Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q, including the documents incorporated by reference herein, contains, and from time to time our management may make, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as "may," "might," "should," "could," "predict," "potential," "believe," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "would," "annualized" and "outlook," or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including the following: the geographic concentration of our business; current and future economic and market conditions inthe United States generally or inHawaii ,Guam and Saipan in particular, including, among other things, the rate of growth and the unemployment rate; the impact on our business, operations, financial condition, liquidity, results of operations, prospects and the trading price of our shares as a result of the COVID-19 pandemic; our dependence on the real estate markets in which we operate; concentrated exposures to certain asset classes and individual obligors; the effect of the current low interest rate environment or changes in interest rates on our business including our net interest income, net interest margin, the fair value of our investment securities, and our mortgage loan originations, mortgage servicing rights and mortgage loans held for sale; changes in the method pursuant to which LIBOR and other benchmark rates are determined or the discontinuance of LIBOR; the possibility of a deterioration in credit quality in our portfolio; the possibility we might underestimate the credit losses inherent in our loan and lease portfolio; our ability to maintain our Bank's reputation; the future value of the investment securities that we own, especially in light of the market volatility caused by the spread of COVID-19 and governmental and regulatory responses thereto; our ability to attract and retain customer deposits; our inability to receive dividends from our bank, pay dividends to our common stockholders and satisfy obligations as they become due; the effects of severe weather, geopolitical instability, including war, terrorist attacks, pandemics (including the ongoing COVID-19 pandemic) or other severe health emergencies and man-made and natural disasters; our ability to maintain consistent growth, earnings and profitability; our ability to attract and retain skilled employees or changes in our management personnel; possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations, including quantitative easing, the lowering of interest rates and the imposition of tariffs that may harm sectors to which we are particularly exposed; our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business; the effectiveness of our risk management and internal disclosure controls and procedures; our ability to keep pace with technological changes; any failure or interruption of our information and communications systems; our ability to identify and address cybersecurity risks; the occurrence of fraudulent activity or effect of a material breach of, or disruption to, the security of any of our or our vendors' systems; the failure to properly use and protect our customer and employee information and data; the possibility of employee misconduct or mistakes; our ability to successfully develop and commercialize new or enhanced products and services; changes in the demand for our products and services; the effects of problems encountered by other financial institutions; our access to sources of liquidity and capital to address our liquidity needs; our use of the secondary mortgage market as a source of liquidity; risks associated with the sale of loans and with our use of appraisals in valuing and monitoring loans; the possibility that actual results may differ from estimates and forecasts; fluctuations in the fair value of our assets and liabilities and off-balance sheet exposures; the effects of the failure of any component of our business infrastructure provided by a third party; the potential for environmental liability; the risk of being subject to litigation and the outcome thereof; the impact of, and changes in, applicable laws, regulations and accounting standards and policies, including the enactment of the Tax Act (Public Law 115-97) onDecember 22, 2017 ; possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations; our likelihood of success in, and the impact of, litigation or regulatory actions; our ability to continue to pay dividends on our common stock or take other capital actions, which must comply with requirements under law or those imposed by our regulators and could 48
Table of Contents
impact our ability to return capital to stockholders; contingent liabilities and unexpected tax liabilities that may be applicable to us as a result of the Reorganization Transactions; and damage to our reputation from any of the factors described above.
The foregoing factors should not be considered an exhaustive list and should be read together with the risk factors and other cautionary statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 and our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 . If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law. Company Overview FHI is a bank holding company, which owns 100% of the outstanding common stock of FHB, its only direct, wholly owned subsidiary. FHB was founded in 1858 under the nameBishop & Company and was the first successful banking partnership in the Kingdom ofHawaii and the second oldest bank formed west of the Mississippi River. The Bank operates its business through three operating segments: Retail Banking, Commercial Banking andTreasury and Other.
References to "we," "our," "us," or the "Company" refer to the Parent and its subsidiary that are consolidated for financial reporting purposes.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of the Company reflect the results of operations, financial position and cash flows of FHI and its wholly owned subsidiary, FHB. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect normal recurring adjustments necessary for a fair presentation of the results for the interim periods. The accompanying unaudited interim consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 and filed with theU.S. Securities and Exchange Commission (the "SEC").
Recent Developments regarding COVID-19 and the
Overview The Coronavirus Disease ("COVID-19") has spread throughout the world and has been declared a pandemic by theWorld Health Organization and continues to evolve. Several countries, namely theU.S. andBrazil , have been particularly hard hit by COVID-19.Europe and other regions have also been significantly impacted by the pandemic. ThroughJuly 2020 , theU.S. leads the world in the number of confirmed cases and deaths reported as a result of COVID-19. Despite efforts to control the spread of COVID-19, theU.S. has recently seen a surge in the number of confirmed COVID-19 cases. The global andU.S. economies have entered into a pandemic-driven recession. The future impact of COVID-19 on the global andU.S. economies, and the timing and robustness of any related recovery, continues to remain uncertain. 49 Table of Contents
As a result of the COVID-19 outbreak and related response, theU.S. economy has deteriorated. Beginning inMarch 2020 , in many parts of theU.S. , employees began working from home and businesses deemed nonessential were temporarily closed. Workers in the retail, restaurant, travel and leisure industries were particularly hard hit by layoffs as large parts of theU.S. remained on lockdown for more than a month. According to theFederal Reserve's May 2020 Beige Book, declines in consumer spending were "especially severe in the leisure and hospitality sector, with very little activity at travel and tourism businesses." The national seasonally-adjusted unemployment rate increased from 4.4% inMarch 2020 to 14.7% inApril 2020 . InMay 2020 , state-by-state decisions began to be made on the pace and extent of reopening local businesses. While the phased reopening of theU.S. economy brought the national seasonally-adjusted unemployment rate down to 11.1% inJune 2020 , new claims for unemployment insurance have remained above one million per week throughJuly 2020 . In addition, as noted above, theU.S. has recently experienced, and continues to experience, a surge in the number of confirmed COVID-19 cases, which has already stalled the reopening strategy in a number of states and may continue to impact the pace of economic recovery going forward. TheU.S. real gross domestic product decreased by 5.0% in the first quarter of 2020. Hawaii Economy
Hawaii's economy continues to be meaningfully impacted by COVID-19 and the responses to it.Hawaii's economy began to suffer inFebruary 2020 with flight cancellations toHawaii due to the global COVID-19 pandemic. OnMarch 5, 2020 , the Governor of theState of Hawaii issued an emergency proclamation declaring a state of emergency inHawaii . OnMarch 21, 2020 , the Governor of theState of Hawaii issued a supplementary emergency proclamation ordering all individuals, both residents and visitors, arriving or returning to theState of Hawaii to a mandatory 14-day self-quarantine. The mandate, which was the first such action in the nation, essentially brought theHawaii tourism industry to a halt. Subsequently, onMarch 23, 2020 , the Governor of theState of Hawaii issued a third supplemental emergency proclamation that ordered all residents to stay-at-home, except for essential workers. Thus far, the spread of COVID-19 has been relatively well controlled inHawaii with quickly instituted stay-at-home orders and the implementation of the mandatory 14-day self-quarantine for residents and visitors arriving or returning to theState of Hawaii . As a result, as ofJuly 15, 2020 ,Hawaii has the lowest fatality and case rates per capita in theU.S as reported by theCenters for Disease Control and Prevention . OnMay 5, 2020 , the Governor of theState of Hawaii issued a seventh supplemental emergency proclamation which effectively ended stay-at-home orders and allowed for the reopening of certain businesses deemed to be of lower risk for COVID-19 transmissions. Subsequently, onMay 18, 2020 , the Governor of theState of Hawaii issued an eighth supplemental emergency proclamation which outlined a four-phase reopening strategy forHawaii's economy and allowing for a gradual reopening of medium-risk businesses inJune 2020 . Following the Governor's issuance of a ninth supplemental emergency proclamation onJune 24, 2020 , which removed the 14-day self-quarantine mandate for interisland travel, the Governor of theState of Hawaii announced a program, effectiveSeptember 1, 2020 , that would allow passengers from theU.S. mainland with an approved negative COVID-19 test within 72 hours prior to arrival in theState of Hawaii to bypass the state's mandatory 14-day self-quarantine requirement. For an economy that is heavily dependent on tourism, the combination of various response measures to the COVID-19 pandemic, including the stay-at-home orders for local residents and the mandatory 14-day self-quarantine for visitors resulted in an unprecedented increase inHawaii unemployment. The statewide seasonally-adjusted unemployment rate was 13.9% inJune 2020 compared to 2.7% inJune 2019 , according to the State ofHawaii Department of Labor and Industrial Relations , while the national seasonally-adjusted unemployment rate was 11.1% inJune 2020 compared to 3.7% inJune 2019 . Visitor arrivals for the first five months of 2020 decreased by 49.5% compared to the same period in 2019, according to theHawaii Tourism Authority . Statistics on visitor spending were not available for 2020 due to insufficient data. While we may see a gradual improvement in unemployment as local businesses and theHawaii tourism industry slowly reopen, the timing and significance of the return of air travel and the recovery of theHawaii tourism industry is highly uncertain and beyond our
control. 50 Table of Contents With regards to reports of home sales onOahu , although volume has decreased year-over-year due to stay-at-home orders that were in place earlier in the year, prices have remained stable. For the six months endedJune 30, 2020 , the volume of single-family home sales decreased by 4.8%, while condominium sales decreased by 22.0% compared to the same period in 2019, according to theHonolulu Board of Realtors . The median price of single-family home sales and condominium sales onOahu was$785,000 and$428,000 , respectively, or an increase of 1.3% and 2.1%, respectively, for the six months endedJune 30, 2020 as compared to the same period in 2019. As ofJune 30, 2020 , months of inventory of single-family homes and condominiums onOahu remained low at approximately 2.5 and 4.1 months, respectively. Lastly, state general excise and use tax revenues decreased by 8.0% for the first five months of 2020 as compared to the same period in 2019, according to the HawaiiDepartment of Business, Economic Development & Tourism . We expect tax revenues for the state to continue to be significantly lower when reported for the remainder of 2020.
Legislative and Regulatory Developments
Recent actions taken by the federal government and theFederal Reserve and other bank regulatory agencies to partially mitigate the economic effects of COVID-19 and related containment measures will also have an impact on our financial position and results of operations. These actions are further discussed below. In response to market conditions resulting from the COVID-19 pandemic, theFederal Reserve has taken a number of proactive measures, including cutting its target for the federal funds rate by a total of 1.50%, bringing it down to a range of 0.00% to 0.25%. We expect that interest rates will remain at record low levels for the foreseeable future. TheFederal Reserve has instituted a number of other measures, including up to$2.3 trillion in lending to support households, employers, financial markets and state and local governments. Additional actions taken by theFederal Reserve to mitigate the lasting impact from the coronavirus pandemic include the following:
? establishing a temporary repurchase agreement facility for foreign and
international monetary authorities;
? committing to quantitative easing through large-scale asset-purchase programs;
? lowering the rate charged on its discount window and extending the length of
the loans offered;
? increasing the frequency of engagement with currency swap lines with foreign
central banks;
? expanding the collateral accepted by its Term Asset-Backed Securities Loan
Facility; and
introducing a number of additional facilities, such as the Main Street Lending
? Facility, which is designed to enhance support for small and mid-sized
businesses that were in good financial standing before the crisis.
TheU.S. government has also enacted certain fiscal stimulus measures in several phases to counteract the economic disruption caused by COVID-19. The CARES Act, enacted onMarch 27, 2020 , is an approximately$2 trillion emergency economic stimulus package in response to the COVID-19 outbreak. Among other provisions, the CARES Act (i) authorized the Secretary of theTreasury to make loans, loan guarantees and other investments, up to$500 billion , for assistance to eligible businesses, States and municipalities with limited, targeted relief for passenger air carriers, cargo air carriers, and businesses critical to maintaining national security, (ii) created a$670 billion loan program (the "Paycheck Protection Program" or the "PPP") for fully guaranteed loans (which may then be forgiven) to small businesses for, among other things, payroll, group health care benefit costs and qualifying mortgage, rent and utility payments (program dollar amount includes amount approved under the original program inMarch 2020 and a second tranche which was approved inApril 2020 ), (iii) provides certain credits against the 2020 personal income tax for eligible individuals and their dependents, (iv) expanded eligibility for unemployment insurance and provides eligible recipients with an additional$600 per week on top of the unemployment amount determined by each State and (v) set a 60-day foreclosure moratorium beginning onMarch 18, 2020 for federally backed mortgage loans (theFederal Housing Administration has subsequently announced a second extension of the foreclosure and eviction moratorium throughAugust 31, 2020 ). 51 Table of Contents The Paycheck Protection Program Flexibility Act of 2020 (the "PPPF Act") was enacted onJune 5, 2020 and modified the PPP as follows: (i) established a minimum maturity of five years for all loans made after the enactment of the PPPF Act and permits an extension of the maturity of existing loans to five years if the borrower and lender agree; (ii) extended the "covered period" of the CARES Act fromJune 30, 2020 , toDecember 31, 2020 ; (iii) extended the eight-week "covered period" for expenditures that qualify for forgiveness to the earlier of 24 weeks following loan origination andDecember 31, 2020 ; (iv) extended the deferral period for payment of principal, interest and fees to the date on which the forgiveness amount is remitted to the lender by the SBA; (v) required the borrower to use at least 60% (down from 75%) of the proceeds of the loan for payroll costs, and up to 40% (up from 25%), for other permitted purposes, as a condition to obtaining forgiveness of the loan; (vi) delayed fromJune 30, 2020 toDecember 31, 2020 , the date by which employees must be rehired to avoid a reduction in the amount of forgiveness of a loan, and creates a "rehiring safe harbor" that allows businesses to remain eligible for loan forgiveness if they make a good faith attempt to rehire employees or hire similarly qualified employees, but are unable to do so, or are able to document an inability to return to pre-COVID-19 levels of business activity due to compliance with social distancing measures; and (vii) allowed borrowers to receive both loan forgiveness under the PPP and the payroll tax deferral permitted under the CARES Act, rather than having to choose the more advantageous option. InJuly 2020 , the CARES Act was amended to extend, throughAugust 8, 2020 , the SBA's authority to make commitments under the PPP. The SBA's existing authority had previously expired onJune 30, 2020 . We are continuing to monitor the potential development of additional legislation and further actions taken by theU.S. government. TheState of Hawaii is expected to receive at least$1.25 billion in federal aid from the CARES Act. We expect that the majority of this federal aid will be used to help fund state and county government response efforts to COVID-19. Additional federal funding is expected to provide for unemployment assistance, direct cash payments toHawaii residents and funding to support local schools and colleges. Impact to our Operations As noted above, onMarch 23, 2020 , the Governor of theState of Hawaii issued a third supplemental emergency proclamation that ordered all residents to stay-at-home, except for essential workers. This stay-at-home order was in place untilMay 5, 2020 . While the Bank is an essential business inHawaii , we saw a significant decrease in customer traffic in our branches. As a result, we strategically closed 26 of our branch locations on a temporary basis. OnJune 1, 2020 , we reopened seven of these branch locations in connection with the reopening of our local businesses. We continue to provide service to all customers and operate our businesses on all islands ofHawaii ,Guam and Saipan. Additionally, as part of our contingency plans, we have established a redundant operations center for our administrative operations, and about 30% of our employees are working remotely.
Impact on our Financial Position and Results of Operations
Due to the widespread impact that COVID-19 is having onHawaii's economy, we expect that adverse economic conditions will continue. AsHawaii's economy begins to reopen, we expect that local consumption of goods and services will begin to resume over an extended period of time. Additionally, the timing and significance of the return of air travel and theHawaii tourism industry is highly uncertain and is dependent upon, among other things, the number of cases declining around the globe, inthe United States and, in particular, inHawaii , visitor receptiveness toHawaii's new pre-travel COVID-19 testing requirements, an extended period in which there is no subsequent "wave" of infections and the widespread availability of a vaccine, treatment or testing, tracking and tracing capabilities. During this time of uncertainty, we remain committed to servicing our customers, caring for our employees and supporting the community. We are working with our customers impacted by COVID-19 through offering payment deferrals and forbearance on certain loan products. We will continue to closely monitor the impact that COVID-19 and the recession inHawaii has on our customers and will adjust the means by which we assist our customers during this period of financial hardship. We are continuing to care for our employees by enabling over 50% of our employees to work from home, and for those employeeswho are deemed essential and unable to work from home, we continue to emphasize the importance of practicing social distancing and good hygiene practices in the workplace. We also launched an initiative to support local restaurants and, through our foundation, to donate up to$1 million to support non-profit organizations with food supply and health and human service programs for those impacted by COVID-19. 52 Table of Contents
The shut-down of our tourism industry, stay-at-home measures, the recession inHawaii and record low interest rates have and we expect will continue to have a negative impact on our financial position and results of operations. A continued decrease in interest rates, or sustained period of interest rates, would be expected to reduce our net interest margin, as, currently, our interest rate profile is such that we project net interest income will benefit from higher interest rates as our assets would reprice faster and to a greater degree than our liabilities, while in the case of lower interest rates, our assets would reprice downward and to a greater degree than our liabilities. Our net interest margin also may be reduced as a result of our participation in the PPP, with loans made thereunder that are not forgiven carrying an interest rate of 1%. Our credit risk profile will also be adversely impacted during this period of financial hardship for our customers. We also expect that we will see temporary decreases in non-interest income, as we have taken certain measures to assist customers during the COVID-19 pandemic, including waiving non-customer ATM fees (up toJune 30, 2020 ) and penalties for early withdrawal of certificates of deposit. Moreover, we have seen increased draws by some of our customers on lines of credit as they have sought to improve their liquidity positions. While we expect a significant portion of loans made by the Bank through our participation in the PPP to be forgiven, we expect that a sizeable portion of such loans will remain on our balance sheet for up to two years. As a result, we expect to see higher loan volumes and reduced capital levels as a result of the COVID-19 pandemic. In light of volatility in the capital markets and economic disruptions, we continue to carefully monitor our capital and liquidity positions. As ofJune 30, 2020 , the Company was "well-capitalized" and met all applicable regulatory capital requirements, including a Common Equity Tier 1 capital ratio of 11.86%, compared to the minimum requirement of 4.50%. We continue to anticipate that we will have sufficient capital levels to meet all of these requirements. Additionally, we continue to access our routine short-term funding sources, such as borrowings and repurchase agreements, and to assess longer-term funding sources. For additional discussions regarding our capital and liquidity positions and related risks, refer to the sections titled "Liquidity" and "Capital" in this MD&A. 53 Table of Contents Selected Financial Data Our financial highlights for the periods indicated are presented in Table 1: Financial Highlights Table 1 For the Three Months Ended For the Six Months EndedJune 30 ,June 30 ,
(dollars in thousands, except per share data) 2020 2019
2020 2019 Income Statement Data: Interest income$ 140,619 $ 173,818 $ 299,151 $ 346,379 Interest expense 12,797 28,205 32,646 55,677 Net interest income 127,822 145,613 266,505 290,702 Provision for credit losses 55,446 3,870 96,646 9,550 Net interest income after provision for credit losses 72,376 141,743 169,859 281,152 Noninterest income 45,656 48,773 94,884 95,845 Noninterest expense 91,450 93,290 187,916 185,913 Income before provision for income taxes 26,582 97,226 76,827 191,084 Provision for income taxes 6,533 24,793 17,913 48,727 Net income$ 20,049 $ 72,433 $ 58,914 $ 142,357 Basic earnings per share$ 0.15 $ 0.54 $ 0.45 $ 1.06 Diluted earnings per share$ 0.15 $ 0.54 $ 0.45 $ 1.06 Basic weighted-average outstanding shares 129,856,730 134,420,380 129,876,218 134,655,217 Diluted weighted-average outstanding shares 130,005,195 134,652,008 130,163,722 134,924,331 Dividends declared per share$ 0.26 $ 0.26 $ 0.52 $ 0.52 Dividend payout ratio 173.33 % 48.15 % 115.56 % 49.06 % Supplemental Income Statement Data (non-GAAP)(1): Core net interest income$ 127,822 $ 145,613 $ 266,505 $ 290,702 Core noninterest income 45,867 48,752 95,010 98,437 Core noninterest expense 91,450 93,029 187,916 185,391 Core net income 20,204 72,612 59,007 144,664
Core basic earnings per share 0.16 0.54 0.45 1.07 Core diluted earnings per share 0.16 0.54 0.45 1.07 Other Financial Information / Performance Ratios:(2) Net interest margin 2.58 % 3.25 % 2.84 % 3.24 % Core net interest margin (non-GAAP)(1),(3) 2.58 % 3.25 % 2.84 % 3.24 % Efficiency ratio 52.70 % 47.99 % 51.99 % 48.09 % Core efficiency ratio (non-GAAP)(1),(4) 52.64 % 47.86 % 51.97 % 47.64 % Return on average total assets 0.36 % 1.42 % 0.56 % 1.40 % Core return on average total assets (non-GAAP)(1),(5) 0.36 % 1.43 % 0.56 % 1.43 % Return on average tangible assets (non-GAAP)(11) 0.38 % 1.50 % 0.58 % 1.48 % Core return on average tangible assets (non-GAAP)(1),(6) 0.38 % 1.50 % 0.58 % 1.50 % Return on average total stockholders' equity 2.99 % 11.13 % 4.42 % 11.15 % Core return on average total stockholders' equity (non-GAAP)(1),(7) 3.01 % 11.16 % 4.43 % 11.33 % Return on average tangible stockholders' equity (non-GAAP)(11) 4.74 % 17.99 % 7.04 % 18.17 % Core return on average tangible stockholders' equity (non-GAAP)(1),(8) 4.77 % 18.03 % 7.05 % 18.46 % Noninterest expense to average assets 1.65 % 1.84 % 1.77 % 1.83 % Core noninterest expense to average assets (non-GAAP)(1),(9) 1.65 % 1.83 % 1.77 % 1.83 % 54 Table of Contents June 30, December 31, 2020 2019 Balance Sheet Data: Cash and cash equivalents$ 1,855,222 $ 694,017 Investment securities 5,135,775 4,075,644 Loans and leases 13,764,030 13,211,650
Allowance for credit losses for loans and leases 192,120
130,530 Goodwill 995,492 995,492 Total assets 22,993,715 20,166,734 Total deposits 19,361,634 16,444,994 Short-term borrowings 200,000 400,000 Long-term borrowings 200,019 200,019 Total liabilities 20,291,818 17,526,476
Total stockholders' equity 2,701,897
2,640,258
Book value per share$ 20.81 $
20.32
Tangible book value per share (non-GAAP)(11)$ 13.14 $
12.66
Asset Quality Ratios: Non-accrual loans and leases / total loans and leases 0.24 %
0.04 % Allowance for credit losses for loans and leases / total loans and leases
1.40 % 0.99 % Net charge-offs / average total loans and leases(10) 0.44 %
0.19 % June 30, December 31, Capital Ratios: 2020 2019
Common Equity Tier 1 Capital Ratio 11.86 %
11.88 % Tier 1 Capital Ratio 11.86 % 11.88 % Total Capital Ratio 13.11 % 12.81 % Tier 1 Leverage Ratio 7.75 % 8.79 %
Total stockholders' equity to total assets 11.75 % 13.09 % Tangible stockholders' equity to tangible assets (non-GAAP)(11) 7.76 %
8.58 %
(1) We present net interest income, noninterest income, noninterest expense, net
income, basic earnings per share, diluted earnings per share and the related
ratios described below, on an adjusted, or "core," basis, each a non-GAAP
financial measure. These core measures exclude from the corresponding GAAP
measure the impact of certain items that we do not believe are representative
of our financial results. We believe that the presentation of these non-GAAP
measures helps identify underlying trends in our business from period to
period that could otherwise be distorted by the effect of certain expenses,
gains and other items included in our operating results. We believe that
these core measures provide useful information about our operating results
and enhance the overall understanding of our past performance and future
performance. Investors should consider our performance and financial
condition as reported under GAAP and all other relevant information when
assessing our performance or financial condition. Non-GAAP measures have
limitations as analytical tools and investors should not consider them in isolation or as a substitute for analysis of our financial results or financial condition as reported under GAAP. 55 Table of Contents
The following table provides a reconciliation of net interest income, noninterest income, noninterest expense and net income to their "core" non-GAAP financial measures:
GAAP to Non-GAAP Reconciliation
Table 2 For the Three Months Ended For the Six Months EndedJune 30 ,June 30 ,
(dollars in thousands, except per share data) 2020 2019 2020 2019 Net interest income$ 127,822 $ 145,613 $ 266,505 $ 290,702 Core net interest income (non-GAAP)$ 127,822 $
145,613
Noninterest income$ 45,656 $ 48,773 $ 94,884 $ 95,845 Losses (gains) on sale of securities 211 (21) 126 2,592 Core noninterest income (non-GAAP)$ 45,867 $ 48,752 $ 95,010 $ 98,437 Noninterest expense$ 91,450 $ 93,290 $ 187,916 $ 185,913 One-time items(a) - (261) - (522) Core noninterest expense (non-GAAP)$ 91,450 $
93,029
Net income$ 20,049 $ 72,433 $ 58,914 $ 142,357 Losses (gains) on sale of securities 211 (21) 126 2,592 One-time noninterest expense items(a) -
261 - 522 Tax adjustments(b) (56) (61) (33) (807) Total core adjustments 155 179 93 2,307 Core net income (non-GAAP)$ 20,204 $
72,612
Basic earnings per share $ 0.15 $ 0.54$ 0.45 $ 1.06 Diluted earnings per share $ 0.15 $ 0.54$ 0.45 $ 1.06 Efficiency ratio 52.70 %
47.99 % 51.99 % 48.09 %
Core basic earnings per share (non-GAAP) $ 0.16 $ 0.54$ 0.45 $ 1.07 Core diluted earnings per share (non-GAAP) $ 0.16 $ 0.54$ 0.45 $ 1.07 Core efficiency ratio (non-GAAP) 52.64 %
47.86 % 51.97 % 47.64 %
(a) One-time items include nonrecurring offering costs.
(b) Represents the adjustments to net income, tax effected at the Company's
effective tax rate for the respective period.
(2) Except for the efficiency ratio and the core efficiency ratio, amounts are
annualized for the three and six months endedJune 30, 2020 and 2019.
(3) Core net interest margin is a non-GAAP financial measure. We compute our core
net interest margin as the ratio of core net interest income to average
earning assets. For a reconciliation to the most directly comparable GAAP
financial measure for core net interest income, see Table 2, GAAP to Non-GAAP
Reconciliation.
(4) Core efficiency ratio is a non-GAAP financial measure. We compute our core
efficiency ratio as the ratio of core noninterest expense to the sum of core
net interest income and core noninterest income. For a reconciliation to the
most directly comparable GAAP financial measure for core noninterest expense,
core net interest income and core noninterest income, see Table 2, GAAP to
Non-GAAP Reconciliation.
(5) Core return on average total assets is a non-GAAP financial measure. We
compute our core return on average total assets as the ratio of core net
income to average total assets. For a reconciliation to the most directly
comparable GAAP financial measure for core net income, see Table 2, GAAP to
Non-GAAP Reconciliation.
(6) Core return on average tangible assets is a non-GAAP financial measure. We
compute our core return on average tangible assets as the ratio of core net
income to average tangible assets, which is calculated by subtracting (and
thereby effectively excluding) amounts related to the effect of goodwill from
our average total assets. For a reconciliation to the most directly
comparable GAAP financial measure for core net income, see Table 2, GAAP to
Non-GAAP Reconciliation.
(7) Core return on average total stockholders' equity is a non-GAAP financial
measure. We compute our core return on average total stockholders' equity as
the ratio of core net income to average total stockholders' equity. For a
reconciliation to the most directly comparable GAAP financial measure for
core net income, see Table 2, GAAP to Non-GAAP Reconciliation. 56 Table of Contents
(8) Core return on average tangible stockholders' equity is a non-GAAP financial
measure. We compute our core return on average tangible stockholders' equity
as the ratio of core net income to average tangible stockholders' equity,
which is calculated by subtracting (and thereby effectively excluding)
amounts related to the effect of goodwill from our average total
stockholders' equity. For a reconciliation to the most directly comparable
GAAP financial measure for core net income, see Table 2, GAAP to Non-GAAP
Reconciliation.
(9) Core noninterest expense to average assets is a non-GAAP financial measure.
We compute our core noninterest expense to average assets as the ratio of
core noninterest expense to average total assets. For a reconciliation to the
most directly comparable GAAP financial measure for core noninterest expense,
see Table 2, GAAP to Non-GAAP Reconciliation.
(10) Net charge-offs / average total loans and leases are annualized for the six
months endedJune 30, 2020 .
(11) Return on average tangible assets, return on average tangible stockholders'
equity, tangible book value per share and tangible stockholders' equity to
tangible assets are non-GAAP financial measures. We compute our return on average tangible assets as the ratio of net income to average tangible assets. We compute our return on average tangible stockholders' equity as
the ratio of net income to average tangible stockholders' equity. We compute
our tangible book value per share as the ratio of tangible stockholders'
equity to outstanding shares. We compute our tangible stockholders' equity
to tangible assets as the ratio of tangible stockholders' equity to tangible
assets. We believe that these financial measures are useful for investors,
regulators, management and others to evaluate financial performance and
capital adequacy relative to other financial institutions. Although these
non-GAAP financial measures are frequently used by shareholders in the
evaluation of a company, they have limitations as analytical tools and
should not be considered in isolation or as a substitute for analyses of
results as reported under GAAP.
The following table provides a reconciliation of these non-GAAP financial measures with their most closely related GAAP measures for the periods indicated:
GAAP to Non-GAAP Reconciliation
Table 3 For the Three Months Ended For the Six Months EndedJune 30 ,June 30 ,
(dollars in thousands, except per share data) 2020 2019 2020 2019 Income Statement Data: Noninterest expense$ 91,450 $ 93,290 $ 187,916 $ 185,913 Core noninterest expense$ 91,450
$ 93,029 $ 187,916 $ 185,391 Net income$ 20,049 $ 72,433 $ 58,914 $ 142,357 Core net income$ 20,204 $ 72,612 $ 59,007 $ 144,664
Average total stockholders' equity$ 2,697,775 $ 2,610,565 $ 2,679,293 $ 2,575,775 Less: average goodwill 995,492 995,492 995,492 995,492 Average tangible stockholders' equity$ 1,702,283
Average total assets$ 22,341,654 $ 20,390,273 $ 21,327,479 $ 20,442,266 Less: average goodwill 995,492 995,492 995,492 995,492 Average tangible assets$ 21,346,162
Return on average total stockholders' equity(a) 2.99 % 11.13 % 4.42 % 11.15 % Core return on average total stockholders' equity (non-GAAP)(a) 3.01 % 11.16 % 4.43 % 11.33 % Return on average tangible stockholders' equity (non-GAAP)(a) 4.74 % 17.99 % 7.04 % 18.17 % Core return on average tangible stockholders' equity (non-GAAP)(a) 4.77 % 18.03 % 7.05 % 18.46 % Return on average total assets(a) 0.36 % 1.42 % 0.56 % 1.40 % Core return on average total assets (non-GAAP)(a) 0.36 % 1.43 % 0.56 % 1.43 % Return on average tangible assets (non-GAAP)(a) 0.38 % 1.50 % 0.58 % 1.48 % Core return on average tangible assets (non-GAAP)(a) 0.38 % 1.50 % 0.58 % 1.50 % Noninterest expense to average assets(a) 1.65 % 1.84 % 1.77 % 1.83 % Core noninterest expense to average assets (non-GAAP)(a) 1.65 % 1.83 % 1.77 % 1.83 % 57 Table of Contents As of As of June 30, December 31, 2020 2019 Balance Sheet Data: Total stockholders' equity$ 2,701,897 $ 2,640,258 Less: goodwill 995,492 995,492
Tangible stockholders' equity$ 1,706,405
$ 1,644,766 Total assets$ 22,993,715 $ 20,166,734 Less: goodwill 995,492 995,492 Tangible assets$ 21,998,223 $ 19,171,242 Shares outstanding 129,866,898 129,928,479
Total stockholders' equity to total assets 11.75 % 13.09 % Tangible stockholders' equity to tangible assets (non-GAAP) 7.76 % 8.58 % Book value per share$ 20.81 $ 20.32 Tangible book value per share (non-GAAP)$ 13.14
(a) Annualized for the three and six months ended
Financial Highlights Net income was$20.0 million for the three months endedJune 30, 2020 , a decrease of$52.4 million or 72% as compared to the same period in 2019. Basic and diluted earnings per share were both$0.15 per share for the three months endedJune 30, 2020 , a decrease of$0.39 per share or 72% as compared to the same period in 2019. The decrease in net income was primarily due to a$51.6 million increase in the provision for credit losses (the "Provision"), a$17.8 million decrease in net interest income and a$3.1 million decrease in noninterest income, partially offset by an$18.3 million decrease in the provision for income taxes and a$1.8 million decrease in noninterest expense for the three months endedJune 30, 2020 . Our return on average total assets was 0.36% for the three months endedJune 30, 2020 , a decrease of 106 basis points from the same period in 2019, and our return on average total stockholders' equity was 2.99% for the three months endedJune 30, 2020 , a decrease of 814 basis points from the same period in 2019. Our return on average tangible assets was 0.38% for the three months endedJune 30, 2020 , a decrease of 112 basis points from the same period in 2019, and our return on average tangible stockholders' equity was 4.74% for the three months endedJune 30, 2020 , down from 17.99% for the same period in 2019. We continued to prudently manage our expenses, as our efficiency ratio was 52.70% for the three months endedJune 30, 2020 compared to 47.99% for the same period in 2019.
Our results for the three months ended
Net interest income was
period in 2019. Our net interest margin was 2.58% for the three months ended
?
2019. The decrease in net interest income was primarily due to lower yields in
all loan categories and lower yields in our investment securities portfolio,
partially offset by lower deposit funding costs during the three months ended
June 30, 2020 .
The Provision was
increase of
increase was primarily due to higher expected credit losses as a result of
? COVID-19 and its impact on
customers. The Provision is recorded to maintain the Allowance for Credit
Losses ("ACL") at levels deemed adequate to absorb lifetime expected credit
losses in our loan and lease portfolio as of the balance sheet date.
Noninterest income was
a decrease of
decrease was primarily due to a
? fees, a
million decrease in other service charges and fees, partially offset by a
million increase in other noninterest income and a
bank-owned life insurance ("BOLI") income. 58 Table of Contents
Noninterest expense was
a decrease of
decrease in noninterest expense was primarily due to a
? card rewards program expense, a
a
million increase in equipment expense.
Net income was$58.9 million for the six months endedJune 30, 2020 , a decrease of$83.4 million or 59% as compared to the same period in 2019. Basic and diluted earnings per share were both$0.45 per share for the six months endedJune 30, 2020 , a decrease of$0.61 per share or 58% as compared to the same period in 2019. The decrease in net income was primarily due to a$87.1 million increase in the Provision, a$24.2 million decrease in net interest income, a$2.0 million increase in noninterest expense and a$1.0 million decrease in noninterest income, partially offset by a$30.8 million decrease in the provision for income taxes for the six months endedJune 30, 2020 . Our return on average total assets was 0.56% for the six months endedJune 30, 2020 , a decrease of 84 basis points from the same period in 2019, and our return on average total stockholders' equity was 4.42% for the six months endedJune 30, 2020 , a decrease of 673 basis points from the same period in 2019. Our return on average tangible assets was 0.58% for the six months endedJune 30, 2020 , a decrease of 90 basis points from the same period in 2019, and our return on average tangible stockholders' equity was 7.04% for the six months endedJune 30, 2020 , down from 18.17% for the same period in 2019. Our efficiency ratio was 51.99% for the six months endedJune 30, 2020 compared to 48.09% for the same period in 2019.
Our results for the six months ended
Net interest income was
a decrease of
net interest margin was 2.84% for the six months ended
? decrease of 40 basis points as compared to the same period in 2019. The
decrease in net interest income was primarily due to lower yields in most loan
categories and lower yields in our investment securities portfolio. This was
partially offset by lower deposit funding costs.
The Provision was
increase of
was primarily due to higher expected credit losses as a result of COVID-19 and
? its impact on
The Provision is recorded to maintain the ACL at levels deemed adequate to
absorb lifetime expected credit losses in our loan and lease portfolio as of
the balance sheet date.
Noninterest income was
decrease of
decrease was primarily due to a
? fees, a
decrease on service charges on deposit accounts and a
BOLI income, partially offset by a
securities and a
Noninterest expense was
an increase of
increase in noninterest expense was primarily due to a
? contracted services and professional fees and a
equipment expense, partially offset by a
program expense, a
and a$0.6 million decrease in other noninterest expense.
Hawaii's economy continues to be meaningfully impacted by COVID-19 and the responses to it. These responses included stay-at-home orders for businesses deemed nonessential, from the end ofMarch 2020 toJune 2020 , and the implementation of the mandatory 14-day self-quarantine for residents and visitors arriving or returning to theState of Hawaii . For an economy that is heavily dependent on tourism, the combination of these various response measures to the COVID-19 pandemic resulted in an unprecedented increase inHawaii unemployment. While we may see a gradual improvement in unemployment as local businesses and theHawaii tourism industry slowly reopen, the timing and significance of the return of air travel and the recovery of theHawaii tourism industry is highly uncertain and beyond our control. As such, we increased our Provision in order to maintain adequate reserves for expected losses. We also continued to maintain high levels of liquidity and remained well-capitalized as ofJune 30, 2020 . 59 Table of Contents
Total loans and leases were
growth in commercial and industrial loans stemming from PPP loans totaling
?
and dealer flooring portfolios during the six months ended
increase in loans was partially offset by decreases in our consumer portfolio,
primarily due to decreases in credit card balances and indirect automobile
loans.
The ACL was
47% from
? aforementioned higher expected credit losses as a result of COVID-19 and its
impact on
ratio of our ACL to total loans and leases outstanding was 1.40% as of
We continued to invest in high-grade investment securities, primarily
collateralized mortgage obligations issued by the Government National Mortgage
Association ("Ginnie Mae"), the Federal National Mortgage Association ("Fannie
? Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"). The total
fair value of our investment securities portfolio was
increase was primarily due to purchases in this portfolio as we invested excess
liquidity into securities.
Total deposits were
billion or 18% as compared to
was primarily due to a
?
in savings deposit balances. Deposits were increased in anticipation of a surge
in funding needs due to our participation in the PPP and other additional
liquidity needs.
Total stockholders' equity was
equity was primarily due to a net gain in the fair value of our investment
? securities of
was partially offset by dividends declared and paid to the Company's
stockholders of
an accounting principle of
million during the six months endedJune 30, 2020 . 60 Table of Contents
Analysis of Results of Operations
Net Interest Income For the three months endedJune 30, 2020 and 2019, average balances, related income and expenses, on a fully taxable-equivalent basis, and resulting yields and rates are presented in Table 4. An analysis of the change in net interest income, on a fully taxable-equivalent basis, is presented in Table 5. Average Balances and Interest Rates
Table 4 Three Months Ended Three Months Ended June 30, 2020 June 30, 2019 Average Average Average Income/ Yield/ Average Income/ Yield/ (dollars in millions) Balance Expense Rate Balance Expense Rate Earning Assets Interest-Bearing Deposits in Other Banks$ 1,436.2 $ 0.4 0.10 %$ 247.2 $ 1.4 2.35 % Available-for-Sale Investment Securities 4,390.4 17.5 1.60 4,438.1 24.8 2.23 Loans Held for Sale 9.8 0.1 2.93 0.7 - 2.76 Loans and Leases (1) Commercial and industrial 3,601.0 24.3 2.71 3,235.0 34.3 4.26 Commercial real estate 3,438.8 28.3 3.31 3,094.4 36.0 4.67 Construction 584.1 4.9 3.35 583.6 6.9 4.73 Residential: Residential mortgage 3,682.7 35.7 3.88 3,581.2 37.2 4.16 Home equity line 885.2 6.8 3.07 908.5 8.6 3.79 Consumer 1,526.5 20.6 5.42 1,657.7 22.7 5.48 Lease financing 238.4 1.7 2.88 149.3 1.2 3.31 Total Loans and Leases 13,956.7 122.3 3.52 13,209.7 146.9 4.46 Other Earning Assets 61.7 0.4 2.79 76.0 0.7 3.71 Total Earning Assets (2) 19,854.8 140.7 2.84 17,971.7 173.8 3.88 Cash and Due from Banks 295.1 342.6 Other Assets 2,191.8 2,076.0 Total Assets$ 22,341.7 $ 20,390.3 Interest-Bearing Liabilities Interest-Bearing Deposits Savings$ 5,501.9 $ 0.9 0.07 %$ 4,712.2 $ 4.0 0.34 % Money Market 3,270.3 1.1 0.13 3,126.7 7.4 0.95 Time 3,335.6 6.6 0.79 3,084.6 12.3 1.60 Total Interest-Bearing Deposits 12,107.8 8.6 0.29 10,923.5 23.7 0.87 Short-Term Borrowings 395.6 2.8 2.88 50.4 0.3 2.25 Long-Term Borrowings 200.0 1.4 2.77 593.5 4.2 2.86 Total Interest-Bearing Liabilities 12,703.4 12.8 0.41 11,567.4 28.2 0.98 Net Interest Income$ 127.9 $ 145.6 Interest Rate Spread 2.43 % 2.90 % Net Interest Margin 2.58 % 3.25 %
Noninterest-Bearing Demand Deposits 6,432.6
5,741.3 Other Liabilities 507.9 471.0 Stockholders' Equity 2,697.8 2,610.6
Total Liabilities and Stockholders' Equity$ 22,341.7
(1) Non-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.
(2) Interest income includes taxable-equivalent basis adjustments of
and nil for the three months endedJune 30, 2020 and 2019, respectively. 61 Table of Contents
Analysis of Change in Net Interest Income
Table 5 Three Months Ended June 30, 2020 Compared to June 30, 2019 (dollars in millions) Volume Rate Total (1) Change in Interest Income:
Interest-Bearing Deposits in Other Banks$ 1.4 $ (2.4) $
(1.0)
Available-for-Sale Investment Securities (0.3) (7.0)
(7.3) Loans Held for Sale 0.1 - 0.1 Loans and Leases Commercial and industrial 3.6 (13.6) (10.0) Commercial real estate 3.7 (11.4) (7.7) Construction - (2.0) (2.0) Residential: Residential mortgage 1.0 (2.5) (1.5) Home equity line (0.2) (1.6) (1.8) Consumer (1.8) (0.3) (2.1) Lease financing 0.7 (0.2) 0.5 Total Loans and Leases 7.0 (31.6) (24.6) Other Earning Assets (0.1) (0.2) (0.3)
Total Change in Interest Income 8.1 (41.2)
(33.1) Change in Interest Expense: Interest-Bearing Deposits Savings 0.6 (3.7) (3.1) Money Market 0.3 (6.6) (6.3) Time 1.0 (6.7) (5.7)
Total Interest-Bearing Deposits 1.9 (17.0)
(15.1) Short-term Borrowings 2.4 0.1 2.5 Long-term Borrowings (2.7) (0.1) (2.8)
Total Change in Interest Expense 1.6 (17.0)
(15.4) Change in Net Interest Income$ 6.5 $ (24.2) $ (17.7)
(1) The 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. Net interest income, on a fully taxable-equivalent basis, was$127.9 million for the three months endedJune 30, 2020 , a decrease of$17.7 million or 12% compared to the same period in 2019. Our net interest margin was 2.58% for the three months endedJune 30, 2020 , a decrease of 67 basis points from the same period in 2019. The decrease in net interest income, on a fully taxable-equivalent basis, was primarily due to lower yields in all loan categories and lower yields in our investment securities portfolio, partially offset by lower deposit funding costs during the three months endedJune 30, 2020 . Yields on our loans and leases were 3.52% for the three months endedJune 30, 2020 , a decrease of 94 basis points as compared to the same period in 2019. We experienced a decrease in our yields from total loans primarily due to decreases in adjustable rate commercial and industrial and commercial real estate loans, which are typically based on the LIBOR. Decreases in the yield on commercial and industrial loans also stemmed from our participation in the PPP, as these loans have a fixed interest rate of one percent per annum. Interest income earned on PPP loans was$5.4 million for the three months endedJune 30, 2020 . The yield in our investment securities portfolio was 1.60% for the three months endedJune 30, 2020 , a decrease of 63 basis points from the same period in 2019. Deposit funding costs were$8.6 million for the three months endedJune 30, 2020 , a decrease of$15.1 million or 64% compared to the same period in 2019. Rates paid on our interest-bearing deposits were 29 basis points for the three months endedJune 30, 2020 , a decrease of 58 basis points compared to the same period in 2019. 62 Table of Contents
For the six months endedJune 30, 2020 and 2019, average balances, related income and expenses, on a fully taxable-equivalent basis, and resulting yields and rates are presented in Table 6. An analysis of the change in net interest income, on a fully taxable-equivalent basis, is presented in Table 7. Average Balances and Interest Rates
Table 6 Six Months Ended Six Months Ended June 30, 2020 June 30, 2019 Average Income/ Yield/ Average Income/ Yield/
(dollars in millions) Balance Expense Rate Balance Expense Rate Earning Assets Interest-Bearing Deposits in Other Banks$ 976.5 $ 2.0 0.40 %$ 376.5 $ 4.6 2.49 % Available-for-Sale Investment Securities 4,211.8 38.7 1.84 4,428.0 49.3 2.23 Loans Held for Sale 12.8 0.1 2.17 0.5 - 2.76 Loans and Leases(1) Commercial and industrial 3,188.4 48.9 3.08 3,200.9 67.5 4.25 Commercial real estate 3,426.3 62.9 3.69 3,044.9 70.7 4.68 Construction 561.5 10.6 3.79 610.2 14.4 4.75 Residential: Residential mortgage 3,711.5 73.4 3.95 3,563.2 73.9 4.14 Home equity line 886.3 14.5 3.28 912.1 17.3 3.82 Consumer 1,569.2 43.6 5.59 1,662.5 45.2 5.48 Lease financing 230.8 3.3 2.90 148.3 2.3 3.15 Total Loans and Leases 13,574.0 257.2 3.80 13,142.1 291.3 4.46 Other Earning Assets 59.4 1.2 3.99 84.1 1.2 2.81 Total Earning Assets(2) 18,834.5 299.2 3.19 18,031.2 346.4 3.86 Cash and Due from Banks 311.2 351.4 Other Assets 2,181.8 2,059.7 Total Assets$ 21,327.5 $ 20,442.3 Interest-Bearing Liabilities Interest-Bearing Deposits Savings$ 5,296.1 $ 4.2 0.16 %$ 4,762.6 $ 8.2 0.35 % Money Market 3,167.6 5.7 0.36 3,155.0 15.0 0.96 Time 2,935.1 14.3 0.98 3,063.3 23.7 1.56 Total Interest-Bearing Deposits 11,398.8 24.2 0.43 10,980.9 46.9 0.86 Short-Term Borrowings 398.6 5.7 2.88 31.7 0.4 2.29 Long-Term Borrowings 200.0 2.7 2.77 596.7 8.4 2.85 Total Interest-Bearing Liabilities 11,997.4 32.6 0.55 11,609.3 55.7 0.97 Net Interest Income$ 266.6 $ 290.7 Interest Rate Spread 2.64 % 2.89 % Net Interest Margin 2.84 % 3.24 %
Noninterest-Bearing Demand Deposits 6,143.0
5,783.8 Other Liabilities 507.8 473.4 Stockholders' Equity 2,679.3 2,575.8
Total Liabilities and Stockholders' Equity$ 21,327.5
(1) Non-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.
(2) Interest income includes taxable-equivalent basis adjustments of
and nil for the six months endedJune 30, 2020 and 2019, respectively. 63 Table of Contents Analysis of Change in Net Interest Income Table 7 Six Months Ended June 30, 2020 Compared to June 30, 2019 (dollars in millions) Volume Rate Total(1) Change in Interest Income:
Interest-Bearing Deposits in Other Banks$ 3.4 $ (6.0) $ (2.6) Available-for-Sale Investment Securities (2.3) (8.3)
(10.6) Loans Held for Sale 0.1 - 0.1 Loans and Leases Commercial and industrial (0.2) (18.4) (18.6) Commercial real estate 8.3 (16.1) (7.8) Construction (1.1) (2.7) (3.8) Residential: Residential mortgage 2.9 (3.4) (0.5) Home equity line (0.5) (2.3) (2.8) Consumer (2.5) 0.9 (1.6) Lease financing 1.2 (0.2) 1.0 Total Loans and Leases 8.1 (42.2) (34.1) Other Earning Assets (0.4) 0.4 -
Total Change in Interest Income 8.9 (56.1)
(47.2) Change in Interest Expense: Interest-Bearing Deposits Savings 0.9 (4.9) (4.0) Money Market 0.1 (9.4) (9.3) Time (1.0) (8.4) (9.4)
Total Interest-Bearing Deposits - (22.7)
(22.7) Short-Term Borrowings 5.2 0.1 5.3 Long-Term Borrowings (5.5) (0.2) (5.7)
Total Change in Interest Expense (0.3) (22.8)
(23.1) Change in Net Interest Income$ 9.2 $ (33.3) $ (24.1)
(1) The 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. Net interest income, on a fully taxable-equivalent basis, was$266.6 million for the six months endedJune 30, 2020 , a decrease of$24.1 million or 8% compared to the same period in 2019. Our net interest margin was 2.84% for the six months endedJune 30, 2020 , a decrease of 40 basis points from the same period in 2019. The decrease in net interest income, on a fully taxable-equivalent basis, was primarily due to lower yields in most loan categories and lower yields in our investment securities portfolio. This was partially offset by lower deposit funding costs. Yields on our loans and leases were 3.80% for the six months endedJune 30, 2020 , a decrease of 66 basis points as compared to the same period in 2019. We experienced a decrease in our yield from total loans primarily due to decreases in adjustable rate commercial and industrial and commercial real estate loans, which are typically based on LIBOR. Decreases in the yield on commercial and industrial loans also stemmed from our participation in the PPP, as these loans have a fixed interest rate of one percent per annum. Interest income earned on PPP loans was$5.4 million for the six months endedJune 30, 2020 . For the six months endedJune 30, 2020 , the yield in our investment securities portfolio was 1.84%, a decrease of 39 basis points compared to the same period in 2019. Deposit funding costs were$24.2 million for the six months endedJune 30, 2020 , a decrease of$22.7 million or 48% compared to the same period in 2019. Rates paid on our interest-bearing deposits were 43 basis points for the six months endedJune 30, 2020 , a decrease of 43 basis points compared to the same period in 2019. TheFederal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is affected by changes in the prime interest rate. The prime rate began in 2019 at 5.50% and decreased 50 basis points during the third quarter of 2019 (25 basis points in each of August and September) and 25 basis points inOctober 2019 to end the year at 4.75%. During 2020, the prime rate decreased 150 basis points in March to end the first quarter at 3.25%, where it remained as at the end of the second quarter of 2020. As noted above, our loan portfolio is also impacted by changes in the LIBOR. AtJune 30, 2020 , the one-month and three-monthU.S. dollar LIBOR interest rates were 0.16% and 0.30%, respectively, while atJune 30, 2019 , the one-month and three-monthU.S. dollar LIBOR interest rates were 2.40% and 2.32%, respectively. The target range for the federal funds rate, which is the cost of immediately available overnight funds, began 2019 at 2.25% to 2.50% and decreased 50 basis points during the third quarter of 2019 (25 basis points in each of August and September) and 25 basis points inOctober 2019 to end the year at 1.50 to 1.75%. During 2020, the target range for the federal funds rate decreased 150 basis points in March to end the first quarter at 0.00% to 0.25%, 64 Table of Contents where it remained as at the end of the second quarter of 2020. InJune 2020 , theFederal Reserve indicated that it expects to maintain the targeted federal funds rate at current levels through 2022. The decrease in the target range for the federal funds rate in 2020 was largely an emergency measure by theFederal Reserve aimed at mitigating the economic impact of COVID-19. Provision for Credit Losses The Provision was$55.4 million for the three months endedJune 30, 2020 , which represented an increase of$51.6 million compared to the same period in 2019. We recorded net charge-offs of loans and leases of$23.4 million and$6.9 million for the three months endedJune 30, 2020 and 2019, respectively. This represented charge-offs of 0.67% and 0.21% of average loans and leases, on an annualized basis, for the three months endedJune 30, 2020 and 2019, respectively. The Provision was$96.6 million for the six months endedJune 30, 2020 , which represented an increase of$87.1 million compared to the same period in 2019. This increase was primarily due to an adjustment related to COVID-19 and the impact we expect it to have on our customers. We recorded net charge-offs of loans and leases of$29.5 million and$12.7 million for the six months endedJune 30, 2020 and 2019, respectively. This represented net charge-offs of 0.44% and 0.20% of average loans and leases, on an annualized basis, for the six months endedJune 30, 2020 and 2019, respectively. The ACL was$192.1 million as ofJune 30, 2020 , an increase of$61.6 million or 47% fromDecember 31, 2019 and represented 1.40% of total outstanding loans and leases as ofJune 30, 2020 compared to 0.99% of total outstanding loans and leases as ofDecember 31, 2019 . The Provision is recorded to maintain the ACL at levels deemed adequate by management based on the factors noted in the "Risk Governance and Quantitative and Qualitative Disclosures About Market Risk - Credit Risk" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"). Noninterest Income
Table 8 presents the major components of noninterest income for the three months
ended
Noninterest Income Table 8 Three Months Ended June 30, Dollar Percent (dollars in thousands) 2020 2019 Change Change Service charges on deposit accounts$ 5,927 $ 8,123 $ (2,196) (27) % Credit and debit card fees 10,870 16,629 (5,759) (35) Other service charges and fees 7,912 9,403 (1,491) (16) Trust and investment services income 8,664 8,931 (267) (3) Bank-owned life insurance 4,432 3,390 1,042 31 Investment securities (losses) gains, net (211) 21 (232) n/m Other 8,062 2,276 5,786 n/m Total noninterest income$ 45,656 $ 48,773 $ (3,117) (6) % n/m - Denotes a variance that is not a meaningful metric to inform the change in noninterest income for the three months endedJune 30, 2020 to the same period in 2019. Noninterest Income Table 9 Six Months Ended June 30, Dollar Percent (dollars in thousands) 2020 2019 Change Change
Service charges on deposit accounts
(8) % Credit and debit card fees 25,819 33,284 (7,465)
(22)
Other service charges and fees 16,451 18,532 (2,081)
(11)
Trust and investment services income 18,255 17,549 706
4
Bank-owned life insurance 6,692 7,203 (511)
(7)
Investment securities losses, net (126) (2,592) 2,466
n/m Other 12,916 5,686 7,230 n/m Total noninterest income$ 94,884 $ 95,845 $ (961) (1) % n/m - Denotes a variance that is not a meaningful metric to inform the change in noninterest income for the six months endedJune 30, 2020 to the same period in 2019. 65 Table of Contents Total noninterest income was$45.7 million for the three months endedJune 30, 2020 , a decrease of$3.1 million or 6% as compared to the same period in 2019. Total noninterest income was$94.9 million for the six months endedJune 30, 2020 , a decrease of$1.0 million or 1% as compared to the same period in 2019.
Service charges on deposit accounts were$5.9 million for the three months endedJune 30, 2020 , a decrease of$2.2 million or 27% as compared to the same period in 2019. This decrease was primarily due to a$2.0 million decrease in overdraft and checking account fees and a$0.5 million decrease in ATM interchange fees from customers. Service charges on deposit accounts were$14.9 million for the six months endedJune 30, 2020 , a decrease of$1.3 million or 8% as compared to the same period in 2019. This decrease was primarily due to a$1.9 million decrease in overdraft and checking account fees, partially offset by a$0.8 million increase in account analysis service charges. Credit and debit card fees were$10.9 million for the three months endedJune 30, 2020 , a decrease of$5.8 million or 35% as compared to the same period in 2019. This decrease was primarily due to a$3.3 million decrease in interchange settlement fees from credit and debit cards, a$2.7 million decrease in merchant service revenues and a$1.3 million decrease in ATM surcharge fees. This was partially offset by a$1.9 million decrease in network association dues. Credit and debit card fees were$25.8 million for the six months endedJune 30, 2020 a decrease of$7.5 million or 22% as compared to the same period in 2019. This decrease was primarily due to a$3.8 million decrease in interchange settlement fees from credit and debit cards, a$3.7 million decrease in merchant service revenues and a$1.4 million decrease in ATM surcharge fees. This was partially offset by a$1.8 million decrease in network association dues. Other service charges and fees were$7.9 million for the three months endedJune 30, 2020 , a decrease of$1.5 million or 16% as compared to the same period in 2019. This decrease was primarily due to a$0.5 million decrease in service fees related to participation loans, a$0.2 million decrease in foreign exchange processing fees, a$0.2 million decrease in online banking fees and a$0.2 million decrease in fees from annuities and securities. Other service charges and fees were$16.5 million for the six months endedJune 30, 2020 , a decrease of$2.1 million or 11% as compared to the same period in 2019. This decrease was primarily due to a$0.6 million decrease in service fees related to participation loans, a$0.5 million decrease in insurance income, a$0.3 million decrease in online banking fees and a$0.2 million decrease in foreign exchange processing fees.
Trust and investment services income was$8.7 million for the three months endedJune 30, 2020 , a decrease of$0.3 million or 3% as compared to the same period in 2019. Trust and investment services income was$18.3 million for the six months endedJune 30, 2020 , an increase of$0.7 million or 4% as compared to the same period in 2019. This increase was primarily due to a$0.9 million increase in investment management fees. BOLI income was$4.4 million for the three months endedJune 30, 2020 , an increase of$1.0 million or 31% as compared to the same period in 2019. This increase was due to a$0.7 million increase in death benefit proceeds from life insurance policies and a$0.3 million increase in BOLI earnings. BOLI income was$6.7 million for the six months endedJune 30, 2020 , a decrease of$0.5 million or 7% as compared to the same period in 2019. This decrease was due to a$0.8 million decrease in BOLI earnings, partially offset by a$0.3 million increase in death benefit proceeds from life insurance policies. Net losses on the sale of investment securities were$0.2 million and nil for the three months endedJune 30, 2020 and 2019, respectively. Net losses on the sale of investment securities were$0.1 million and$2.6 million for the six months endedJune 30, 2020 and 2019, respectively. The decrease in losses of$2.5 million was primarily due to our investment portfolio restructuring and sale of 48 investment securities inJanuary 2019 , which contributed to the$2.6 million loss for the six months endedJune 30, 2019 . Other noninterest income was$8.1 million for the three months endedJune 30, 2020 , an increase of$5.8 million as compared to the same period in 2019. This increase was primarily due to a$3.5 million increase in customer-related interest rate swap fees, a$1.3 million increase in gains on the sale of residential mortgage loans and a$0.9 million increase in volume-based incentives. Other noninterest income was$12.9 million for the six months endedJune 30, 2020 , an increase of$7.2 million as compared to the same period in 2019. This increase was primarily due to a$4.6 million increase in customer-related interest rate swap fees, a$2.5 million increase in gains on the sale of residential mortgage loans and a$0.8 million increase in volume-based incentives. 66 Table of Contents Noninterest Expense
Table 10 presents the major components of noninterest expense for the three
months ended
Noninterest Expense Table 10 Three Months Ended June 30, Dollar Percentage (dollars in thousands) 2020 2019 Change Change
Salaries and employee benefits$ 42,414 $ 42,185 $ 229 1 % Contracted services and professional fees 15,478 14,303
1,175 8 Occupancy 7,302 7,286 16 - Equipment 5,207 4,544 663 15
Regulatory assessment and fees 2,100 2,149
(49) (2) Advertising and marketing 1,402 1,980 (578) (29) Card rewards program 5,163 7,664 (2,501) (33) Other 12,384 13,179 (795) (6) Total noninterest expense$ 91,450 $ 93,290 $ (1,840) (2) % Noninterest Expense Table 11 Six Months Ended June 30, Dollar Percentage (dollars in thousands) 2020 2019 Change Change
Salaries and employee benefits$ 87,243 $ 87,045 $ 198 - % Contracted services and professional fees 31,533 27,948
3,585 13 Occupancy 14,545 14,272 273 2 Equipment 9,915 8,828 1,087 12
Regulatory assessment and fees 4,046 3,596
450 13 Advertising and marketing 3,225 3,946 (721) (18) Card rewards program 12,178 14,396 (2,218) (15) Other 25,231 25,882 (651) (3) Total noninterest expense$ 187,916 $ 185,913 $ 2,003 1 % Total noninterest expense was$91.5 million for the three months endedJune 30, 2020 , a decrease of$1.8 million or 2% as compared to the same period in 2019. Total noninterest expense was$187.9 million for the six months endedJune 30, 2020 , an increase of$2.0 million or 1% as compared to the same period in 2019. Salaries and employee benefits expense was$42.4 million for the three months endedJune 30, 2020 , an increase of$0.2 million or 1% as compared to the same period in 2019. Salaries and employee benefits expense was$87.2 million for the six months endedJune 30, 2020 , an increase of$0.2 million or less than 1% as compared to the same period in 2019. Contracted services and professional fees were$15.5 million for the three months endedJune 30, 2020 , an increase of$1.2 million or 8% as compared to the same period in 2019. This increase was primarily due to a$1.0 million increase in contracted data processing expenses, primarily related to system upgrades and product enhancements. Contracted services and professional fees were$31.5 million for the six months endedJune 30, 2020 , an increase of$3.6 million or 13% as compared to the same period in 2019. This increase was primarily due to a$2.1 million increase in contracted data processing expenses, primarily related to system upgrades and product enhancements, a$1.0 million increase in outside services, primarily attributable to marketing and new customer services, and a$0.6 million increase in audit, legal and consultant fees.
Occupancy expense was
67 Table of Contents Equipment expense was$5.2 million for the three months endedJune 30, 2020 , an increase of$0.7 million or 15% as compared to the same period in 2019. This increase was primarily due to a$0.6 million increase in furniture and equipment depreciation expense. Equipment expense was$9.9 million for the six months endedJune 30, 2020 , an increase of$1.1 million or 12% as compared to the same period in 2019. This increase was primarily due to a$0.6 million increase in furniture and equipment depreciation expense and a$0.3 million increase in technology-related license and maintenance fees.
Regulatory assessment and fees were
Advertising and marketing expense was$1.4 million for the three months endedJune 30, 2020 , a decrease of$0.6 million or 29% as compared to the same period in 2019. This decrease was primarily due to a$0.3 million decrease due to higher vendor reimbursements and a$0.3 million decrease in advertising costs. Advertising and marketing expense was$3.2 million for the six months endedJune 30, 2020 , a decrease of$0.7 million or 18% as compared to the same period in 2019. This decrease was primarily due to a$0.5 million decrease in advertising costs and a$0.2 million decrease due to higher vendor reimbursements. Card rewards program expense was$5.2 million for the three months endedJune 30, 2020 , a decrease of$2.5 million or 33% as compared to the same period in 2019. This decrease was primarily due to a$1.4 million decrease in priority rewards card redemptions, a$0.7 million decrease in interchange fees paid to our credit card partners and a$0.3 million decrease in credit card cash reward redemptions. Card rewards program expense was$12.2 million for the six months endedJune 30, 2020 , a decrease of$2.2 million or 15% as compared to the same period in 2019. This decrease was primarily due to a$1.4 million decrease in priority rewards card redemptions, a$0.5 million decrease in credit card cash reward redemptions and a$0.3 million decrease in interchange fees paid to
our credit card partners. Other noninterest expense was$12.4 million for the three months endedJune 30, 2020 , a decrease of$0.8 million or 6% as compared to the same period in 2019. This decrease was primarily due to a$0.5 million decrease in net periodic benefit costs. Other noninterest expense was$25.2 million for the six months endedJune 30, 2020 , a decrease of$0.7 million or 3% as compared to the same period in 2019. This decrease was primarily due to a$0.9 million decrease in net periodic benefit costs. Provision for Income Taxes The provision for income taxes was$6.5 million (an effective tax rate of 24.58%) for the three months endedJune 30, 2020 , compared with the provision for income taxes of$24.8 million (an effective tax rate of 25.50%) for the same period in 2019. The provision for income taxes was$17.9 million (an effective tax rate of 23.32%) for the six months endedJune 30, 2020 , compared with the provision for income taxes of$48.7 million (an effective tax rate of 25.50%) for the same period in 2019. The reduction in the effective tax rates for the three and six months endedJune 30, 2020 , compared to the same periods in 2019, was primarily due to the reduction of pretax income, which resulted in the tax credits, tax-exempt income and other tax benefit items to have proportionately higher impacts on the effective tax rates. In addition, the reduction in the effective tax rate for the six months endedJune 30, 2020 also stemmed from a state tax settlement withBNP Paribas USA, Inc. related to periods during which the Company was included in the state combined returns ofBNP Paribas USA ,
Inc. Analysis of Business Segments Our business segments are Retail Banking, Commercial Banking andTreasury and Other. Table 12 summarizes net income from our business segments for the three and six months endedJune 30, 2020 and 2019. Additional information about operating segment performance is presented in "Note 18. Reportable Operating Segments" contained in our unaudited interim consolidated financial statements. In 2019, the Company made changes to the internal measurement of segment operating profits for the purpose of evaluating segment performance and resource allocation. The primary reason for the change was to align deposit balances within the business segment that directly manages them. Specifically, certain deposit balances previously included as part of the Retail Banking segment have been reclassified to the Commercial Banking segment. The reallocation of select deposit balances affected net interest income, net interest income after provision for credit losses, noninterest income, provision for income taxes and net income. The Company has reported its selected financial information using the new deposit balance 68 Table of Contents alignments for the three and six months endedJune 30, 2020 . The Company has restated the selected financial information for the three and six months endedJune 30, 2019 in order to conform with the current presentation.
Additionally, during the fourth quarter of 2019, the Company changed its assumptions embedded in allocating deposit costs to business segments. The Company has reported its selected financial information using the new deposit cost assumptions starting with the fourth quarter of 2019.
Business Segment Net Income Table 12 Three Months Ended Six Months Ended June 30, June 30, (dollars in thousands) 2020 2019 2020 2019 Retail Banking$ 27,037 $ 52,178 $ 54,064 $ 105,488 Commercial Banking 4,342 23,599 11,618 46,129 Treasury and Other (11,330) (3,344) (6,768) (9,260) Total$ 20,049 $ 72,433 $ 58,914 $ 142,357
Retail Banking. Our Retail Banking segment includes the financial products and services we provide to consumers, small businesses and certain commercial customers. Loan and lease products offered include residential and commercial mortgage loans, home equity lines of credit, automobile loans and leases, personal lines of credit, installment loans and small business loans and leases. Deposit products offered include checking, savings and time deposit accounts. Our Retail Banking segment also includes our wealth management services. Net income for the Retail Banking segment was$27.0 million for the three months endedJune 30, 2020 , a decrease of$25.1 million or 48% as compared to the same period in 2019. The decrease in net income for the Retail Banking segment was primarily due to a$22.6 million increase in the Provision, an$11.6 million decrease in net interest income and a$1.2 million decrease in noninterest income, partially offset by a$8.3 million decrease in the provision for income taxes and a$1.9 million decrease in noninterest expense. The increase in the Provision was primarily due to the adjustment related to COVID-19 and the impact that we expect it to have on our customers. The decrease in net interest income was primarily due to a decrease in transfer pricing credits on interest expenses from deposits as a result of lower yields on our deposit portfolio. The decrease in noninterest income was primarily due to decreases in overdraft and checking account fees and other services charges and fees, partially offset by higher gains on the sale of residential mortgage loans. The decrease in the provision for income tax was primarily due to lower pretax income. The decrease in noninterest expense was primarily due to a decrease in salaries and employee benefits expense. Net income for the Retail Banking segment was$54.1 million for the six months endedJune 30, 2020 , a decrease of$51.4 million or 49% as compared to the same period in 2019. The decrease in net income for the Retail Banking segment was primarily due to a$40.1 million increase in the Provision, a$28.9 million decrease in net interest income and a$2.6 million increase in noninterest expense, partially offset by a$18.9 million decrease in the provision for income taxes and a$1.3 million increase in noninterest income. The increase in the Provision was primarily due to the adjustment related to COVID-19 and the impact that we expect it to have on our customers. The decrease in net interest income was primarily due to a decrease in transfer pricing credits on interest expenses from deposits as a result of lower yields on our deposit portfolio, as well as higher transfer pricing charges related to the residential loans portfolio. The increase in noninterest expense was primarily due to higher overall expenses that were allocated to the Retail Banking segment and an increase in contracted services and professional fees, partially offset by a decrease in salaries and benefits expense. The decrease in the provision for income taxes was primarily due to the decrease in pretax income. The increase in noninterest income was primarily due to higher gains on the sale of residential mortgage loans and an increase in trust and investment services income, partially offset by decreases in other service charges and fees and overdraft and checking account fees.
The increase in total assets for the Retail Banking segment was primarily due to
PPP loans during the six months ended
Commercial Banking. Our Commercial Banking segment includes our corporate banking, residential and commercial real estate loans, commercial lease financing, automobile loans and auto dealer financing, business deposit products and credit cards that we provide primarily to middle market and large companies inHawaii ,Guam , Saipan andCalifornia . Net income for the Commercial Banking segment was$4.3 million for the three months endedJune 30, 2020 , a decrease of$19.3 million or 82% as compared to the same period in 2019. The decrease in net income for the Commercial Banking segment was primarily due to a$23.1 million increase in the Provision and a$1.9 million decrease in net interest income, 69
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partially offset by a$7.1 million decrease in the provision for income taxes. The increase in the Provision was primarily due to the adjustment related to COVID-19 and the expected impact that it will have on our customers. The decrease in net interest income was primarily due to a decrease in transfer pricing credits on interest expenses from deposits as a result of lower yields on our deposit portfolio. The decrease in the provision for income taxes was primarily due to the decrease in pretax income. Net income for the Commercial Banking segment was$11.6 million for the six months endedJune 30, 2020 , a decrease of$34.5 million or 75% as compared to the same period in 2019. The decrease in net income for the Commercial Banking segment was primarily due to a$40.7 million increase in the Provision, a$2.7 million increase in noninterest expense, a$2.1 million decrease in net interest income and a$1.3 million decrease in noninterest income, partially offset by a$12.4 million decrease in the provision for income taxes. The increase in the Provision was primarily due to the adjustment related to COVID-19 and the expected impact that it will have on our customers. The increase in noninterest expense was primarily due to increases in contracted services and professional fees, salaries and benefits expense, other taxes and higher overall expenses that were allocated to the Commercial Banking segment, partially offset by a decrease in card reward expenses. The decrease in net interest income was primarily due to a decrease in transfer pricing credits on interest expenses from deposits as a result of lower yields on our deposit portfolio. The decrease in noninterest income was primarily due to a decrease in credit and debit card fees, partially offset by an increase in customer-related swap fees. The decrease in the provision for income taxes was primarily due to the decrease in pretax income. The decrease in total assets for the Commercial Banking segment was primarily due to decreases in our Shared National Credits and dealer flooring portfolios, partially offset by higher draws on lines by existing customers and PPP loans during the six months endedJune 30, 2020 .Treasury and Other. OurTreasury and Other segment includes our treasury business, which consists of corporate asset and liability management activities, including interest rate risk management. The assets and liabilities (and related interest income and expense) of our treasury business consist of interest-bearing deposits, investment securities, federal funds sold and purchased, government deposits, short- and long-term borrowings and bank-owned properties. Our primary sources of noninterest income are from bank-owned life insurance, net gains from the sale of investment securities, foreign exchange income related to customer driven currency requests from merchants and island visitors and management of bank-owned properties inHawaii andGuam . The net residual effect of the transfer pricing of assets and liabilities is included inTreasury and Other, along with the elimination of intercompany transactions. Other organizational units (Technology, Operations, Credit and Risk Management, Human Resources, Finance, Administration, Marketing andCorporate and Regulatory Administration ) provide a wide range of support to our other income earning segments. Expenses incurred by these support units are charged to the applicable business segments through an internal cost allocation process. Net loss for theTreasury and Other segment was$11.3 million for the three months endedJune 30, 2020 , an increase in loss of$8.0 million as compared to the same period in 2019. The increase in the net loss was primarily due to a$6.0 million increase in the Provision, a$4.3 million increase in net interest expense and a$1.2 million decrease in noninterest income, partially offset by a$2.8 million increase in the benefit for income taxes. The increase in the Provision was primarily due to the adjustment related to COVID-19 and the expected impact that it will have on our customers. The increase in net interest expense was primarily due to lower earnings credits as a result of lower average yields in our loan portfolio and lower average yields in our investment securities portfolio, partially offset by a decrease in transfer pricing charges as a result of lower yields on our deposit portfolio. The decrease in noninterest income was primarily due to decreases in credit and debit card fees and overdraft and checking account fees, partially offset by an increase in BOLI income. The increase in the benefit for income taxes was primarily due to the increase in pretax loss. Net loss for theTreasury and Other segment was$6.8 million for the six months endedJune 30, 2020 , a decrease in loss of$2.5 million or 27% as compared to the same period in 2019. The decrease in net loss was primarily due to a$6.9 million increase in net interest income and a$3.3 million decrease in noninterest expense, partially offset by a$6.3 million increase in the Provision and a$1.0 million decrease in noninterest income. The increase in net interest income was primarily due to a decrease in transfer pricing charges as a result of lower yields on our deposit portfolio, partially offset by lower earnings credits as a result of lower average yields in our loan portfolio and lower average yields in our investment securities portfolio. The decrease in noninterest expense was primarily due to higher overall expenses that led to a larger credit allocation to theTreasury and Other segment, as well as lower other taxes and pension-related expenses, partially offset by an increase in salaries and employee benefits expense and equipment expenses. The increase in the Provision was primarily due to the 70
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adjustment related to COVID-19 and the expected impact that it will have on our customers. The decrease in noninterest income was primarily due to decreases in credit and debit card fees, overdraft and checking account fees, BOLI income, customer-related rate swap fees and market adjustments for foreign exchange transactions, partially offset by a decrease in net losses on the sale of investment securities as a result of the investment portfolio restructuring and sale of 48 investment securities inJanuary 2019 .
The increase in total assets for the
Analysis of Financial Condition
Liquidity Liquidity refers to our ability to maintain cash flow that is adequate to fund operations and meet present and future financial obligations through either the sale or maturity of existing assets or by obtaining additional funding through liability management. We consider the effective and prudent management of liquidity to be fundamental to our health and strength. Our objective is to manage our cash flow and liquidity reserves so that they are adequate to fund our obligations and other commitments on a timely basis and at a reasonable cost. Liquidity is managed to ensure stable, reliable and cost-effective sources of funds to satisfy demand for credit, deposit withdrawals and investment opportunities. Funding requirements are impacted by loan originations and refinancings, deposit balance changes, liability issuances and settlements and off-balance sheet funding commitments. We consider and comply with various regulatory and internal guidelines regarding required liquidity levels and periodically monitor our liquidity position in light of the changing economic environment and customer activity. Based on periodic liquidity assessments, we may alter our asset, liability and off-balance sheet positions. The Company's Asset Liability Management Committee ("ALCO") monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change. This process, combined with our ability to raise funds in money and capital markets and through private placements, provides flexibility in managing the exposure to liquidity risk. Immediate liquid resources are available in cash, which is primarily on deposit with theFederal Reserve Bank of San Francisco (the "FRB"). As ofJune 30, 2020 andDecember 31, 2019 , cash and cash equivalents were$1.9 billion and$0.7 billion , respectively. Potential sources of liquidity also include investment securities in our available-for-sale portfolio. The estimated fair value of our available-for-sale investment securities were$5.1 billion and$4.1 billion as ofJune 30, 2020 andDecember 31, 2019 , respectively. As ofJune 30, 2020 andDecember 31, 2019 , we maintained our excess liquidity primarily in collateralized mortgage obligations issued byGinnie Mae , Fannie Mae and Freddie Mac. As ofJune 30, 2020 , our available-for-sale investment securities portfolio was comprised of securities with a weighted average life of approximately 4.2 years. These funds offer substantial resources to meet either new loan demand or to help offset reductions in our deposit funding base. Liquidity is further enhanced by our ability to pledge loans to access secured borrowings from the FHLB and the FRB. As ofJune 30, 2020 , we had borrowing capacity of$1.9 billion from the FHLB and$982.0 million from the FRB based on the amount of collateral pledged. As ofDecember 31, 2019 , we had borrowing capacity of$1.7 billion from the FHLB and$596.8 million from the FRB based on the amount of collateral pledged. Our core deposits have historically provided us with a long-term source of stable and relatively lower cost of funding. Our core deposits, defined as all deposits exclusive of time deposits exceeding$250,000 , totaled$17.0 billion and$15.1 billion as ofJune 30, 2020 andDecember 31, 2019 , which represented 88% and 92%, respectively, of our total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company, however, deposit levels could decrease if interest rates increase significantly or if corporate customers increase investing activities and reduce deposit balances The Company's routine funding requirements are expected to consist primarily of general corporate needs and capital to be returned to our shareholders. We expect to meet these obligations from dividends paid by the Bank to the Parent. Additional sources of liquidity available to us include selling residential real estate loans in the secondary market, short- and long-term borrowings and the issuance of long-term debt and equity securities. At the start of the pandemic, we increased our liquidity position through additional public time deposits in anticipation of a surge in funding needs due to our participation in the PPP and other additional liquidity needs. As ofJune 30, 2020 , we maintained these
higher levels of liquidity. 71 Table of ContentsInvestment Securities
Table 13 presents the estimated fair value of our available-for-sale investment
securities portfolio as of
Investment Securities Table 13 June 30, December 31, (dollars in thousands) 2020 2019
29,888
Government-sponsored enterprises debt securities -
101,439
Mortgage-backed securities: Residential - Government agency 232,617
291,209
Residential - Government-sponsored enterprises 390,912
399,492
Commercial - Government agency 629,679
-
Commercial - Government-sponsored enterprises 322,996
101,719
Collateralized mortgage obligations: Government agency 1,926,584
2,381,278
Government-sponsored enterprises 1,538,069
770,619
Total available-for-sale securities$ 5,135,775 $ 4,075,644
Table 14 presents the maturity distribution at amortized cost and
weighted-average yield to maturity of our available-for-sale investment
securities portfolio as of
Maturities and Weighted-Average Yield on Securities(1)
Table 14
1 Year or Less After 1 Year - 5 Years After 5 Years - 10 Years Over 10 Years Total Weighted Weighted Weighted Weighted Weighted Average Average Average Average Average Fair
(dollars in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Value As ofJune 30, 2020 Available-for-sale securities U.S. Treasury and government agency debt securities $ - - %$ 30.4 0.81 % $ - - %$ 64.0 1.10 %$ 94.4 1.00 %$ 94.9 Mortgage-backed securities(2): Residential - Government agency - - 224.8 2.46 - - - - 224.8 2.46 232.6 Residential - Government-sponsored enterprises - - 327.3 2.59 47.8 2.43 - - 375.1 2.57 390.9 Commercial - Government agency - - 498.3 2.33 109.3 1.71 5.2 2.04 612.8 2.22 629.7 Commercial - Government-sponsored enterprises - - 27.7 2.99 284.6 1.85 - - 312.3 1.95 323.0 Collateralized mortgage obligations(2): Government agency 30.4 1.71 1,644.6 1.87 150.6 1.25 62.1 1.38 1,887.7 1.80 1,926.6 Government-sponsored enterprises 73.5 2.20 765.1 1.80 679.7 1.47 - - 1,518.3 1.67 1,538.1 Total available-for-sale securities as of June 30, 2020$ 103.9 2.05 %$ 3,518.2 2.02 %$ 1,272.0 1.59 %$ 131.3 1.27 %$ 5,025.4 1.90 %$ 5,135.8
(1) Weighted-average yields were computed on a fully taxable-equivalent basis.
(2) Maturities for mortgage-backed securities and collateralized mortgage
obligations anticipate future prepayments. The fair value of our available-for-sale investment securities portfolio was$5.1 billion as ofJune 30, 2020 , an increase of$1.1 billion or 26% compared toDecember 31, 2019 . Our available-for-sale investment securities are carried at fair value with changes in fair value reflected in other comprehensive income or through the Provision.
As ofJune 30, 2020 , we maintained all of our investment securities in the available-for-sale category recorded at fair value in the unaudited interim consolidated balance sheets, with$3.5 billion invested in collateralized mortgage obligations issued byGinnie Mae , Fannie Mae and Freddie Mac. Our available-for-sale portfolio also included$1.6 billion in mortgage-backed securities issued byGinnie Mae , Freddie Mac, Fannie Mae and a municipal housing authority and$94.9 million in debt securities issued by theU.S Treasury and government agencies (US International Development Finance Corporation bonds). We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability and the level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities and change the composition of our investment securities portfolio. We conduct a regular assessment of our investment securities portfolio to determine whether any securities are impaired. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and the ACL is recorded for the credit loss, limited by the amount that the 72
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fair value is less than the amortized cost basis. Any impairment that has not been recorded through the ACL is recognized in other comprehensive income. For the three and six months endedJune 30, 2020 , we did not record any credit losses related to our investment securities portfolio. Gross unrealized gains in our investment securities portfolio were$111.9 million and$19.0 million as ofJune 30, 2020 andDecember 31, 2019 , respectively. Gross unrealized losses in our investment securities portfolio were$1.6 million and$24.0 million as ofJune 30, 2020 andDecember 31, 2019 , respectively. The increase in unrealized gains in our investment securities portfolio was primarily due to lower market interest rates as ofJune 30, 2020 , relative toDecember 31, 2019 , resulting in a higher valuation. The increase in unrealized gain positions was primarily related to our mortgage-backed securities and collateralized mortgage obligations, the fair values of which are sensitive to changes in market interest rates. We are required to hold non-marketable equity securities, comprised of FHLB stock, as a condition of our membership in the FHLB system. Our FHLB stock is accounted for at cost, which equals par or redemption value. As ofJune 30, 2020 andDecember 31, 2019 , we held FHLB stock of$26.1 million and$34.1 million , respectively, which is recorded as a component of other assets in our unaudited interim consolidated balance sheets.
See "Note 2.
Loans and Leases
Table 15 presents the composition of our loan and lease portfolio by major
categories as of
Loans and Leases Table 15 June 30, December 31, (dollars in thousands) 2020 2019 Commercial and industrial$ 3,423,708 $ 2,743,242 Commercial real estate 3,423,499 3,463,953 Construction 617,935 519,241 Residential: Residential mortgage 3,691,950 3,768,936 Home equity line 876,491 893,239 Total residential 4,568,441 4,662,175 Consumer 1,492,160 1,620,556 Lease financing 238,287 202,483 Total loans and leases$ 13,764,030 $ 13,211,650
Total loans and leases were$13.8 billion as ofJune 30, 2020 , an increase of$552.4 million or 4% fromDecember 31, 2019 with increases in commercial and industrial loans, construction loans and lease financing. The increase in total loans and leases was primarily due to our participation in the PPP which had a total amortized cost basis of$916.4 million as ofJune 30, 2020 . While we have not experienced declines in our loan portfolio in the second quarter, it is possible that the effects of COVID-19 on the economy could result in less demand for our loan products.
Commercial and industrial loans are made primarily to corporations, middle market and small businesses for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes. We also offer a variety of automobile dealer flooring lines to our customers inHawaii andCalifornia to assist with the financing of their inventory. Commercial and industrial loans were$3.4 billion as ofJune 30, 2020 , an increase of$680.5 million or 25% fromDecember 31, 2019 . This increase was primarily due to PPP loans totaling$916.4 million , offset by decreases in our Shared National Credits and dealer flooring portfolios during the six months endedJune 30, 2020 . Commercial real estate loans are secured by first mortgages on commercial real estate at loan to value ("LTV") ratios generally not exceeding 75% and a minimum debt service coverage ratio of 1.20 to 1. The commercial properties are predominantly apartments, neighborhood and grocery anchored retail, industrial, office, and to a lesser extent, specialized properties such as hotels. The primary source of repayment for investor property is cash flow from the property and for owner occupied property is the operating cash flow from the business. Commercial real estate loans were$3.4 billion as ofJune 30, 2020 , a decrease of$40.5 million or 1% fromDecember 31, 2019 . This decrease was primarily due to a payoff of a commercial real estate loan totaling$50.0 million during the six months endedJune 30, 2020 . 73 Table of Contents Construction loans are for the purchase or construction of a property for which repayment will be generated by the property. Loans in this portfolio are primarily for the purchase of land, as well as for the development of commercial properties, single family homes and condominiums. We classify loans as construction until the completion of the construction phase. Following completion of the construction phase, if a loan is retained by the Bank, the loan is reclassified to the commercial real estate or residential real estate classes of loans. Construction loans were$617.9 million as ofJune 30, 2020 , an increase of$98.7 million or 19% fromDecember 31, 2019 . The increase in construction loans stemmed from various disbursements of project loans during the six months endedJune 30, 2020 . Residential real estate loans are generally secured by 1-4 unit residential properties and are underwritten using traditional underwriting systems to assess the credit risks and financial capacity and repayment ability of the consumer. Decisions are primarily based on LTV ratios, debt-to-income ("DTI") ratios, liquidity and credit scores. LTV ratios generally do not exceed 80%, although higher levels are permitted with mortgage insurance. We offer fixed rate mortgage products and variable rate mortgage products with interest rates that are subject to change every year after the first, third, fifth or tenth year, depending on the product and are based on LIBOR. Variable rate residential mortgage loans are underwritten at fully-indexed interest rates. We generally do not offer interest-only, payment-option facilities, Alt-A loans or any product with negative amortization. Residential real estate loans were$4.6 billion as ofJune 30, 2020 , a decrease of$93.7 million or 2% fromDecember 31, 2019 . Our portfolio of residential real estate loans declined due to the sale of$132.0 million in residential mortgages during the six months endedJune 30, 2020 . Consumer loans consist primarily of open- and closed-end direct and indirect credit facilities for personal, automobile and household purchases as well as credit card loans. We seek to maintain reasonable levels of risk in consumer lending by following prudent underwriting guidelines, which include an evaluation of personal credit history, cash flow and collateral values based on existing market conditions. Consumer loans were$1.5 billion as ofJune 30, 2020 , a decrease of$128.4 million or 8% fromDecember 31, 2019 . The decrease in consumer loans was primarily due to decreases in credit card balances and indirect automobile loans. Lease financing consists of commercial single investor leases and leveraged leases. Underwriting of new lease transactions is based on our lending policy, including but not limited to an analysis of customer cash flows and secondary sources of repayment, including the value of leased equipment, the guarantors' cash flows and/or other credit enhancements. No new leveraged leases are being added to the portfolio and all remaining leveraged leases are running off. Lease financing was$238.3 million as ofJune 30, 2020 , an increase of$35.8 million or 18% fromDecember 31, 2019 . The increase in lease financing was due to portfolio growth in our commercial single investor leases. See "Note 3. Loans and Leases" and "Note 4. Allowance for Credit Losses" contained in our unaudited interim consolidated financial statements and the discussion in "Analysis of Financial Condition - Allowance for Credit Losses" of this MD&A for more information on our loan and lease portfolio. 74 Table of Contents The Company's loan and lease portfolio includes adjustable-rate loans, primarily tied to Prime and LIBOR, hybrid-rate loans, for which the initial rate is fixed for a period from one year to as much as ten years, and fixed rate loans, for which the interest rate does not change through the life of the loan. Table 16 presents the recorded investment in our loan and lease portfolio as ofJune 30, 2020 by rate type: Loans and Leases by Rate Type Table 16 June 30, 2020 Adjustable Rate Hybrid Fixed
(dollars in thousands) Prime LIBOR
Total Rate Rate Total Commercial and industrial
$ 245,967 $ 1,836,507 $ -$ 26,535
3,012,963 89,838 320,698 3,423,499 Construction 38,741 450,105 33 34,202 523,081 984 93,870 617,935
Residential:
Residential mortgage 24,177 154,551 94,848 56,494
330,070 380,224 2,981,656 3,691,950 Home equity line 336,901 - 17,460 - 354,361 522,078 52 876,491 Total residential 361,078 154,551 112,308 56,494 684,431 902,302 2,981,708 4,568,441 Consumer 305,272 18,861 1,514 110 325,757 3,761 1,162,642 1,492,160 Lease financing - - - - - - 238,287 238,287
Total loans and leases
% by rate type at June 30, 2020 7 % 33 % 1 % 8 % 49 % 7 % 44 % 100 %
Tables 17 and 18 present the geographic distribution of our loan and lease
portfolio as of
Geographic Distribution of Loan and Lease Portfolio
Table 17 June 30, 2020 U.S. Guam & Foreign &
(dollars in thousands) Hawaii Mainland(1) Saipan Other Total Commercial and industrial$ 1,975,998 $ 1,184,445 $ 215,470 $ 47,795 $ 3,423,708 Commercial real estate 2,221,441 804,164 397,656 238 3,423,499 Construction 282,487 330,326 5,122 - 617,935 Residential: Residential mortgage 3,568,419 2,446 121,085 - 3,691,950 Home equity line 845,095 73 31,323 - 876,491 Total residential 4,413,514 2,519 152,408 - 4,568,441 Consumer 1,100,888 19,826 370,284 1,162 1,492,160 Lease financing 88,081 139,141 11,065 - 238,287 Total Loans and Leases$ 10,082,409 $
2,480,421
73% 18% 8% 1% 100%
(1) For secured loans and leases, classification as
on where the collateral is located. For unsecured loans and leases, classification asU.S. Mainland is made based on the location where the majority of the borrower's business operations are conducted. 75 Table of Contents
Geographic Distribution of Loan and Lease Portfolio Table 18
U.S. Guam & Foreign & (dollars in thousands) Hawaii Mainland(1) Saipan Other Total Commercial and industrial$ 1,270,997 $ 1,285,340 $ 140,929 $ 45,976 $ 2,743,242 Commercial real estate 2,289,626 768,314 405,720 293 3,463,953 Construction 261,089 253,577 4,575 - 519,241 Residential: Residential mortgage 3,642,251 2,708 123,977 - 3,768,936 Home equity line 861,079 78 32,082 - 893,239 Total residential 4,503,330 2,786 156,059 - 4,662,175 Consumer 1,202,762 22,521 393,045 2,228 1,620,556 Lease financing 85,842 110,630 6,011 - 202,483 Total Loans and Leases$ 9,613,646 $
2,443,168
73% 18% 8% 1% 100%
(1) For secured loans and leases, classification as
on where the collateral is located. For unsecured loans and leases, classification asU.S. Mainland is made based on the location where the majority of the borrower's business operations are conducted. Our lending activities are concentrated primarily inHawaii . However, we also have lending activities on theU.S. mainland,Guam and Saipan. Our commercial lending activities on theU.S. mainland include automobile dealer flooring activities inCalifornia , participation in the Shared National Credits Program and selective commercial real estate projects based on existing customer relationships. Our lease financing portfolio includes commercial leveraged and single investor lease financing activities both inHawaii and on theU.S. mainland. However, no new leveraged leases are being added to the portfolio and all remaining leveraged leases are running off. Our consumer lending activities are concentrated primarily inHawaii and, to a smaller extent, inGuam and Saipan.
Table 19 presents certain contractual loan maturity categories and sensitivities
of those loans to changes in interest rates as of
Maturities for Selected Loan Categories(1) Table 19 June 30, 2020 Due in One Due After One Due After (dollars in thousands) Year or Less to Five Years Five Years Total Commercial and industrial$ 987,725 $ 2,189,928 $ 246,055 $ 3,423,708 Construction 274,976 274,491 68,468 617,935 Total Selected Loans$ 1,262,701 $ 2,464,419 $ 314,523 $ 4,041,643 Total of loans with: Adjustable interest rates$ 1,151,666 $ 1,262,168 $ 218,256 $ 2,632,090 Hybrid interest rates 696 4,872 8,291 13,859 Fixed interest rates 110,339 1,197,379 87,976 1,395,694 Total Selected Loans$ 1,262,701 $
2,464,419
(1) Based on contractual maturities.
Credit Quality
We perform an internal loan review and grading or scoring procedures on an ongoing basis. The review provides management with periodic information as to the quality of the loan portfolio and effectiveness of our lending policies and procedures. The objective of the loan review and grading or scoring procedures is to identify, in a timely manner, existing or emerging credit quality issues so that appropriate steps can be initiated to avoid or minimize future losses. For purposes of managing credit risk and estimating the ACL, management has identified three portfolio segments (commercial, residential and consumer) that we use to develop our systematic methodology to determine the ACL. The categorization of loans for the evaluation of credit risk is specific to our credit risk evaluation process and these loan categories are not necessarily the same as the loan categories used for other evaluations of our loan portfolio. See "Note 4. Allowance for Credit Losses" contained in our unaudited interim consolidated financial statements for more information about our approach to estimating the ACL. 76 Table of Contents The following tables and discussion address non-performing assets, loans and leases that are 90 days past due but are still accruing interest, impaired
loans and loans modified in a TDR.
Non-Performing Assets and Loans and Leases Past Due 90 Days or More and Still Accruing Interest
Table 20 presents information on our non-performing assets and accruing loans
and leases past due 90 days or more as of
Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More Table 20 June 30, December 31, (dollars in thousands) 2020 2019 Non-Performing Assets Non-Accrual Loans and Leases Commercial Loans: Commercial and industrial$ 11,559 $ 32 Commercial real estate 13,168 30 Construction 2,043 - Total Commercial Loans 26,770 62 Residential Loans: Residential mortgage 6,059 5,406 Total Residential Loans 6,059 5,406
Total Non-Accrual Loans and Leases 32,829
5,468
Other Real Estate Owned ("OREO") 446 319 Total Non-Performing Assets$ 33,275
$ 5,787
Accruing Loans and Leases Past Due 90 Days or More Commercial Loans: Commercial and industrial$ 2,309 $ 1,429 Commercial real estate 900 1,013 Construction 248 2,367 Total Commercial Loans 3,457 4,809 Residential Loans: Residential mortgage - 74 Home equity line 4,496 2,995 Total Residential Loans 4,496 3,069 Consumer 2,167 4,272
Total Accruing Loans and Leases Past Due 90 Days or More
Restructured Loans on Accrual Status and Not Past Due 90 Days or More$ 11,182 $ 14,493 Total Loans and Leases$ 13,764,030 $ 13,211,650 Ratio of Non-Accrual Loans and Leases to Total Loans and Leases 0.24 %
0.04 % Ratio of Non-Performing Assets to Total Loans and Leases and OREO
0.24 %
0.04 % Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More to Total Loans and Leases and OREO
0.32 % 0.14 % Table 21 presents the activity in Non-Performing Assets ("NPAs") for the six months endedJune 30, 2020 : Non-Performing Assets Table 21 Six Months Ended June 30, (dollars in thousands) 2020 Balance at beginning of period $ 5,787 Additions 48,487
Reductions
Payments (3,712) Return to accrual status (567) Sales of other real estate owned (319) Charge-offs/write-downs (16,401) Total Reductions (20,999) Balance at end of period $ 33,275 77 Table of Contents The level of NPAs represents an indicator of the potential for future credit losses. NPAs consist of non-accrual loans and leases and other real estate owned. Changes in the level of non-accrual loans and leases typically represent increases for loans and leases that reach a specified past due status, offset by reductions for loans and leases that are charged-off, paid down, sold, transferred to other real estate owned or are no longer classified as non-accrual because they have returned to accrual status as a result of continued performance and an improvement in the borrower's financial condition and loan repayment capabilities. Total NPAs were$33.3 million as ofJune 30, 2020 , an increase of$27.5 million or 475% fromDecember 31, 2019 . The ratio of our NPAs to total loans and leases and other real estate owned was 0.24% as ofJune 30, 2020 , an increase of 20 basis points fromDecember 31, 2019 . The increase in total NPAs was primarily due to a$13.1 million increase in commercial real estate non-accrual loans, a$11.5 million increase in commercial and industrial non-accrual loans and a$2.0 million increase in construction non-accrual loans. As ofJune 30, 2020 , commercial real estate non-accrual loans were$13.2 million , an increase of$13.1 million fromDecember 31, 2019 . This increase was primarily due to an addition of a$15.1 million commercial real estate loan, partially offset by a$2.7 million charge-off. The increase in commercial real estate non-accruals loans was primarily due to the impact of COVID-19 and the shut-down of the tourism industry inHawaii . As ofJune 30, 2020 , commercial and industrial non-accrual loans were$11.6 million , an increase of$11.5 million fromDecember 31, 2019 . This increase was primarily due to additions in commercial and industrial loans totaling$27.8 million , partially offset by$13.3 million in charge-offs and$3.0 million in payments. The increase in commercial and industrial non-accruals loans was primarily due to the impact of COVID-19 and the shut-down of the tourism industry inHawaii .
As of
As ofJune 30, 2020 , residential mortgage non-accrual loans were$6.1 million , an increase of$0.7 million or 12% fromDecember 31, 2019 . As ofJune 30, 2020 , our residential mortgage non-accrual loans were comprised of 36 loans with a weighted average current LTV ratio of 51%. Other real estate owned represents property acquired as the result of borrower defaults on loans. Other real estate owned 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. As ofJune 30, 2020 , other real estate owned was$0.4 million which was comprised of one residential real estate property. As ofDecember 31, 2019 , other real estate owned was$0.3 million which was comprised of two residential real estate properties. 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$10.1 million as ofJune 30, 2020 , a decrease of$2.0 million or 17% as compared toDecember 31, 2019 . Construction and consumer loans that were past due 90 days or more and still accruing interest both decreased by$2.1 million during the six months endedJune 30, 2020 . This was partially offset by increases of$1.5 million and$0.9 million in home equity lines and commercial and industrial loans, respectively, that were past due 90 days or more and still accruing interest during the six months endedJune 30, 2020 . Impaired Loans. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. For a loan that has been modified in a TDR, the contractual terms of the loan agreement refers to the contractual terms specified by the original loan agreement, not the contractual terms specified by the modified loan agreement. Impaired loans were$44.7 million and$20.6 million as ofJune 30, 2020 andDecember 31, 2019 , respectively. These impaired loans had a related ACL of$1.6 million and$0.2 million as ofJune 30, 2020 andDecember 31, 2019 . The increase in impaired loans during the six months endedJune 30, 2020 was primarily due to increases in commercial real estate, commercial and industrial and construction loans of$13.1 million ,$10.2 million and$1.8 million , respectively, partially offset by a decrease in residential mortgage loans of$1.2 million . The impaired loan balance is further decreased by charge- 78
Table of Contents
offs and paydowns. As of
If interest due on the balances of all non-accrual loans as ofJune 30, 2020 had been accrued under the original terms, approximately$0.5 million and$0.6 million in additional interest income would have been recorded during the three and six months endedJune 30, 2020 , respectively, compared to nil and$0.1 million in additional interest income that would have been recorded for the same periods in 2019. Actual interest income recorded on these loans was$0.1 million for both the three and six months endedJune 30, 2020 , compared to$0.4 million and$0.9 million , respectively, for the same periods in 2019.
COVID-19 Financial Hardship Relief Programs
Certain borrowers are currently unable to meet their contractual payment obligations because of the adverse effects of COVID-19. To help mitigate these effects, we have been offering various relief programs to assist customerswho are experiencing financial hardship due to COVID-19. For example, for certain residential mortgage and commercial loans, various relief options are available on a case-by-case basis, including payment deferrals for up to six months. For certain consumer loans, loan assistance is being offered in the form of payment deferrals for up to three months, which extends the term of the loan by the number of months deferred, and interest will continue to accrue on the principal balance. The short-term modifications for payment deferrals, extensions of repayment terms, or delays in payment described above that are insignificant and made on a good faith basis in response to borrowers impacted by COVID-19who were current prior to any relief are not required to be accounted for and disclosed as TDRs under GAAP. Please see "Note 4. Allowance for Credit Losses" in the notes to our unaudited interim consolidated financial statements for further discussion on short-term modifications.
Table 22 presents information on our loans and leases that received payment
deferrals under our COVID-19 financial hardship relief programs as of
Loans and Leases Receiving Payment Deferrals under COVID-19 Financial Hardship Relief Programs
Table 22 June 30, 2020 Number of Loans Amortized (dollars in thousands) and Leases Cost Basis Loans and Leases Receiving Payment Deferrals under COVID-19 Financial Hardship Relief Programs Commercial and industrial 1,433$ 931,111 Commercial real estate 434 1,179,280 Construction 40 66,037 Lease financing 61 10,615 Residential mortgage 1,322 564,671 Consumer 17,898 275,625
Total Loans and Leases Receiving Payment Deferrals under COVID-19 Financial Hardship Relief Programs
21,188$ 3,027,339 Total Loans and Leases
Ratio of Loans and Leases Receiving Payment Deferrals under COVID-19 Financial Hardship Relief Programs to Total Loans and Leases 22.0 % 79 Table of Contents In addition to the relief programs described above, we have been also participating in the PPP offered by theU.S. Small Business Administration ("SBA"). The PPP is intended to help small businesses impacted by the COVID-19 pandemic by providing "fully forgivable" loans for up to$10 million to cover up to 24 weeks of payroll expenses, including employee benefits, and can also be used to make mortgage interest, rent and utility payments. PPP loans have a fixed interest rate of one percent per annum and a maturity date of up to five years, with the ability to prepay the loan in full without penalty. The first payment is deferred for 10 months or until compensation is received for forgiven amounts, and interest will continue to accrue during the initial deferment period. The borrower may apply with the Bank for loan forgiveness of the amount due on the loan in an amount equal to payroll, employee benefits, mortgage interest, rent and utility costs incurred during the 24-week period, subject to limitations, in accordance with the PPP and CARES Act. Because the purpose of the PPP is to help small businesses keep their workers employed and paid, if the business spends less than 60% of loan proceeds on payroll costs, uses the loan proceeds for non-payroll costs that are not related to mortgage interest, rent or utility payments, or significantly reduces its employee count or compensation levels without qualifying for other exceptions, a portion of the loan will not be forgiven, and the business will be required to repay that portion of the loan to the Bank over the remaining term of the loan. Table 23 presents information on our PPP loans outstanding as ofJune 30, 2020 to borrowers operating in industries greatly impacted by the COVID-19 pandemic ("high impact industries") and all other industries: PPP Loans Outstanding to Borrowers by Industry
Table 23 June 30, 2020 Number Amortized (dollars in thousands) of Loans Cost Basis PPP Loans Outstanding to Borrowers byIndustry High Impact Industries : Food service 596$ 110,711 Automobile dealers 77 63,867 Retail 520 59,765 Hospitality/Hotel 94 56,481 Transportation 165 35,573
Total PPP Loans Outstanding to Borrowers Operating in
1,452
326,397
All other industries (1) 4,564
589,999
Total PPP Loans Outstanding (2) 6,016 $
916,396
Total Loans and Leases $
13,764,030
Ratio of PPP Loans Outstanding to Borrowers Operating in
2.4 % Ratio of PPP Loans Outstanding to Total Loans and Leases
6.7 %
(1) "All other industries" represent borrowers that received PPP loans that did
not operate in the five high impact industries listed above, which is primarily comprised of the construction, health care, and professional services industries.
(2) Outstanding loan balances are reported net of deferred loan costs and fees of
$2.6 million and$27.4 million atJune 30, 2020 , respectively.
Loans Modified in a Troubled Debt Restructuring
Table 24 presents information on loans whose terms have been modified in a TDR
as of
Loans Modified in a Troubled Debt Restructuring Table 24 June 30, December 31, (dollars in thousands) 2020 2019 Commercial and industrial$ 3,609 $ 4,919 Commercial real estate 675 692 Total commercial 4,284 5,611 Residential mortgage 7,865 10,487 Total$ 12,149 $ 16,098 80 Table of Contents
Loans modified in a TDR were$12.1 million as ofJune 30, 2020 , a decrease of$3.9 million or 25% fromDecember 31, 2019 . This decrease was primarily due to decreases in residential mortgage loans of$2.6 million and commercial and industrial loans of$1.3 million . As ofJune 30, 2020 ,$11.2 million or 92% of our loans modified in a TDR were performing in accordance with their modified contractual terms and were on accrual status. Generally, loans modified in a TDR are returned to accrual status after the borrower has demonstrated performance under the modified terms by making six consecutive timely payments. See "Note 4. Allowance for Credit Losses" contained in our unaudited interim consolidated financial statements for more information and a description of the modification programs that we currently offer to our customers. As noted above, we have begun to provide our borrowers with opportunities to defer payments, or portions thereof. In the absence of intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral).
Allowance for Credit Losses for Loans and Leases & Reserve for Unfunded Commitments
We adopted the provisions of Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments onJanuary 1, 2020 . This guidance changes the accounting for credit losses from an "incurred loss" model, which estimates a loss allowance based on current known and inherent losses within a loan portfolio to an "expected loss" model, which estimates a loss based on losses expected to be recorded over the life of the loan portfolio. EffectiveJanuary 1, 2020 , we recorded a pre-tax cumulative effect adjustment to increase the ACL by$0.8 million and to increase the reserve for unfunded commitments by$16.3 million . The Company's ACL under CECL is significantly more dependent on the quantitative model and less on the qualitative assessment, compared to the previous incurred loss model. The increase in the ACL was primarily related to our indirect auto, commercial real estate and consumer loan products. This was partially offset by the decrease in the ACL related to our commercial and industrial, home equity lines and residential real estate loan products. These directional changes were predominantly due to differences between the loss emergence periods previously used under the incurred loss methodology and the remaining life of the loan as required under CECL. The large increase to our reserve for unfunded commitments was primarily due to an increase in utilization rates estimated using our CECL methodology. 81 Table of Contents
Table 25 presents an analysis of our ACL for the periods indicated:
Allowance for Credit Losses Table 25 Three Months Ended June 30, Six Months Ended June 30, (dollars in thousands) 2020 2019 2020 2019 Balance at Beginning of Period$ 166,013 $ 141,546 $ 130,530 $ 141,718 Adjustment to Adopt ASC Topic 326 - - 770 - After Adoption of ASC Topic 326 166,013 141,546 131,300 141,718 Loans and Leases Charged-Off Commercial Loans: Commercial and industrial (13,974) (2,000) (14,175) (2,000) Commercial real estate (2,723) - (2,723) - Construction (379) - (379) - Lease financing - - - (24) Total Commercial Loans (17,076) (2,000) (17,277) (2,024) Residential Loans: Residential mortgage (14) - (14) - Home equity line - - (8) - Total Residential Loans (14) - (22) - Consumer (8,907) (7,505) (17,504) (16,103) Total Loans and Leases Charged-Off (25,997) (9,505) (34,803) (18,127) Recoveries on Loans and Leases Previously Charged-Off Commercial Loans: Commercial and industrial 100 25 320 62 Commercial real estate - 32 - 63 Construction 30 - 140 - Total Commercial Loans 130 57 460 125 Residential Loans: Residential mortgage 17 118 152 336 Home equity line 8 67 130 99 Total Residential Loans 25 185 282 435 Consumer 2,456 2,382 4,539 4,834 Total Recoveries on Loans and Leases Previously Charged-Off 2,611 2,624 5,281 5,394 Net Loans and Leases Charged-Off (23,386) (6,881) (29,522) (12,733) Provision for Credit Losses - Loans and Leases 49,493 3,870 90,342 9,550 Balance at End of Period$ 192,120 $ 138,535 $ 192,120 $ 138,535 Average Loans and Leases Outstanding$ 13,956,669 $ 13,209,655 $ 13,574,048 $ 13,142,057 Ratio of Net Loans and Leases Charged-Off to Average Loans and Leases Outstanding(1) 0.67 % 0.21 % 0.44 % 0.20 % Ratio of Allowance for Credit Losses for Loans and Leases to Loans and Leases Outstanding 1.40 % 1.04 % 1.40 % 1.04 %
(1) Annualized for the three and six months ended
Tables 26 and 27 present the allocation of the ACL by loan and lease category, in both dollars and as a percentage of total loans and leases outstanding as ofJune 30, 2020 andDecember 31, 2019 : Allocation of the Allowance for Credit Losses by Loan and Lease Category Table 26 June 30, December 31, (dollars in thousands) 2020 2019 Commercial and industrial$ 21,299 $ 28,975 Commercial real estate 53,122 22,325 Construction 5,276 4,844 Lease financing 3,837 424 Total commercial 83,534 56,568 Residential mortgage 33,874 29,303 Home equity line 7,635 9,876 Total residential 41,509 39,179 Consumer 67,077 34,644 Unallocated - 139
Total Allowance for Credit Losses for Loans and Leases
82 Table of Contents
Allocation of the Allowance for Credit Losses by Loan and Lease Category
Table 27 June 30, December 31, 2020 2019 Allocated Loan Allocated Loan ACL as category as ACL as category as (as a percentage of total loans % of loan or % of total % of loan or % of total and leases outstanding) lease category loans and leases lease category loans and leases Commercial and industrial 0.62 % 24.88 % 1.06 % 20.76 % Commercial real estate 1.55 24.87 0.64 26.22 Construction 0.85 4.49 0.93 3.93 Lease financing 1.61 1.73 0.21 1.53 Total commercial 1.08 55.97 0.82 52.44 Residential mortgage 0.92 26.82 0.78 28.53 Home equity line 0.87 6.37 1.11 6.76 Total residential 0.91 33.19 0.84 35.29 Consumer 4.50 10.84 2.14 12.27 Total 1.40 % 100.00 % 0.99 % 100.00 %
As ofJune 30, 2020 , the ACL was$192.1 million or 1.40% of total loans and leases outstanding, compared with an ACL of$130.5 million or 0.99% of total loans and leases outstanding as ofDecember 31, 2019 . The level of the ACL was commensurate with the adverse impacts that COVID-19 is having on theHawaii
and global economy. Net charge-offs of loans and leases were$23.4 million , or 0.67% of total average loans and leases on an annualized basis, for the three months endedJune 30, 2020 compared to$6.9 million or 0.21% of total average loans and leases, on an annualized basis, for the three months endedJune 30, 2019 . Net charge-offs in our commercial lending portfolio were$16.9 million and$1.9 million for the three months endedJune 30, 2020 and 2019, respectively. The increase in net charge-offs in our commercial lending portfolio was primarily due to$16.0 million in charge-offs related to several loans that have been adversely impacted by the shut-down of the tourism industry inHawaii . Net recoveries in our residential lending portfolio were nil and$0.2 million for the three months endedJune 30, 2020 and 2019, respectively. Net charge-offs in our consumer lending portfolio were$6.5 million and$5.1 million for the three months endedJune 30, 2020 and 2019, respectively. Net charge-offs in our consumer portfolio segment include those related to credit cards, automobile loans, installment loans and small business lines of credit and reflect the inherent risk associated with these loans. Net charge-offs of loans and leases were$29.5 million , or 0.44% of total average loans and leases on an annualized basis, for the six months endedJune 30, 2020 compared to$12.7 million or 0.20% of total average loans and leases, on an annualized basis, for the six months endedJune 30, 2019 . Net charge-offs in our commercial lending portfolio were$16.8 million and$1.9 million for the six months endedJune 30, 2020 and 2019, respectively. The increase in net charge-offs in our commercial lending portfolio was primarily due to$16.0 million in charge-offs related to several loans that have been adversely impacted by the shut-down of the tourism industry inHawaii . Net recoveries in our residential lending portfolio were$0.3 million and$0.4 million for the six months endedJune 30, 2020 and 2019, respectively. Our net recovery position in this portfolio segment is largely attributable to rising real estate prices inHawaii . Net charge-offs in our consumer lending portfolio were$13.0 million and$11.3 million for the six months endedJune 30, 2020 and 2019, respectively. Net charge-offs in our consumer portfolio segment include those related to credit card, automobile loans, installment loans and small business lines of credit and reflect the inherent risk associated with these loans.
The increase in the ACL during the second quarter of 2020 was primarily due to the adverse economic impact that COVID-19 is having and is expected to continue to have on the global, national and local economies. Business closures and the ripple effect it has had and will continue to have on unemployment filings is expected to impact the ability of our borrowers to continue to remain current on their loans and leases. As noted earlier, a significant number of our customers (primarily individuals and small businesses) have taken advantage of payment deferral programs in assisting them while they may be temporarily unemployed or where their businesses have closed. We continue to monitor the length and severity of the shut-down of our tourism industry and the re-opening of theHawaii economy under new guidelines. Once these measures are relaxed, we expect that local consumption of goods and services will begin to resume over an extended period of time. Additionally, the timing and significance of any return of air travel and theHawaii tourism industry is highly uncertain and is dependent upon the number of cases declining around the globe. 83 Table of Contents
As ofJune 30, 2020 , the higher allocation of our ACL to our commercial and consumer portfolio segments and the lower allocation to our residential portfolio segment (which is secured by real estate), is primarily due to expected credit losses related to COVID-19 and the impact that it will have on theHawaii economy, local businesses and our customers. See "Note 4. Allowance for Credit Losses" contained in our unaudited interim consolidated financial statements for more information on the ACL.Goodwill
Goodwill was$995.5 million as of bothJune 30, 2020 andDecember 31, 2019 . Our goodwill originated from the acquisition of the Company by BNPP in December of 2001.Goodwill generated in that acquisition was recorded on the balance sheet of the Bank as a result of push down accounting treatment, and remains on our consolidated balance sheets.Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment at a reporting unit level. Determining the amount of goodwill impairment, if any, includes assessing the fair value of the reporting unit and comparing it to the carrying amount of the reporting unit. There was no impairment in our goodwill for the three and six months endedJune 30, 2020 . Future events, or the continued adverse effect of ongoing events, including the COVID-19 pandemic, that could cause a significant decline in our expected future cash flows or a significant adverse change in our business or the business climate may necessitate taking charges in future reporting periods related to the impairment of our goodwill and other intangible assets. Other Assets
Other assets were
Deposits
Deposits are the primary funding source for the Bank and are acquired from a broad base of local markets, including both individual and corporate customers. We obtain funds from depositors by offering a range of deposit types, including demand, savings, money market and time. Table 28 presents the composition of our deposits as ofJune 30, 2020 andDecember 31, 2019 : Deposits Table 28 June 30, December 31, (dollars in thousands) 2020 2019 Demand$ 6,880,091 $ 5,880,072 Savings 5,727,367 4,998,933 Money Market 3,247,511 3,055,832 Time 3,506,665 2,510,157 Total Deposits(1)$ 19,361,634 $ 16,444,994
(1) Public deposits were
billion compared toDecember 31, 2019 .
Total deposits were$19.4 billion as ofJune 30, 2020 , an increase of$2.9 billion or 18% fromDecember 31, 2019 . The increase in deposit balances stemmed from a$1.0 billion increase in public time deposit balances, a$1.0 billion increase in demand deposit balances and a$728.4 million increase in savings deposit balances. We increased our liquidity position in anticipation of a surge in funding needs, primarily due to our participation in the PPP.
Short-term and Long-term Borrowings
As ofJune 30, 2020 andDecember 31, 2019 , short-term borrowings were$200.0 million and$400.0 million , respectively. These short-term FHLB fixed-rate advances have a weighted average interest rate of 2.88% and 2.84%, respectively. The remaining short-term FHLB fixed-rate advance (as ofJune 30, 2020 ) matured inJuly 2020 . 84 Table of Contents Long-term borrowings were$200.0 million as of bothJune 30, 2020 andDecember 31, 2019 . The Company's long-term borrowings included$200.0 million in FHLB fixed-rate advances with a weighted average interest rate of 2.73% and maturity dates ranging from 2023 to 2024. Long-term borrowings mature in excess of one year from the unaudited interim consolidated balance sheet date. As ofJune 30, 2020 andDecember 31, 2019 , the available remaining borrowing capacity with the FHLB was$1.9 billion and$1.7 billion , respectively. The FHLB fixed-rate advances and remaining borrowing capacity were secured by residential real estate loan collateral as ofJune 30, 2020 andDecember 31, 2019 .
Pension and Postretirement Plan Obligations
We have a noncontributory qualified defined benefit pension plan, an unfunded supplemental executive retirement plan, a directors' retirement plan (a non-qualified pension plan for eligible directors) and a postretirement benefit plan providing life insurance and healthcare benefits that we offer to our directors and employees, as applicable. The noncontributory qualified defined benefit pension plan, the unfunded supplemental executive retirement plan and the directors' retirement plan are all frozen to new participants. OnMarch 11, 2019 , the Company's board of directors approved an amendment to the SERP to freeze the SERP. As a result of such amendment, effectiveJuly 1, 2019 , there are no new accruals of benefits, including service accruals. To calculate annual pension costs, we use the following key variables: (1) size of the employee population, length of service and estimated compensation increases; (2) actuarial assumptions and estimates; (3) expected long-term rate of return on plan assets; and (4) discount rate. Pension and postretirement benefit plan obligations, net of pension plan assets, were$122.1 million as ofJune 30, 2020 , an increase of$0.1 million fromDecember 31, 2019 . This increase was primarily due to net periodic benefit costs for the six months endedJune 30, 2020 of$4.3 million , offset by payments
of$4.2 million .
See "Note 16. Noninterest Income and Noninterest Expense" contained in our unaudited interim consolidated financial statements for more information on our pension and postretirement benefit plans.
Foreign Activities Cross-border outstandings are defined as loans (including accrued interest), acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets which are denominated in dollars or other non-local currency. As ofJune 30, 2020 , there were no aggregate cross-border outstandings in countries which amounted to 0.75% to 1% of our total consolidated assets. As ofDecember 31, 2019 , aggregate cross-border outstandings in countries which amounted to 0.75% to 1% of our total consolidated assets were approximately$174.7 million toJapan and$162.1 million toCanada . There were no cross-border outstandings in excess of 1% of our total consolidated assets as of bothJune 30, 2020 andDecember 31, 2019 . Capital
The bank regulators currently use a combination of risk-based ratios and a leverage ratio to evaluate capital adequacy. The Company and the Bank are subject to the federal bank regulators' final rules implementing Basel III and various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Capital Rules".) The Capital Rules, among other things impose a capital measure called "Common Equity Tier 1" ("CET1"), to which most deductions/adjustments to regulatory capital must be made. In addition, the Capital Rules specify that Tier 1 capital consists of CET1 and "Additional Tier 1 capital" instruments meeting certain specified requirements.
Under the Capital Rules, the minimum capital ratios are as follows:
? 4.5% CET1 capital to risk-weighted assets,
? 6.0% Tier 1 capital (that is, CET1 capital plus Additional Tier 1 capital) to
risk-weighted assets,
? 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to
risk-weighted assets, and
? 4.0% Tier 1 capital to average quarterly assets.
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The Capital Rules also require a 2.5% capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is composed entirely of CET1, on top of these minimum risk weighted asset ratios, effectively resulting in minimum ratios of (i) 7% CET1 to risk-weighted assets, (ii) 8.5% Tier 1 capital to risk-weighted assets, and (iii) 10.5% total capital to risk-weighted assets. As ofJune 30, 2020 , the Company's capital levels remained characterized as "well capitalized" under the Capital Rules. Our regulatory capital ratios, calculated in accordance with the Capital Rules, are presented in Table 29 below. There have been no conditions or events sinceJune 30, 2020 that management believes have changed either the Company's or the Bank's capital classifications. Regulatory Capital Table 29 June 30, December 31, (dollars in thousands) 2020 2019 Stockholders' Equity$ 2,701,897 $ 2,640,258 Less: Goodwill 995,492 995,492
Accumulated other comprehensive income (loss), net 52,731
(31,749)
Common Equity Tier 1 Capital and Tier 1 Capital$ 1,653,674 $ 1,676,515 Add: Qualifying allowance for credit losses and reserve for unfunded commitments 174,837 131,130 Total Capital$ 1,828,511 $ 1,807,645 Risk-Weighted Assets$ 13,946,442 $ 14,110,799 Key Regulatory Capital Ratios
Common Equity Tier 1 Capital Ratio 11.86 %
11.88 % Tier 1 Capital Ratio 11.86 % 11.88 % Total Capital Ratio 13.11 % 12.81 % Tier 1 Leverage Ratio 7.75 % 8.79 % Total stockholders' equity was$2.7 billion as ofJune 30, 2020 , an increase of$61.6 million or 2% fromDecember 31, 2019 . The increase in stockholders' equity was primarily due to a net gain in the fair value of our investment securities of$84.6 million and earnings for the period of$58.9 million . This was partially offset by dividends declared and paid to the Company's stockholders of$67.5 million , the cumulative effect adjustment of a change in an accounting principle of$12.5 million and common stock repurchased of$5.0 million during the six months endedJune 30, 2020 .
In
Off-Balance Sheet Arrangements and Guarantees
Off-Balance Sheet Arrangements
We hold interests in several unconsolidated variable interest entities ("VIEs"). These unconsolidated VIEs are primarily low income housing tax credit investments in partnerships and limited liability companies. Variable interests are defined as contractual ownership or other interest in an entity that change with fluctuations in an entity's net asset value. The primary beneficiary consolidates the VIE. Based on our analysis, we have determined that the Company is not the primary beneficiary of these entities. As a result, we do not consolidate these VIEs. Guarantees We sell residential mortgage loans on the secondary market, primarily to Fannie Mae or Freddie Mac. The agreements under which we sell residential mortgage loans to Fannie Mae or Freddie Mac contain provisions that include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the specific representations and warranties vary among investors, insurance or guarantee agreements, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state and local laws and other matters. As of bothJune 30, 2020 andDecember 31, 2019 , the unpaid principal balance of our portfolio of residential mortgage loans sold was$2.3 billion . The agreements under which we sell residential mortgage loans 86
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require delivery of various documents to the investor or its document custodian. Although these loans are primarily sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred if a loan review reveals that underwriting and documentation standards were potentially not met in the origination of those loans. Upon receipt of a repurchase request, we work with investors to arrive at a mutually agreeable resolution. Repurchase demands are typically reviewed on an individual loan by loan basis to validate the claims made by the investor to determine if a contractually required repurchase event has occurred. We manage the risk associated with potential repurchases or other forms of settlement through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards. For the six months endedJune 30, 2020 , there was one repurchase of a residential mortgage loan of$0.3 million and there were no pending repurchase requests. In addition to servicing loans in our portfolio, substantially all of the loans we sell to investors are sold with servicing rights retained. We also service loans originated by other mortgage loan originators. As servicer, our primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans, or loan modifications or short sales. Each agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by the Company in such capacity and provides protection against expenses and liabilities incurred by the Company when acting in compliance with the respective servicing agreements. However, if we commit a material breach of obligations as servicer, we may be subject to termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards vary by investor. These standards and remedies are determined by servicing guides issued by the investors as well as the contract provisions established between the investors and the Company. Remedies could include repurchase of an affected loan. For the six months endedJune 30, 2020 , we had no repurchase requests related to loan servicing activities, nor were there any pending repurchase requests as ofJune 30, 2020 . Although to date repurchase requests related to representation and warranty provisions and servicing activities have been limited, it is possible that requests to repurchase mortgage loans may increase in frequency as investors more aggressively pursue all means of recovering losses on their purchased loans. However, as ofJune 30, 2020 , management believes that this exposure is not material due to the historical level of repurchase requests and loss trends and thus has not established a liability for losses related to mortgage loan repurchases. As ofJune 30, 2020 , 97% of our residential mortgage loans serviced for investors were current. We maintain ongoing communications with investors and continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in loans sold to investors. Contractual Obligations
Our contractual obligations have not changed materially since previously
reported as of
Future Application of Accounting Pronouncements
For a discussion of the expected impact of accounting pronouncements recently issued but not adopted by us as ofJune 30, 2020 , see "Note 1. Organization and Basis of Presentation - Recent Accounting Pronouncements" to the unaudited interim consolidated financial statements for more information.
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