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MarketScreener Homepage  >  Equities  >  Nasdaq  >  First Hawaiian, Inc.    FHB

FIRST HAWAIIAN, INC.

(FHB)
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FIRST HAWAIIAN : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

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08/04/2020 | 06:04am EDT

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 in the United States generally or in Hawaii, 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) on December 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

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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 ended December 31, 2019 and our
Quarterly Report on Form 10-Q for the quarter ended March 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 name Bishop & Company and was the first successful banking partnership in
the Kingdom of Hawaii and the second oldest bank formed west of the Mississippi
River. The Bank operates its business through three operating segments: Retail
Banking, Commercial Banking and Treasury 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 ended December 31, 2019 and filed with the U.S. Securities and
Exchange Commission (the "SEC").



Recent Developments regarding COVID-19 and the Hawaii and Global Economy



Overview



The Coronavirus Disease ("COVID-19") has spread throughout the world and has
been declared a pandemic by the World Health Organization and continues to
evolve. Several countries, namely the U.S. and Brazil, have been particularly
hard hit by COVID-19. Europe and other regions have also been significantly
impacted by the pandemic. Through July 2020, the U.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, the U.S. has recently seen a surge in
the number of confirmed COVID-19 cases. The global and U.S. economies have
entered into a pandemic-driven recession. The future impact of COVID-19 on the
global and U.S. economies, and the timing and robustness of any related
recovery, continues to remain uncertain.



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As a result of the COVID-19 outbreak and related response, the U.S. economy has
deteriorated. Beginning in March 2020, in many parts of the U.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 the U.S. remained on lockdown
for more than a month. According to the Federal Reserve'sMay 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% in March
2020 to 14.7% in April 2020. In May 2020, state-by-state decisions began to be
made on the pace and extent of reopening local businesses. While the phased
reopening of the U.S. economy brought the national seasonally-adjusted
unemployment rate down to 11.1% in June 2020, new claims for unemployment
insurance have remained above one million per week through July 2020. In
addition, as noted above, the U.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. The U.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 in February 2020 with flight
cancellations to Hawaii due to the global COVID-19 pandemic. On March 5, 2020,
the Governor of the State of Hawaii issued an emergency proclamation declaring a
state of emergency in Hawaii. On March 21, 2020, the Governor of the State of
Hawaii issued a supplementary emergency proclamation ordering all individuals,
both residents and visitors, arriving or returning to the State of Hawaii to a
mandatory 14-day self-quarantine. The mandate, which was the first such action
in the nation, essentially brought the Hawaii tourism industry to a halt.
Subsequently, on March 23, 2020, the Governor of the State 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 in Hawaii
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 the State of Hawaii. As a result, as of July 15, 2020, Hawaii has
the lowest fatality and case rates per capita in the U.S as reported by the
Centers for Disease Control and Prevention. On May 5, 2020, the Governor of the
State 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,
on May 18, 2020, the Governor of the State of Hawaii issued an eighth
supplemental emergency proclamation which outlined a four-phase reopening
strategy for Hawaii's economy and allowing for a gradual reopening of
medium-risk businesses in June 2020. Following the Governor's issuance of a
ninth supplemental emergency proclamation on June 24, 2020, which removed the
14-day self-quarantine mandate for interisland travel, the Governor of the State
of Hawaii announced a program, effective September 1, 2020, that would allow
passengers from the U.S. mainland with an approved negative COVID-19 test within
72 hours prior to arrival in the State 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 in Hawaii unemployment. The statewide
seasonally-adjusted unemployment rate was 13.9% in June 2020 compared to 2.7% in
June 2019, according to the State of Hawaii Department of Labor and Industrial
Relations, while the national seasonally-adjusted unemployment rate was 11.1% in
June 2020 compared to 3.7% in June 2019. Visitor arrivals for the first five
months of 2020 decreased by 49.5% compared to the same period in 2019, according
to the Hawaii 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 the Hawaii tourism industry
slowly reopen, the timing and significance of the return of air travel and the
recovery of the Hawaii tourism industry is highly uncertain and beyond our
control.



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With regards to reports of home sales on Oahu, 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 ended June 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 the
Honolulu Board of Realtors. The median price of single-family home sales and
condominium sales on Oahu was $785,000 and $428,000, respectively, or an
increase of 1.3% and 2.1%, respectively, for the six months ended June 30, 2020
as compared to the same period in 2019. As of June 30, 2020, months of inventory
of single-family homes and condominiums on Oahu 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 Hawaii Department 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 the Federal 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, the
Federal 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. The Federal 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 the Federal 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.





The U.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 on March 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 the Treasury 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 in March 2020 and a second tranche which was approved in April 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 on March 18, 2020 for federally backed mortgage
loans (the Federal Housing Administration has subsequently announced a second
extension of the foreclosure and eviction moratorium through August 31, 2020).



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The Paycheck Protection Program Flexibility Act of 2020 (the "PPPF Act") was
enacted on June 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 from June 30, 2020, to December 31, 2020; (iii) extended the
eight-week "covered period" for expenditures that qualify for forgiveness to the
earlier of 24 weeks following loan origination and December 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 from
June 30, 2020 to December 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.



In July 2020, the CARES Act was amended to extend, through August 8, 2020, the
SBA's authority to make commitments under the PPP. The SBA's existing authority
had previously expired on June 30, 2020. We are continuing to monitor the
potential development of additional legislation and further actions taken by the
U.S. government.



The State 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 to Hawaii residents and funding to support local schools
and colleges.



Impact to our Operations



As noted above, on March 23, 2020, the Governor of the State 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
until May 5, 2020. While the Bank is an essential business in Hawaii, 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. On June 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 of Hawaii, 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 on Hawaii's economy, we
expect that adverse economic conditions will continue. As Hawaii'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 the Hawaii tourism industry is
highly uncertain and is dependent upon, among other things, the number of cases
declining around the globe, in the United States and, in particular, in Hawaii,
visitor receptiveness to Hawaii'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 in Hawaii 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 employees who 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.



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The shut-down of our tourism industry, stay-at-home measures, the recession in
Hawaii 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 to June 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 of June
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.



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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 Ended
                                                           June 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 %




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                                                           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.




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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 Ended
                                                           June 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 $ 266,505$ 290,702


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 $ 187,916$ 185,391


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 $ 59,007$ 144,664

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 ended June 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.




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  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 ended June 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 Ended
                                                                   June 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

$ 1,615,073$ 1,683,801$ 1,580,283

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

$ 19,394,781$ 20,331,987$ 19,446,774

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 %




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  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

$ 12.66

(a) Annualized for the three and six months ended June 30, 2020 and 2019.




Financial Highlights



Net income was $20.0 million for the three months ended June 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
ended June 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 ended June 30, 2020.



Our return on average total assets was 0.36% for the three months ended
June 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
ended June 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 ended
June 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 ended June 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 ended June 30, 2020 compared to 47.99% for the same period
in 2019.


Our results for the three months ended June 30, 2020 were highlighted by the following:

Net interest income was $127.8 million for the three months ended

June 30, 2020, a decrease of $17.8 million or 12% as compared to the same

period in 2019. Our net interest margin was 2.58% for the three months ended

? June 30, 2020, a decrease of 67 basis points as compared to the same period in

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 $55.4 million for the three months ended June 30, 2020, an

increase of $51.6 million, as compared to the same period in 2019. This

increase was primarily due to higher expected credit losses as a result of

? COVID-19 and its impact on Hawaii's economy, key industries, businesses and our

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 $45.7 million for the three months ended June 30, 2020,

a decrease of $3.1 million or 6% as compared to the same period in 2019. The

decrease was primarily due to a $5.8 million decrease in credit and debit card

? fees, a $2.2 million decrease in service charges on deposit accounts and a $1.5

million decrease in other service charges and fees, partially offset by a $5.8

million increase in other noninterest income and a $1.0 million increase in

   bank-owned life insurance ("BOLI") income.




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  Table of Contents

Noninterest expense was $91.5 million for the three months ended June 30, 2020,

a decrease of $1.8 million or 2% compared to the same period in 2019. The

decrease in noninterest expense was primarily due to a $2.5 million decrease in

? card rewards program expense, a $0.8 million decrease in other expenses and a

$0.6 million decrease in advertising and marketing expense, partially offset by

a $1.2 million increase in contracted services and professional fees and a $0.7

million increase in equipment expense.





Net income was $58.9 million for the six months ended June 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 ended
June 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 ended June 30, 2020.



Our return on average total assets was 0.56% for the six months ended
June 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
ended June 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 ended
June 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
ended June 30, 2020, down from 18.17% for the same period in 2019. Our
efficiency ratio was 51.99% for the six months ended June 30, 2020 compared to
48.09% for the same period in 2019.



Our results for the six months ended June 30, 2020 were highlighted by the following:

Net interest income was $266.5 million for the six months ended June 30, 2020,

a decrease of $24.2 million or 8% as compared to the same period in 2019. Our

net interest margin was 2.84% for the six months ended June 30, 2020, a

? 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 $96.6 million for the six months ended June 30, 2020, an

increase of $87.1 million as compared to the same period in 2019. This increase

was primarily due to higher expected credit losses as a result of COVID-19 and

? its impact on Hawaii's economy, key industries, businesses and our customers.

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 $94.9 million for the six months ended June 30, 2020, a

decrease of $1.0 million or 1% as compared to the same period in 2019. The

decrease was primarily due to a $7.5 million decrease in credit and debit card

? fees, a $2.1 million decrease in other service charges and fees, a $1.3 million

decrease on service charges on deposit accounts and a $0.5 million decrease in

BOLI income, partially offset by a $7.2 million increase in other income, a

$2.5 million decrease in losses from the sale of available for sale investment

securities and a $0.7 million increase in trust and investment services income.

Noninterest expense was $187.9 million for the six months ended June 30, 2020,

an increase of $2.0 million or 1% as compared to the same period in 2019. The

increase in noninterest expense was primarily due to a $3.6 million increase in

? contracted services and professional fees and a $1.1 million increase in

equipment expense, partially offset by a $2.2 million decrease in card rewards

program expense, a $0.7 million decrease in advertising and marketing expense

   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 of March 2020 to June 2020, and the
implementation of the mandatory 14-day self-quarantine for residents and
visitors arriving or returning to the State 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 in Hawaii
unemployment. While we may see a gradual improvement in unemployment as local
businesses and the Hawaii tourism industry slowly reopen, the timing and
significance of the return of air travel and the recovery of the Hawaii 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
of June 30, 2020.

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  Table of Contents


Total loans and leases were $13.8 billion as of June 30, 2020, an increase of

$552.4 million or 4% from December 31, 2019. The increase was primarily due to

growth in commercial and industrial loans stemming from PPP loans totaling

? $916.4 million, partially offset by decreases in our Shared National Credits

and dealer flooring portfolios during the six months ended June 30, 2020. The

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 $192.1 million as of June 30, 2020, an increase of $61.6 million or

47% from December 31, 2019. This increase was primarily due to the

? aforementioned higher expected credit losses as a result of COVID-19 and its

impact on Hawaii's economy, key industries, businesses and our customers. The

ratio of our ACL to total loans and leases outstanding was 1.40% as of

June 30, 2020, an increase of 41 basis points compared to December 31, 2019.




   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 $5.1 billion as of

June 30, 2020, an increase of $1.1 billion compared to December 31, 2019. The

increase was primarily due to purchases in this portfolio as we invested excess

   liquidity into securities.



Total deposits were $19.4 billion as of June 30, 2020, an increase of $2.9

billion or 18% as compared to December 31, 2019. The increase in total deposits

was primarily due to 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. 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 $2.7 billion as of June 30, 2020, an increase of

$61.6 million or 2% from December 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 ended June 30, 2020.




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  Table of Contents

Analysis of Results of Operations



Net Interest Income



For the three months ended June 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

$ 20,390.3

(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 $0.1 million

    and nil for the three months ended June 30, 2020 and 2019, respectively.




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  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 ended June 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 ended June 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 ended
June 30, 2020. Yields on our loans and leases were 3.52% for the three months
ended June 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 ended June 30, 2020. The yield in our investment securities
portfolio was 1.60% for the three months ended June 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 ended June 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 ended June 30, 2020, a
decrease of 58 basis points compared to the same period in 2019.



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For the six months ended June 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

$ 20,442.3

(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 $0.1 million

    and nil for the six months ended June 30, 2020 and 2019, respectively.




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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 ended June 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
ended June 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
ended June 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 ended
June 30, 2020. For the six months ended June 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 ended June 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 ended June 30, 2020, a decrease of 43
basis points compared to the same period in 2019.



The Federal 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 in
October 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. At June 30, 2020, the one-month and
three-month U.S. dollar LIBOR interest rates were 0.16% and 0.30%, respectively,
while at June 30, 2019, the one-month and three-month U.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 in October
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%,

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where it remained as at the end of the second quarter of 2020. In June 2020, the
Federal 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 the Federal
Reserve aimed at mitigating the economic impact of COVID-19.



Provision for Credit Losses



The Provision was $55.4 million for the three months ended June 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 ended June 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 ended June 30, 2020 and 2019,
respectively. The Provision was $96.6 million for the six months ended
June 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 ended June 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 ended June 30, 2020 and 2019, respectively. The ACL
was $192.1 million as of June 30, 2020, an increase of $61.6 million or 47% from
December 31, 2019 and represented 1.40% of total outstanding loans and leases as
of June 30, 2020 compared to 0.99% of total outstanding loans and leases as of
December 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 June 30, 2020 and 2019 and Table 9 presents the major components of noninterest income for the six months ended June 30, 2020 and 2019:




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 ended June 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 $ 14,877$ 16,183$ (1,306)

   (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 ended June 30, 2020 to the same period in
2019.



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Total noninterest income was $45.7 million for the three months ended
June 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 ended
June 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 ended
June 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 ended June 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 ended
June 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 ended
June 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 ended
June 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 ended June 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 ended
June 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 ended June 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 ended June 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 ended June 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 ended June 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 ended June 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 in January 2019, which contributed to the $2.6
million loss for the six months ended June 30, 2019.



Other noninterest income was $8.1 million for the three months ended
June 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 ended June 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.



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Noninterest Expense


Table 10 presents the major components of noninterest expense for the three months ended June 30, 2020 and 2019 and Table 11 presents the major components of noninterest expense for the six months ended June 30, 2020 and 2019:




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 ended
June 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 ended
June 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
ended June 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 ended June 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 ended June 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 ended June 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 $7.3 million for three months ended June 30, 2020, a minimal change as compared to the same period in 2019. Occupancy expense was $14.5 million for the six months ended June 30, 2020, an increase of $0.3 million or 2% as compared to the same period in 2019.



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Equipment expense was $5.2 million for the three months ended June 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
ended June 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 $2.1 million for the three months ended June 30, 2020, a minimal change as compared to the same period in 2019. Regulatory assessment and fees were $4.0 million for the six months ended June 30, 2020, an increase of $0.5 million or 13% as compared to the same period in 2019.




Advertising and marketing expense was $1.4 million for the three months ended
June 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 ended
June 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 ended
June 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
ended June 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 ended
June 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 ended June 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 ended June 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 ended June 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 ended June 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 ended June 30, 2020 also stemmed from a
state tax settlement with BNP Paribas USA, Inc. related to periods during which
the Company was included in the state combined returns of BNP Paribas USA,
Inc.



Analysis of Business Segments



Our business segments are Retail Banking, Commercial Banking and Treasury and
Other. Table 12 summarizes net income from our business segments for the three
and six months ended June 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

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alignments for the three and six months ended June 30, 2020. The Company has
restated the selected financial information for the three and six months ended
June 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
ended June 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
ended June 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 June 30, 2020.

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
in Hawaii, Guam, Saipan and California.



Net income for the Commercial Banking segment was $4.3 million for the three
months ended June 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,

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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 ended June 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 ended June 30, 2020.



Treasury and Other.  Our Treasury 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 in Hawaii and Guam. The net
residual effect of the transfer pricing of assets and liabilities is included in
Treasury and Other, along with the elimination of intercompany transactions.



Other organizational units (Technology, Operations, Credit and Risk Management,
Human Resources, Finance, Administration, Marketing and Corporate 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 the Treasury and Other segment was $11.3 million for the three
months ended June 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 the Treasury and Other segment was $6.8 million for the six months
ended June 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 the Treasury 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

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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 in January 2019.



The increase in total assets for the Treasury and Other segment was primarily due to increases in interest-bearing deposits in other banks and investment securities portfolio during the six months ended June 30, 2020.

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 the Federal Reserve Bank of San Francisco (the "FRB"). As of June 30, 2020
and December 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
of June 30, 2020 and December 31, 2019, respectively. As of June 30, 2020 and
December 31, 2019, we maintained our excess liquidity primarily in
collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie
Mac. As of June 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 of June 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 of December 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 of June 30, 2020 and December 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 of June 30, 2020, we maintained these
higher levels of liquidity.



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Investment Securities

Table 13 presents the estimated fair value of our available-for-sale investment securities portfolio as of June 30, 2020 and December 31, 2019:




Investment Securities                                                      Table 13
                                                       June 30,      December 31,
(dollars in thousands)                                   2020            2019

U.S.Treasury and government agency debt securities $ 94,918 $

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 June 30, 2020:

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 of June 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 of June 30, 2020, an increase of $1.1 billion or 26% compared to
December 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 of June 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 by Ginnie Mae, Fannie Mae and Freddie Mac. Our
available-for-sale portfolio also included $1.6 billion in mortgage-backed
securities issued by Ginnie Mae, Freddie Mac, Fannie Mae and a municipal housing
authority and $94.9 million in debt securities issued by the U.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

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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 ended June 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 of June 30, 2020 and December 31, 2019,
respectively. Gross unrealized losses in our investment securities portfolio
were $1.6 million and $24.0 million as of June 30, 2020 and December 31, 2019,
respectively. The increase in unrealized gains in our investment securities
portfolio was primarily due to lower market interest rates as of June 30, 2020,
relative to December 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 of June 30, 2020
and December 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. Investment Securities" contained in our unaudited interim consolidated financial statements for more information on our investment securities portfolio.



Loans and Leases


Table 15 presents the composition of our loan and lease portfolio by major categories as of June 30, 2020 and December 31, 2019:




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 of June 30, 2020, an increase of
$552.4 million or 4% from December 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 of June 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 in Hawaii and
California to assist with the financing of their inventory. Commercial and
industrial loans were $3.4 billion as of June 30, 2020, an increase of $680.5
million or 25% from December 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 ended June 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 of June 30, 2020, a decrease
of $40.5 million or 1% from December 31, 2019. This decrease was primarily due
to a payoff of a commercial real estate loan totaling $50.0 million during the
six months ended June 30, 2020.

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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 of June 30, 2020, an
increase of $98.7 million or 19% from December 31, 2019. The increase in
construction loans stemmed from various disbursements of project loans during
the six months ended June 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
of June 30, 2020, a decrease of $93.7 million or 2% from December 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 ended June 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 of
June 30, 2020, a decrease of $128.4 million or 8% from December 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 of June 30, 2020, an increase of $35.8 million
or 18% from December 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.



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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 of
June 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 Treasury Other

Total Rate Rate Total Commercial and industrial

               $ 245,967$ 1,836,507   $       -   $    26,535

$ 2,109,009$ 12,875$ 1,301,824$ 3,423,708 Commercial real estate 31,234 2,063,991 337 917,401

     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 $ 982,292$ 4,524,015$ 114,192$ 1,034,742

$ 6,655,241$ 1,009,760$ 6,099,029$ 13,764,030

% 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 June 30, 2020 and December 31, 2019:

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 $ 1,152,005$ 49,195$ 13,764,030 Percentage of Total Loans and Leases

                           73%            18%            8%            1%           100%


(1) For secured loans and leases, classification as U.S. Mainland is made based

    on where the collateral is located. For unsecured loans and leases,
    classification as U.S. Mainland is made based on the location where the
    majority of the borrower's business operations are conducted.




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Geographic Distribution of Loan and Lease Portfolio                                                                Table 18
                                                                            

December 31, 2019

                                                                        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 $ 1,106,339$ 48,497$ 13,211,650 Percentage of Total Loans and Leases

                          73%            18%            8%            1%           100%


(1) For secured loans and leases, classification as U.S. Mainland is made based

    on where the collateral is located. For unsecured loans and leases,
    classification as U.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 in Hawaii. However, we also
have lending activities on the U.S. mainland, Guam and Saipan. Our commercial
lending activities on the U.S. mainland include automobile dealer flooring
activities in California, 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 in Hawaii and on the U.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 in Hawaii and, to a smaller extent, in Guam and
Saipan.



Table 19 presents certain contractual loan maturity categories and sensitivities of those loans to changes in interest rates as of June 30, 2020:

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 $ 314,523$ 4,041,643

(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.

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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 June 30, 2020 and December 31, 2019:





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 $ 10,120$ 12,150


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 ended June 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




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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 of June 30, 2020, an increase of $27.5 million
or 475% from December 31, 2019. The ratio of our NPAs to total loans and leases
and other real estate owned was 0.24% as of June 30, 2020, an increase of 20
basis points from December 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 of June 30, 2020, commercial real estate non-accrual loans were $13.2
million, an increase of $13.1 million from December 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 in Hawaii.



As of June 30, 2020, commercial and industrial non-accrual loans were $11.6
million, an increase of $11.5 million from December 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 in Hawaii.



As of June 30, 2020, construction non-accrual loans were $2.0 million, an increase of $2.0 million or 100% from December 31, 2019. This increase was primarily due to the addition of one construction non-accrual loan of $2.2 million, partially offset by a $0.4 million charge-off.




As of June 30, 2020, residential mortgage non-accrual loans were $6.1 million,
an increase of $0.7 million or 12% from December 31, 2019. As of June 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 of June 30, 2020, other real estate owned was $0.4 million which
was comprised of one residential real estate property.  As of December 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 of June 30, 2020, a decrease of $2.0 million or 17% as compared to
December 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 ended June 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 ended June 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 of June 30, 2020 and
December 31, 2019, respectively. These impaired loans had a related ACL of $1.6
million and $0.2 million as of June 30, 2020 and December 31, 2019. The increase
in impaired loans during the six months ended June 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-

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offs and paydowns. As of June 30, 2020 and December 31, 2019, we recorded charge-offs of $17.0 million and $0.6 million, respectively, related to our total impaired loans. Our impaired loans are considered in management's assessment of the overall adequacy of the ACL.




If interest due on the balances of all non-accrual loans as of June 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 ended June 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 ended June 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 customers who
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-19 who
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 June 30, 2020:

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                                                     

$ 13,764,030


Ratio of Loans and Leases Receiving Payment Deferrals
under COVID-19 Financial Hardship Relief Programs to
Total Loans and Leases                                                                22.0 %


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In addition to the relief programs described above, we have been also
participating in the PPP offered by the U.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 of June 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 by Industry
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 High Impact Industries

                                           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 High Impact Industries to Total Loans and Leases

                                  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 at June 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 June 30, 2020 and December 31, 2019:





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




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Loans modified in a TDR were $12.1 million as of June 30, 2020, a decrease of
$3.9 million or 25% from December 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 of June 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 on January 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.



Effective January 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.



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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 June 30, 2020 and 2019.





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 of
June 30, 2020 and December 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 $ 192,120$ 130,530




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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 of June 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 of December 31, 2019. The level of the ACL was
commensurate with the adverse impacts that COVID-19 is having on the Hawaii
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 ended
June 30, 2020 compared to $6.9 million or 0.21% of total average loans and
leases, on an annualized basis, for the three months ended June 30, 2019. Net
charge-offs in our commercial lending portfolio were $16.9 million and $1.9
million for the three months ended June 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 in Hawaii. Net
recoveries in our residential lending portfolio were nil and $0.2 million for
the three months ended June 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 ended June 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 ended
June 30, 2020 compared to $12.7 million or 0.20% of total average loans and
leases, on an annualized basis, for the six months ended June 30, 2019. Net
charge-offs in our commercial lending portfolio were $16.8 million and $1.9
million for the six months ended June 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 in Hawaii. Net
recoveries in our residential lending portfolio were $0.3 million and $0.4
million for the six months ended June 30, 2020 and 2019, respectively. Our net
recovery position in this portfolio segment is largely attributable to rising
real estate prices in Hawaii. Net charge-offs in our consumer lending portfolio
were $13.0 million and $11.3 million for the six months ended June 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 the
Hawaii 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 the Hawaii tourism industry is highly uncertain and is
dependent upon the number of cases declining around the globe.



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As of June 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
the Hawaii 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 both June 30, 2020 and December 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 ended
June 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 $576.5 million as of June 30, 2020, an increase of $85.9 million or 18% from December 31, 2019. This increase was primarily due to a $107.0 million increase in interest rate swap agreements and a $31.0 million increase in prepaid assets, partially offset by a $30.6 million decrease in current tax receivables and deferred tax assets.



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 of June 30, 2020 and
December 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 $2.4 billion as of June 30, 2020, an increase of $1.4

    billion compared to December 31, 2019.



Total deposits were $19.4 billion as of June 30, 2020, an increase of $2.9
billion or 18% from December 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 of June 30, 2020 and December 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 of June 30, 2020) matured
in July 2020.



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Long-term borrowings were $200.0 million as of both June 30, 2020 and
December 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 of June 30, 2020 and December 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 of June 30, 2020 and December 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. On March 11,
2019, the Company's board of directors approved an amendment to the SERP to
freeze the SERP. As a result of such amendment, effective July 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 of June 30, 2020, an increase of $0.1 million from
December 31, 2019. This increase was primarily due to net periodic benefit costs
for the six months ended June 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 of June 30, 2020, there were no aggregate
cross-border outstandings in countries which amounted to 0.75% to 1% of our
total consolidated assets. As of December 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 to Japan and $162.1
million to Canada. There were no cross-border outstandings in excess of 1% of
our total consolidated assets as of both June 30, 2020 and December 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 of June 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 since June 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 of June 30, 2020, an increase of
$61.6 million or 2% from December 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 ended June 30, 2020.



In July 2020, the Company's Board of Directors declared a quarterly cash dividend of $0.26 per share on our outstanding shares. The dividend will be paid on September 4, 2020 to shareholders of record at the close of business on August 24, 2020.

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 both
June 30, 2020 and December 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

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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 ended
June 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 ended June 30, 2020, we had no repurchase requests
related to loan servicing activities, nor were there any pending repurchase
requests as of June 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 of June 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 of June 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 December 31, 2019.

Future Application of Accounting Pronouncements




For a discussion of the expected impact of accounting pronouncements recently
issued but not adopted by us as of June 30, 2020, see "Note 1. Organization and
Basis of Presentation - Recent Accounting Pronouncements" to the unaudited
interim consolidated financial statements for more information.

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2020 538 M - -
Net income 2020 137 M - -
Net Debt 2020 - - -
P/E ratio 2020 13,9x
Yield 2020 7,13%
Capitalization 1 895 M 1 895 M -
Capi. / Sales 2020 3,52x
Capi. / Sales 2021 3,64x
Nbr of Employees 2 100
Free-Float 92,1%
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NameTitle
Robert S. Harrison Chairman, President & Chief Executive Officer
Ravi Mallela Chief Financial Officer, Treasurer & Executive VP
Matthew J. Cox Independent Director
W. Allen Doane Independent Director
Allen B. Uyeda Lead Independent Director
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