Bank of Hawaii Corp: Form 10-Q for the period ended Mar 31, 2025

The following MD&A is intended to help the reader understand the Company and its operations and is focused on our financial results for the first quarter of 2025, including comparisons of year-to-year performance, trends, and updates from the Company’s most recent 10-K filing. Discussion and analysis of our 2024 fiscal year, as well as the year-to-year comparison between fiscal years 2024 and 2023, are included in Part II, Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2024, filed with the SEC on March 4, 2025.

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. 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 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. Given these risks and uncertainties, you should not place undue reliance on any forward-looking statement as a prediction of our actual results.

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) Our business is sensitive to regional business and economic conditions, in particular those of Hawaiʻi, Guam and other Pacific Islands; (2) Our loan portfolio is largely secured by real estate, and a downturn in the real estate market may adversely affect our results of operations; (3) Significant changes to the size, structure, powers and operations of the federal government, changes to U.S. economic policies, and uncertainties regarding the potential for these changes may cause economic disruptions that could, in turn, adversely impact our business, results of operations and financial condition; (4) A sustained period of high inflation could pose a risk to local economies and the financial performance of the Bank; (5) Climate change and the governmental responses to it could have a material adverse impact on the Bank and its customers; (6) Disruptions, instability and failures in the banking industry may negatively impact us; (7) Any reduction in defense spending by the federal government in the state of Hawaiʻi could adversely impact the economy in Hawaiʻi and the Pacific Islands; (8) Changes in interest rates could adversely impact our results of operations and capital; (9) Our allowance for credit losses may prove to be insufficient to absorb losses or appropriately reflect, at any given time, the inherent risk of loss in our loan portfolio; (10) Consumer protection initiatives and court decisions related to the foreclosure process affect our remedies as a creditor; (11) Changes in the capital markets could materially affect the level of assets under management and the demand for our other fee-based services; (12) The Parent’s liquidity is dependent on dividends from the Bank; (13) There can be no assurance that the Parent will continue to declare cash dividends; (14) Fiscal and monetary policy changes may significantly impact our profitability and liquidity; (15) Legislation and regulatory initiatives affecting the financial services industry, including new interpretations, restrictions and requirements, could detrimentally affect the Company’s business; (16) Changes in income tax laws and interpretations, or in accounting standards, could materially affect our financial condition or results of operations; (17) A failure in or breach of our operational systems, information systems, or infrastructure, or those of our third party vendors and other service providers, may result in financial losses, loss of customers, or damage to our reputation; (18) An interruption or breach in security of our information systems or those related to merchants and third party vendors, including as a result of cyber-attacks, could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, or result in financial losses; (19) Our mortgage banking income may experience significant volatility; (20) Our mortgage loan servicing business may be impacted if we do not meet our obligations, or if servicing standards change; (21) Risks related to representation and warranty provisions may impact our mortgage loan servicing business; (22) Risks relating to residential mortgage loan servicing activities may adversely affect our results; (23) The requirement to record certain assets and liabilities at fair value may adversely affect our financial results (24) Natural disasters and adverse weather in Hawaiʻi and the Pacific Islands may negatively affect real estate property values and our operations (25) Competition may adversely affect our business; (26) Our future performance will depend on our ability to respond timely to technological change; (27) Negative public opinion could damage our reputation and adversely impact our earnings and liquidity (28) We are subject to certain litigation, and our expenses related to this litigation may adversely affect our results; (29) Our performance depends on attracting and retaining key employees and skilled personnel to operate our business effectively; (30) The soundness of other financial institutions may adversely impact our financial condition or results of operations; and (31) We have experienced increases in FDIC insurance assessments.

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, 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 Estimates

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. Application of GAAP requires us to make estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Most accounting estimates are not considered by management to be critical accounting estimates. Critical accounting estimates are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. In determining which accounting estimates are critical accounting estimates, we consider, among other things, whether the application of GAAP 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 estimates that we believe are most critical in preparing our Consolidated Financial Statements are presented in the section titled “Critical Accounting Estimates” in Item 7. “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, 2024. There have been no significant changes in the Company’s application of critical accounting estimates since December 31, 2024.

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

Currently, Hawai‘i's economy remains on stable footing, but economic growth may be disrupted by changes in trade policies and tariffs, immigration actions, and federal spending cuts. The Maui economy continues its gradual post-wildfire recovery while the visitor industry for the rest of the Hawai‘i is expected to remain stable in the near term. Strong construction activity from both public and private sector projects continues to drive employment and serves as the primary bright spot in the local economy. However, tariffs on materials and potential labor shortages are looming concerns. Hawai‘i’s unemployment rate was 2.9% in March 2025, which was below the U.S. unemployment rate of 4.2%.

For the first three months of 2025, the median price of single-family home and condominium sales on Oahu increased by 7.5% and 1.0%, respectively, compared to the same period in 2024. The volume of single-family homes sales on Oahu decreased 4.0% and condominium sales increased 0.4% compared to the same period in 2024. Inventory of single-family homes and condominiums on Oahu was 3.3 months and 6.2 months, respectively, for the first quarter of 2025.

Earnings Summary

Net income for the first quarter of 2025 was $44.0 million, an increase of $7.6 million or 21% compared to the same period in 2024. Diluted earnings per common share was $0.97 for the first quarter of 2025, an increase of $0.10 or 11% compared to the same period in 2024.

• The return on average common equity for the first quarter of 2025 was 11.80% compared with 11.20% in the same quarter of 2024.
• Net interest income for the first quarter of 2025 was $125.8 million, an increase of 10% compared to the same period last year.
• Net interest margin was 2.32% in the first quarter of 2025, an increase of 21 basis points from the same period in 2024.
• The provision for credit losses for the first quarter of 2025 and 2024 was $3.3 million and $2.0 million, respectively.
• Noninterest income was $44.1 million in the first quarter of 2025, an increase of 4% compared to the same period last year.
• Noninterest expense was $110.5 million in the first quarter of 2025, an increase of 4% compared to the same period last year.
• The effective tax rate for the first quarter of 2025 was 21.67% compared to 24.76% for the same period last year.

We continued to maintain a strong balance sheet during the first quarter of 2025, with what we believe are appropriate reserves for credit losses and strong capital.

• Total assets were $23.9 billion as of March 31, 2025, an increase of 1.2% from December 31, 2024.
• Total loans and leases were $14.1 billion as of March 31, 2025, an increase of 0.3% from December 31, 2024.
• The allowance for credit losses on loans and leases was $147.7 million as of March 31, 2025, a decrease of $0.8 million from December 31, 2024. The ratio of the allowance for credit losses to total loans and leases outstanding was 1.05% at the end of the quarter, down 1 basis point from December 31, 2024.
• Net loan and lease charge-offs during the first quarter of 2025 were $4.4 million or 13 basis points annualized of total average loans and leases outstanding. Net loan and lease charge-offs for the first quarter of 2025 were comprised of charge-offs of $5.7 million partially offset by recoveries of $1.3 million. Compared to the same quarter of 2024, net loan and lease charge-offs increased by $2.1 million or 6 basis points annualized on total average loans and leases outstanding.
• Total non-performing assets (“NPAs”) were $17.5 million as of March 31, 2025, down $1.8 million from December 31, 2024. NPAs were 12 basis points of total loans and leases and foreclosed real estate at the end of the quarter, down 2 basis points from December 31, 2024.
• The investment securities portfolio was $7.4 billion as of March 31, 2025, an increase of 2% from December 31, 2024. The investment portfolio remains largely comprised of securities issued by U.S. government agencies and U.S. government-sponsored enterprises. Floating rate securities represented 17.4% of the investment securities portfolio as of March 31, 2025, compared to 16.5% as of December 31, 2024.
• Total deposits were $21.0 billion as of March 31, 2025 and $20.6 billion as of December 31, 2024.
• Total shareholders’ equity was $1.7 billion as of March 31, 2025, an increase of 2% from December 31, 2024.
• No shares of common stock were repurchased under the share repurchase program in the first quarter of 2025. Total remaining buyback authority under the share repurchase program was $126.0 million at March 31, 2025.
• 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 June 13, 2025 to shareholders of record at the close of business on May 30, 2025.
• On April 3, 2025, 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 May 1, 2025 to shareholders of record of the preferred stock as of the close of business on April 16, 2025.

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)

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

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

3. Interest income includes taxable-equivalent basis adjustments, based upon a federal statutory tax rate of 21% of $1.5 million and $0.7 million for the three months ended March 31, 2025 and 2024, respectively.

(dollars in millions)

1The change in interest income or expense due to both rate and volume has been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each.

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 months ended March 31, 2025 increased by $286.3 million, or 1%, compared to the same period last year primarily due to an increase in our commercial mortgages portfolio. Yields on our investment securities portfolio increased by 3 basis points during the three months ended March 31, 2025 compared to the same period last year primarily due to investment securities that we purchased in late 2024 and in the first quarter of 2025. This increase was partially offset by lower income earned from interest rate swaps that hedge a portion of our AFS securities portfolio. Interest income on our loan and lease portfolio increased by $4.5 million during the three months ended March 31, 2025 compared to the same period last year primarily due to an increase in new loan production. This increase was partially offset by lower 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 months ended March 31, 2025 increased by $322.9 million, or 2%, compared to the same period last year was primarily due to an increase in savings deposits. This increase was partially offset by a private institution exercising their right to call on two repurchase agreements ($50 million in May 2024 and $50 million in February

2025). As compared to the same period last year, the cost of our interest-bearing liabilities decreased by 23 basis points during the three months ended March 31, 2025 primarily due to a decrease in prevailing interest rate environment, which was driven by 100 basis points of interest rate cuts by the Federal Open Market Committee in late 2024.

Noninterest Income

Table 3 presents the components of noninterest income.

(dollars in thousands)

Trust and asset management income increased by $0.6 million or 5% in the first quarter of 2025 compared to the same period last year primarily due to an increase in assets under management. 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 $12.0 billion and $11.9 billion as of March 31, 2025 and March 31, 2024, respectively.

Annuity and insurance income increased by $0.5 million or 49% in the first quarter of 2025 compared to the same period last year primarily due to an increase in sales volume of annuity and insurance products.

Noninterest Expense

Table 4 presents the components of noninterest expense.

(dollars in thousands)

Total salaries and benefits expense increased by $4.7 million or 8% in the first quarter of 2025 compared to the same period last year, primarily due to increases in incentive compensation and medical, dental, and life insurance expense, partially offset by decreases in share-based compensation and separation expense.

FDIC insurance expense decreased by $2.0 million or 55% in the first quarter of 2025 compared to the same period last year, primarily due to an adjustment of our industry-wide FDIC special assessment.

Total other expense increased by $1.6 million or 12% in the first quarter of 2025 compared to the same period last year, primarily due to increases in advertising expenses, broker's charges, and an increase in workers compensation claims in the first quarter of 2025 compared to the same period last year.

Provision for Income Taxes

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

(dollars in thousands)

The provision for income taxes was $12.2 million in the first quarter of 2025, an increase of $0.2 million compared to the same period last year. The effective tax rate for the first quarter of 2025 was 21.67%, a decrease from 24.76% for the same period last year. The lower effective tax rate in the first quarter of 2025 compared to the same period last year was primarily due to an increase in tax-exempt income, an increase in net tax benefits from low-income housing investments, and a decrease in tax expense from discrete items.

Analysis of Unaudited Statements of Condition

Investment Securities

The carrying value of our investment securities portfolio was $7.4 billion and $7.3 billion as of March 31, 2025 and December 31, 2024, respectively. The increase is primarily due to the purchase of $241.9 million in available-for-sale investment securities during the three months ended March 31, 2025, of which $105.8 million were floating rate securities. Floating rate securities represented 17.4% of the investment securities portfolio as of March 31, 2025, compared to 16.5% as of December 31, 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. These evaluations may cause us to change the level of funds we deploy into investment securities, change the composition of our investment securities portfolio, adjust hedge positions, 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 March 31, 2025, 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 March 31, 2025 and $1.1 billion as of December 31, 2024. See Note 2 Investment Securities 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)

Total loans and leases as of March 31, 2025 increased by $39.3 million from December 31, 2024, primarily due to growth in our commercial loans, partially offset by reductions in our consumer loan portfolio.

Commercial loans and leases as of March 31, 2025 increased by $72.3 million or 1.2% from December 31, 2024, primarily due to increased loan production in our construction loan portfolio, which increased by $54.8 million or 17.7%. Consumer loans and leases as of March 31, 2025 decreased by $33.0 million or 0.4% from December 31, 2024, primarily due to paydowns in our home equity portfolio and a slowdown in production for our automobile loans.

Table 6a presents an additional breakdown of the Company’s commercial mortgage portfolio.

(dollars in thousands)

1. Amount includes unamortized loan origination fees.

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.

Our commercial and consumer lending activities are concentrated primarily in Hawai‘i and the West Pacific. 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)

Derivative financial instruments decreased by $35.8 million due to decrease in yield curves from December 2024 to March 2025 decreasing the valuation of customer swaps and fair value hedges. Deferred tax assets and tax receivable decreased by $6.7 million due to temporary differences between financial reporting and income tax basis of unrealized losses on investment securities.

Deposits

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

(dollars in thousands)

Total deposits were $21.0 billion as of March 31, 2025, an increase of $375.2 million or 1.8% from December 31, 2024. Consumer deposits increased by $124.9 million due to an increase of $167.2 million in core deposits, defined as all deposits exclusive of time deposits, partially offset by a decrease of $42.3 million in time deposits. Commercial deposits increased by $112.2 million primarily from increases of $68.3 million in core deposits and $43.9 million in time deposits. Public and other deposits increased by $138.1 million due to an increase of $160.4 million in core deposits, partially offset by a decrease of $22.3 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 $28.8 million partially offset by $3.1 million decrease in consumer deposits. The increase in Regular Savings was primarily due to increases in public deposits of $182.8 million, $124.0 million in consumer deposits and $2.7 million in commercial deposits.

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

(dollars in thousands)

Estimated uninsured deposits are calculated pursuant to regulatory guidance and reported in our Call Report and include deposits collateralized by government-backed securities and intercompany deposits of wholly-owned subsidiaries. Table 12 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 reconciliation provides useful information about our deposits at risk.

(dollars in thousands)

1Balances presented as of March 31, 2025 are preliminary.

2Balances presented as of December 31, 2024 were revised to reflect changes made in our Call Report.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase were $50.0 million and $100.0 million as of March 31, 2025 and December 31, 2024, respectively. In February 2025, a private institution exercised its right to call on a repurchase agreement with a balance of $50.0 million, resulting in its termination. As of March 31, 2025, our remaining repurchase agreement was at a fixed interest rate of 3.89%. with a remaining maturity of 4.63 years. Our repurchase agreement was 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)

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 9 Business Segments to the unaudited Consolidated Financial Statements.

(dollars in thousands)

43

Consumer Banking

Net income decreased by $3.4 million or 10% in the first quarter of 2025 compared to the same period last year primarily due to an increase in noninterest expense, a decrease in net interest income, and an increase in the provision for credit losses. This was partially offset by an increase in noninterest income. Noninterest expense decreased by $3.7 million or 4% primarily due to higher allocated administrative and support unit costs. Net interest income decreased by $1.4 million or 1% primarily due to lower deposit spreads on higher deposit balances, as well as lower loan balances. The provision for credit losses increased by $1 million or 44% primarily due to higher net charge-offs in the auto loan and installment loan portfolios. Noninterest income increased by $1.5 million or 5% primarily due to higher trust and asset management income, annuity and insurance income, and monthly service fees.

Commercial Banking

Net income increased by $2.0 million or 7% in the first quarter of 2025 compared to the same period last year primarily due to increases in net interest income and noninterest income, partially offset by an increase in noninterest expense. Net interest income increased by $4.1 million or 8% primarily due to increases in loan balances, primarily in commercial mortgages, and allocated interest income due to increases in balances and spreads on interest bearing and savings deposits, partially offset by a reduction in noninterest bearing deposit balances. Noninterest income increased by $1.0 million or 14% primarily due to increases in loan fees and customer derivative program revenue, and a gain on sale of leased equipment, partially offset by a decrease in merchant revenue. Noninterest expense increased by $1.0 million or 5% primarily due to higher allocated administrative and support unit expenses and merchant processing fees, partially offset by lower salaries & benefits.

Treasury and Other

Net loss decreased by $8.9 million or 34% in the first quarter of 2025 compared to the same period last year primarily due to higher net interest income, partially offset by lower noninterest income. The net interest income increased by $9.2 million or 27% primarily due to a decrease in funding costs reflecting lower rate environment. Noninterest income decreased by $0.7 million or 19% primarily due to a decrease in other income. 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)

1Excludes loans that are fully charged-off and placed on non-accrual status during the same period.

NPAs consist of non-accrual loans and leases and foreclosed real estate. Changes in the level of non-accrual loans and leases typically are caused by 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 March 31, 2025 were $16.1 million, a decrease of $0.6 million or 3% from December 31, 2024 primarily due to decreases in commercial and industrial and residential mortgage non-accrual loans. Commercial and industrial non-accrual loans decreased by $1.2 million from December 31, 2024, primarily due to the partial charge-off of a loan.

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 $1.4 million as of March 31, 2025 compared to $2.7 million as of December 31, 2024. The decrease was due to the sale of two foreclosed properties during the three months ended March 31, 2025.

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

Loans and leases past due 90 days or more and still accruing interest were $7.6 million as of March 31, 2025, a $0.7 million or 9% decrease from December 31, 2024. The decrease was primarily in our home equity portfolio. This category includes loans and leases that are well-secured and in the process of collection, as well as loans and leases that have not reached the specified past due status to be placed on non-accrual.

Reserve for Credit Losses

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

(dollars in thousands)

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

Allowance for Credit Losses (the “Allowance”)

As of March 31, 2025, the Allowance was $147.7 million or 1.05% of total loans and leases outstanding, compared with an Allowance of $148.5 million or 1.06% of total loans and leases outstanding as of December 31, 2024. The Allowance as of March 31, 2025 and December 31, 2024, includes a qualitative overlay to account for economic uncertainty and downside risk of a recession.

Net charge-offs on loans and leases for the three months ended March 31, 2025 were $4.4 million or 0.13% of total average loans and leases on an annualized basis, compared to $2.3 million or 0.07% of total average loans and leases on an annualized basis for the three months ended March 31, 2024. This increase was primarily due to higher gross charge-offs in both commercial and industrial and automobile portfolios.

Reserve for Unfunded Commitments

The Unfunded Reserve was $1.8 million as of March 31, 2025, a decrease of $0.3 million or 16% from December 31, 2024, primarily due to lower unfunded commitments in our construction portfolio. The reserve for unfunded commitments is recorded in other liabilities in the unaudited consolidated statements of condition.

Provision for Credit Losses

For the three months ended March 31, 2025, the provision for credit losses was $3.3 million compared to $2.0 million for the same period last year. The increase in the provision was due to the change in the balances of our unfunded commitments during the three months ended March 31, 2025 compared to the same period in the prior 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 consolidated statements of income and condition. In this management process, we balance market risks with expected returns 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. This involves balancing expected returns with potential earnings and price volatility 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 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 forward looking net interest income and economic value, respectively, under instantaneous parallel shocks of the yield curve ranging from -400 basis points to +400 basis points. We measure NII sensitivity over two successive 12-month periods to evaluate interest rate risk over short-term and medium-term time horizons. 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 three months ended March 31, 2025, 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 AFS investment securities portfolio; and
• using derivative financial instruments.

Changes in interest rates may have a material impact on earnings and valuation due to balance sheet cash flow, maturity structure and repricing frequency. The investment portfolio and loan portfolios have significant repricing volumes and cash flows from maturities and paydowns, providing opportunities 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 March 31, 2025, 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 10 Derivative Financial Instruments 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. This model attempts to capture the dynamic nature of assets and liabilities in various interest rate environments. It estimates and measures 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 the repricing behavior of interest-bearing deposits. 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 March 31, 2025 and December 31, 2024, 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 consolidated statements of condition and interest rates are generally unchanged.

(dollars in thousands)

Based on our net interest income simulation as of March 31, 2025, net interest income is expected to increase as interest rates rise. Rising interest rates would drive higher rates on floating rate loans, interest rate swaps 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, swaps and investment securities, as well as drive higher premium amortization on existing investment securities. Based on our net interest income simulation as of March 31, 2025, NII sensitivity to changes in interest rates for the twelve months subsequent to March 31, 2025 increased slightly to both rising and falling rates compared to the sensitivity profile for December 31, 2024. NII sensitivity increased due primarily to the increase in volume of floating rate assets, partially offset by an increase in interest rate sensitive deposits.

To analyze the impact of changes in interest rates in a more realistic manner, we also simulate non-parallel interest rate scenarios. These 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.

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 consolidated statements of condition and interest rates are generally unchanged.

(dollars in thousands)

Compared to December 31, 2024, EVE sensitivity decreased in both rising and falling rate scenarios due to the longer life and higher valuation attributed to deposits. However, in the down 400 bps scenario, EVE sensitivity increased as the overall lower prevailing market rates have made the 0% floor on deposit rates more impactful.

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 holdings expose us to a small degree of foreign currency risk. 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 restricted stock units and restricted stock at the date of grant. The fair value of 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 factors such as loan originations and refinancings, changes in deposit balances, liability issuances and settlements, and off-balance sheet funding commitments. We adhere to 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 March 31, 2025, we had pledged loans and investment securities to the Federal Reserve Discount Window and had remaining borrowing capacity of $7.5 billion. We are also a member of the FHLB. As of March 31, 2025, we had pledged loans to the FHLB and had remaining borrowing capacity of $1.8 billion. The ratio of readily available liquidity to uninsured deposits was 129% at March 31, 2025, compared to 116% at December 31, 2024. The increase in the readily available liquidity to uninsured deposits ratio was due to an increase in cash and cash equivalents combined with increased borrowing capacity realized from pledging additional loan collateral, and a decrease in uninsured deposits.

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 March 31, 2025, 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 March 31, 2025, cash and cash equivalents were $0.9 billion, the carrying value of our AFS investment securities was $2.9 billion, and total deposits were $21.0 billion. As of March 31, 2025, our AFS investment securities portfolio was comprised of securities with an average base duration of approximately 3.00 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 and the Division of Financial Institutions, an agency of the State of Hawai‘i Department of Commerce and Consumer Affairs. 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. As of March 31, 2025, the Company’s capital levels remained characterized as “well-capitalized.” There have been no conditions or events since March 31, 2025, 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 March 31, 2025 and December 31, 2024.

(dollars in thousands)

1. Regulatory capital ratios as of March 31, 2025 are preliminary.

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

Shareholders' Equity

As of March 31, 2025, shareholders’ equity was $1.7 billion, an increase of $37.2 million or 2% from December 31, 2024. For the first three months of 2025, the increase was attributed to net income of $44.0 million, other comprehensive income of $25.0 million, share-based compensation of $3.7 million, and common stock issued under purchase and equity compensation plans of $1.3 million were offset by cash dividends declared of $28.2 million on common shares, cash dividends declared of $5.3 million on preferred shares, and common stock repurchases of $3.3 million related to taxes withheld for share-based compensation.

No shares of common stock were repurchased under the share repurchase program in the first quarter of 2025. From the beginning of our share repurchase program in July 2001 through March 31, 2025, 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 March 31, 2025. 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 April 2025, 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 May 1, 2025, to shareholders of record of the preferred stock at the close of business on April 16, 2025.

In April 2025, 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 June 13, 2025, to shareholders of record of the common stock at the close of business on May 30, 2025.

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 including cybersecurity 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 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. 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, 2024.

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 March 31, 2025. 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 March 31, 2025.

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 March 31, 2025, 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, 2024 except as set forth below:

Significant changes to the size, structure, powers and operations of the federal government, changes to U.S. economic policies, and uncertainties regarding the potential for these changes may cause economic disruptions that could, in turn, adversely impact our business, results of operations and financial condition.

The current U.S. administration has implemented significant changes in federal priorities and has taken steps to change the operations, structure, and policy focus of various federal agencies, as well as regulatory priorities, policy approaches and interpretations of existing laws by those federal agencies. For example, recent executive actions and proposed legislation has changed agency mandates, modified or reduced federal program funding, altered regulatory frameworks, or adjusted the size and composition of the federal workforce. Moreover, leadership transitions at key federal agencies have impacted or may impact rulemaking, supervision, enforcement, and examination priorities across the financial regulatory landscape. These developments in the federal government may have varying effects on the banking and financial services industry that are difficult to predict, which makes it difficult for us to anticipate and mitigate attendant risks. Compliance with changing federal and regulatory priorities could, among other things, increase the costs of operating our business, reduce the demand for our products and services, impact our ability to achieve our business goals, and increase our legal, operational and reputational risks, any or all of which could materially adversely affect our results of operations.

The current U.S. administration also has implemented rapid shifts in macroeconomic policies, such as those relating to trade restrictions and tariffs, which have created significant uncertainties regarding U.S. economic growth, the potential for recession, and concerns over an increase in inflation. In particular, these economic policies have created significant instability in the trade relationship between the U.S. and Chinese economies, including tariff escalation, scrutiny of U.S. investment into Chinese companies, and potential limits on Chinese companies’ access to U.S. markets. In order to limit the impact of unpredictable U.S. actions, global companies and governments may reduce the use of the U.S. dollar in world trade and financial transactions, which could result in further volatility in the financial markets and U.S. economy. Slow economic growth, economic contraction or recession, or shifts in broader consumer and business trends in Hawaiʻi and the Pacific Islands would significantly impact our ability to originate loans, the ability of borrowers to repay loans, and the value of the collateral securing loans.

Other political and economic events within the United States, including a contentious domestic political environment, changes in or disagreements over U.S. monetary policy and actions of the Federal Reserve, disagreements over long-term federal budget and deficit reduction plans, the threat of a U.S. government shutdown, disagreements over, or threats not to increase, the U.S. government’s borrowing limit (or “debt ceiling”), and risk of further downgrade of the ratings of U.S. government debt obligations, also may negatively impact financial markets and the U.S. economy, including the economy of Hawaiʻi and the Pacific Islands.

Further, the perception of the potential for additional, significant changes in federal regulatory or economic policy also has increased uncertainty and may exacerbate declines in investor and consumer confidence, which in turn may adversely impact financial markets and the broader economy of the U.S. and the economy of Hawaiʻi and the Pacific Islands in particular, perhaps suddenly and to a significant degree.

Regional business and economic conditions are a major driver of our results of operations. Difficult conditions in the regional business and economic environment, including those caused by the lack of stability and predictability of U.S. policymaking, may materially adversely affect our operating expenses, the quality of our assets, credit losses, and the demand for our products and services.