, 2024 decreased by $46.4 million from December 31, 2023 primarily due to reductions in our consumer loans, partially offset by growth in our commercial loan portfolio.

Commercial loans and leases as of September 30, 2024 increased by $152.6 million or 3% from December 31, 2023 primarily due to commercial mortgage loans, which increased by $119.6 million or 3% due to increased demand.

Consumer loans and leases as of September 30, 2024 decreased by $199.0 million or 2% from December 31, 2023. Residential mortgage loans decreased by $61.5 million or 1% from December 31, 2023 primarily due to fewer loan originations in the higher rate environment. The home equity portfolio decreased by $69.0 million or 3% from December 31, 2023 as a result of paydowns and fewer loan originations. Automobile loans decreased by $50.9 million or 6% from December 31, 2023 due to fewer loan originations as a result of increased competition.

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

(dollars in thousands)

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 Hawai‘i. 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 Hawai‘i.

Other Assets

Table 8 presents the major components of other assets.

(dollars in thousands)

Low-income housing and other equity investments increased by $12.4 million due to increased funding of existing projects. Deferred tax assets and tax receivable decreased by $19.7 million due to temporary differences between financial reporting and income tax basis of unrealized losses on investment securities and decrease in federal income tax receivable. Derivative financial instruments decreased by $20.7 million due to decreasing fair value of our interest rate swaps impacted by prevailing interest rates, partially offset by the termination of certain fair value hedges. Prepaid expenses increased by $4.1 million due to an increase in prepaid insurance and other prepaid expenses. Deferred compensation plan assets increased by $6.5 million primarily due to contributions from plan participants and net appreciation in plan assets during the period.

Deposits

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

(dollars in thousands)

Total deposits were $21.0 billion as of September 30, 2024, a decrease of $76.7 million or 0.4% from December 31, 2023. Consumer deposits increased by $20.7 million due to an increase of $231.1 million in time deposits, partially offset by a decrease of $210.4 million in core deposits, which include all deposits excluding time deposits. Commercial deposits decreased by $245.0 million primarily from decreases of $178.7 million in core deposits and $66.3 million in time deposits. Public and other deposits increased by $147.6 million due to an increase of $201.2 million in core deposits, partially offset by a decrease of $53.6 million in time deposits.

Table 10 presents the composition of our savings deposits.

(dollars in thousands)

The increase in Money Market was primarily due to an increase in commercial deposits of $372.9 million partially offset by $35.6 million decrease in consumer deposits. The increase in Regular Savings was primarily due to increases in consumer deposits of $139.1 million and $8.6 million in public deposits, partially offset by a decrease of $11.3 million in commercial deposits.

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

(dollars in thousands)

Estimated uninsured deposits is calculated pursuant to regulatory guidance and reported in our Call Report, and includes deposits collateralized by government-backed securities and intercompany deposits of wholly-owned subsidiaries. The table below presents a reconciliation of our estimated uninsured deposits as reported in our Call Report to our adjusted uninsured deposits. We believe the adjusted uninsured deposits provides useful information about our deposits at risk.

(dollars in thousands)

1Balances presented as of September 30, 2024 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 were $100.5 million and $150.5 million as of September 30, 2024 and December 31, 2023, respectively. In May 2024, a private institution exercised their right to call on one repurchase agreement with a balance of $50.0 million, resulting in its termination. As of September 30, 2024, the weighted-average interest rate remained relatively unchanged from December 31, 2023 (1.55% for government entities and 3.80% for private institutions). The weighted-average interest rates as of September 30, 2024 for our outstanding agreements with government entities and private institutions were 1.55% and 3.88%, respectively, with all rates being fixed. The weighted-average maturities as of September 30, 2024 for our repurchase agreements with government entities and private institutions were 0.11 year and 4.13 years, respectively. Each of our repurchase agreements are accounted for as collateralized financing arrangements (i.e., a secured borrowing) and not as sales and subsequent repurchases of securities.

Other Debt

Table 13 presents the composition of our other debt.

(dollars in thousands)

53

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 unaudited Consolidated Financial Statements.

(dollars in thousands)

Consumer Banking

Net income decreased by $1.6 million or 5% in the third quarter of 2024 compared to the same period in 2023 primarily due to increases in noninterest expense and the provision for credit losses, as well as a decrease in net interest income, partially offset by an increase in noninterest income. The increase in noninterest expense was primarily due to higher allocated administrative and support unit costs. The increase in the provision for credit losses was primarily due to higher net charge-offs in the installment loan and auto loan portfolios. The decrease in net interest income was primarily due to lower deposit spreads on higher deposit balances, partially offset by higher loan spreads. The increase in noninterest income was primarily due to higher trust and asset management fees.

Net income decreased by $2.6 million or 3% in the first nine months of 2024 compared to the same period in 2023 primarily due to increases in noninterest expense and the provision for credit losses, partially offset by an increase in noninterest income. The increase in noninterest expense was primarily due to higher allocated FDIC insurance costs and higher allocated administrative and support unit costs. The increase in the provision for credit losses was primarily due to higher net charge-offs in the installment loan and residential loan portfolios. The increase in noninterest income was primarily due to higher trust and asset management fees.

Commercial Banking

Net income decreased by $2.0 million or 6.7% in the third quarter of 2024 compared to the same period in 2023 primarily due to decreases in net interest income and noninterest income, partially offset by a decrease in noninterest expense and a reduction in the tax provision. The decrease in net interest income was primarily due to reductions in deposit balances and an increase in the provision for credit losses. The decrease in net interest income was partially offset by an increase in loan balances. The decrease in noninterest income was primarily due to a decrease in customer derivative program revenue, partially offset by an increase in other loan fees. The decrease in noninterest expense is primarily due to reduced allocated administrative and support unit expenses, lower salaries & benefits, and lower broker charges related to the customer derivative program, partially offset by an increase in operational losses.

Net income decreased by $7.2 million or 7.6% in the first nine months of 2024 compared to the same period in 2023 primarily due to decreases in interest income and noninterest income, partially offset by a decrease in noninterest expense, and a reduction in the tax provision. The decrease in net interest income was primarily due to lower deposits spreads and an increase in the provision for credit losses. The decrease in noninterest income is primarily due to reduced customer derivative program revenue. The decrease in noninterest expense is primarily due to reduced allocated administrative and support unit expenses, salaries & benefits, and broker charges related to the customer derivative program.

Treasury and Other

Net income decreased by $3.9 million in the third quarter of 2024 compared to the same period last year primarily due to lower noninterest income. The decrease in noninterest income was primarily due to gains on extinguishments of repurchase agreements in the third quarter of 2023. 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 $20.2 million or 37% in the first nine months of 2024 compared to the same period last year primarily due to lower net interest income and noninterest income partially offset by lower noninterest expense. The decrease in net interest income was primarily due to higher funding costs offset by an increase in interest income from higher asset yields. The lower noninterest income was primarily due to gains on extinguishments of repurchase agreements in 2023. The lower noninterest expense was primarily due to lower salaries and benefits from overall lower headcount. The provision for income taxes in this business segment represents the residual amount to arrive at the total tax expense for the Company.

Corporate Risk Profile

Credit Risk

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 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 NPAs and accruing loans and leases past due 90 days or more.

(dollars in thousands)

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, written down, paid down, sold, transferred to foreclosed real estate, or are no longer classified as non-accrual because they have returned to accrual status.

Non-accrual loans as of September 30, 2024 were $17.1 million, an increase of $7.5 million or 77% from December 31, 2023 primarily due to increases in commercial and industrial and residential mortgage non-accrual loans. Commercial and industrial non-accrual loans increased $6.2 million from December 31, 2023, which primarily relates to one borrower. During the three months ended September 30, 2024, we recorded a $1.4 million charge-off in connection with our commercial and industrial non-accrual loans. Residential mortgage non-accrual loans increased $1.3 million or 45% from December 31, 2023. As of September 30, 2024, our residential mortgage non-accrual loans were comprised of 17 loans with a weighted average current loan-to-value ratio of 76.6%.

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 $2.7 million as of September 30, 2024 compared to $2.1 million as of December 31, 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 $7.5 million as of September 30, 2024, a $0.9 million or 14% increase from December 31, 2023. 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)

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

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

Allowance for Credit Losses (the "Allowance")

As of September 30, 2024, the Allowance was $147.3 million or 1.06% of total loans and leases outstanding, compared with an Allowance of $146.4 million or 1.05% of total loans and leases outstanding as of December 31, 2023. The Allowance as of September 30, 2024, continues to include a qualitative overlay to account for economic uncertainty and downside risk of a recession.

Net charge-offs on loans and leases for the three and nine months ended September 30, 2024 were $3.8 million or 0.11% and $9.5 million or 0.09%, respectively of total average loans and leases on an annualized basis, compared to $2.0 million or 0.06% and $6.1 million or 0.06% of total average loans and leases on an annualized basis for the three and nine months ended September 30, 2023, respectively, primarily due to higher gross charge-offs in both commercial and industrial and other consumer portfolios.

Reserve for Unfunded Commitments

The Unfunded Reserve was $3.0 million as of September 30, 2024, a decrease of $3.0 million or 45% from December 31, 2023, primarily driven by higher commercial and industrial utilization rates and a slight decline in construction commitments. The reserve for unfunded commitments is recorded in other liabilities in the unaudited Consolidated Statements of Condition.

Provision for Credit Losses

For the three and nine months ended September 30, 2024, the provision for credit losses was $3.0 million and $7.4 million, respectively, compared to $2.0 million and $6.5 million for the same periods last year.

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 that balance expected return with potential earnings and price volatility that may arise due to changes in interest rates over short-term, medium-term, and long-term time horizons while 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 to fluctuations in interest rates: 1) net interest income (“NII”) sensitivity, and 2) economic value of equity (“EVE”) sensitivity. NII and EVE sensitivities measure the estimated percentage change in 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. NII sensitivity is measured over two successive 12-month periods and thus evaluates interest rate risk over short-term and medium-term time horizons, while EVE sensitivity, which captures the present value of all on and off-balance sheet positions, measures interest rate risk over a long-term time horizon. The results are measured relative to established limits and early warning indicators 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. While we recognize that instantaneous parallel shocks of the entire yield curve are unrealistic, we believe that the application of immediate shocks provides us with a sufficient range of potential outcomes to frame our risk exposures. We pay particular attention to the +/-200 basis point shock sensitivities, as we believe they represent a more realistic range of rate movements that could occur in the near to medium term. For the nine months ended September 30, 2024, we remained within applicable guidelines for such scenarios.

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 changes in the rate environment. These assets are primarily funded by deposit balances, which generally 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, 2024, 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 unaudited 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.

We utilize net interest income simulations to analyze short-term income sensitivities to changes in interest rates. Table 17a presents as of September 30, 2024 and December 31, 2023, an estimate of the change in net interest income over the next twelve months that would result from an immediate change in interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario. The base case scenario assumes the statement of condition and interest rates are generally unchanged. Based on our net interest income simulation as of September 30, 2024, net interest income is expected to increase as interest rates rise. Rising interest rates would drive higher rates on floating rate loans and investment securities, as well as higher reinvestment rates on loan and investment securities cashflows. However, lower interest rates would likely cause an initial 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, 2024, NII sensitivity to changes in interest rates for the twelve months subsequent to September 30, 2024, was less sensitive in comparison to the sensitivity profile for December 31, 2023. NII sensitivity decreased due primarily to an increase in assumed deposit repricing sensitivity. To analyze the impact of changes in interest rates in a more realistic manner, non-parallel interest rate scenarios are also simulated. These non-parallel interest rate scenarios help to isolate the sensitivity of earnings to various points on the yield curve. Based upon our interest rate simulations, the Company is exposed to movements in both the short and long-end of the yield curve. A movement higher or lower in the short-end of the yield curve would lead to floating-rate assets immediately repricing, while liability funding would react on a lag. Thus, net interest income may decrease from the base case in the near term if short-term rates were to decrease, although would benefit if short-term rates were to increase and liabilities maintained their ability to lag market rate increases. A movement higher or lower in the long-end of the yield curve would lead to assets repricing over time given ongoing cash flows from maturities and prepayments of investment securities and loans. Net interest income may decrease from the base case should long-term rates decline from their current levels, although would benefit if long-term rates were to increase.

(dollars in thousands)

Table 17b presents an estimate of the change in EVE that would result from an immediate change in interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario. Similar to the sensitivity profile above, the base case scenario assumes the statement of condition and interest rates are generally unchanged.

(dollars in thousands)

EVE sensitivity was largely unchanged, as our addition of pay-fixed swaps continue to offset the sensitivity of fixed-rate assets in up rate shock environments.

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, 2024 we had pledged loans and investment securities to the Federal Reserve Discount Window and had remaining borrowing capacity of $7.2 billion. We are also a member of the FHLB Des Moines. As of September 30, 2024, we had pledged loans to the FHLB and had remaining borrowing capacity of $1.9 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 AFS 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, 2024, 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.

We continued our focus on maintaining a strong liquidity position. As of September 30, 2024, cash and cash equivalents were $1.3 billion, the carrying value of our AFS investment securities was $2.6 billion, and total deposits were $21.0 billion. As of September 30, 2024, our AFS investment securities portfolio was comprised of securities with an average base duration of approximately 3.31 years.

Capital Management

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

The Company and the Bank are each subject to regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements could cause certain mandatory and discretionary actions by regulators that, if undertaken, would likely have a material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures. These measures were established by regulation intended to ensure capital adequacy. Capital ratios are calculated using the regulatory capital rule that allows a five-year transition period related to the adoption of CECL, which will be complete as of December 31, 2024. As of September 30, 2024, the Company’s capital levels remained characterized as “well-capitalized.” There have been no conditions or events since September 30, 2024, 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, 2024 and December 31, 2023.

(dollars in thousands)

1 Regulatory capital ratios as of September 30, 2024 are preliminary.

2 Includes unrealized gains and losses related to the Company’s reclassification of AFS investment securities to the HTM category.

As of September 30, 2024, shareholders’ equity was $1.7 billion, an increase of $251.2 million or 18% from December 31, 2023. For the first nine months of 2024, net income of $110.8 million, net preferred stock issuance of $160.6 million, other comprehensive income of $61.3 million, share-based compensation of $11.1 million, and common stock issued under purchase and equity compensation plans of $4.1 million were offset by cash dividends declared of $84.2 million on common shares, common stock repurchased of $5.1 million, and cash dividends declared of $7.4 million on preferred shares. No shares of common stock were repurchased under the share repurchase program in the third quarter of 2024. From the beginning of our share repurchase program in July 2001 through September 30, 2024, 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.

Remaining buyback authority under our share repurchase program was $126.0 million as of September 30, 2024. 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 2024, the Parent’s Board of Directors declared quarterly dividend payments of its Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, of $10.94 per share, equivalent to $0.2735 per depositary share and its Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series B, of $20.00 per share, equivalent to $0.5000 per depositary share. Dividends will be payable on November 1, 2024, to shareholders of record of the preferred stock at the close of business on October 17, 2024.

In October 2024, 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 13, 2024, to shareholders of record of the common stock at the close of business on November 29, 2024.

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, 2023.

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, 2024. 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, 2024.

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, 2024, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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, 2023.