FIRST HAWAIIAN, INC. 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 impact of the ongoing COVID-19 pandemic and any other pandemic, epidemic or health-related crisis; the geographic concentration of our business; current and future economic and market conditions inthe United States generally or inHawaii ,Guam and Saipan in particular; 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; 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 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; our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business; the effectiveness of our risk management and internal disclosure controls and procedures; our ability to keep pace with technological changes; any failure or interruption of our information and communications systems; our ability to identify and address cybersecurity risks; the occurrence of fraudulent activity or effect of a material breach of, or disruption to, the security of any of our or our vendors' systems; the failure to properly use and protect our customer and employee information and data; the possibility of employee misconduct or mistakes; our ability to successfully develop and commercialize new or enhanced products and services; changes in the demand for our products and services; the effects of problems encountered by other financial institutions; our access to sources of liquidity and capital to address our liquidity needs; our use of the secondary mortgage market as a source of liquidity; risks associated with the sale of loans and with our use of appraisals in valuing and monitoring loans; the possibility that actual results may differ from estimates and forecasts; fluctuations in the fair value of our assets and liabilities and off-balance sheet exposures; the effects of the failure of any component of our business infrastructure provided by a third party; the potential for environmental liability; the risk of being subject to litigation and the outcome thereof; the impact of, and changes in, applicable laws, regulations and accounting standards and policies, including the enactment of the Tax Act (Public Law 115-97) onDecember 22, 2017 ; possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations; our likelihood of success in, and the impact of, litigation or regulatory actions; our ability to continue to pay dividends on our common stock; 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. 41 Table of Contents The foregoing factors should not be considered an exhaustive list and should be read together with the risk factors and other cautionary statements included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law. Company Overview FHI is a bank holding company, which owns 100% of the outstanding common stock of FHB, its only direct, wholly owned subsidiary. FHB was founded in 1858 under the nameBishop & Company and was the first successful banking partnership in the Kingdom ofHawaii and the second oldest bank formed west of the Mississippi River. The Bank operates its business through three operating segments: Retail Banking, Commercial Banking andTreasury and Other.
References to "we," "our," "us," or the "Company" refer to the Parent and its subsidiary that are consolidated for financial reporting purposes.
Basis of Presentation
The accompanying unaudited interim consolidated financial statements of the Company reflect the results of operations, financial position and cash flows of FHI and its wholly owned subsidiary, FHB. All significant intercompany accounts and transactions have been eliminated in consolidation. The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect normal recurring adjustments necessary for a fair presentation of the results for the interim periods. The accompanying unaudited interim consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 and filed with theU.S. Securities and Exchange Commission (the "SEC").
Recent Developments regarding COVID-19 and the
Overview
The COVID-19 pandemic has brought unprecedented challenges to businesses and economies around the world, particularly those inthe United States . Our business has been, and continues to be, impacted by the recent and ongoing outbreak of COVID-19. There remains a high degree of uncertainty relating to the ongoing spread and severity of the virus and new variants, as well as the availability, distribution and use of effective treatments and vaccines. To the extent that the economy continues to be negatively impacted by the pandemic, our results will be affected. In light of the uncertainties and continuing developments discussed herein, the ultimate adverse impact of COVID-19 cannot be reliably estimated at this time, but it has been and is expected to continue to be material. Hawaii Economy
Hawaii's economy continues to be significantly impacted by COVID-19 and the responses to it. 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 self-quarantine for visitors resulted in an unprecedented increase inHawaii unemployment. The statewide seasonally adjusted unemployment rate was 9.0% inMarch 2021 compared to 2.6% inMarch 2020 , according to the State ofHawaii Department of Labor and Industrial Relations , while the national seasonally adjusted unemployment rate was 6.0% inMarch 2021 compared to 4.4% inMarch 2020 . Visitor arrivals and average daily visitor spending for the first three months of 2021 decreased by 60.1% and 18.2%, respectively, compared to the same period in 2020, according to theHawaii Tourism Authority . While we may continue to see a gradual improvement in unemployment as local businesses and theHawaii tourism industry continues to reopen in 2021 and the COVID-19 vaccine becomes more widely administered, the timing and extent of the return of air travel and the recovery of theHawaii tourism industry is highly uncertain and beyond our control. 42 Table of Contents The volume of home sales onOahu has increased year-over-year. For the three months endedMarch 31, 2021 , the volume of single-family home sales increased by 11.9%, while condominium sales increased by 32.5% compared to the same period in 2020, according to theHonolulu Board of Realtors . The median price of single-family home sales and condominium sales onOahu was$915,000 and$455,000 , respectively, or an increase of 17.3% and 5.8%, respectively, for the three months endedMarch 31, 2021 as compared to the same period in 2020. As ofMarch 31, 2021 , months of inventory of single-family homes and condominiums onOahu remained low at approximately 1.3 and 2.9 months, respectively. Lastly, state general excise and use tax revenues decreased by 18.3% for the first three months of 2021 as compared to the same period in 2020, according to the HawaiiDepartment of Business, Economic Development & Tourism .
Legislative and Regulatory Developments
Actions taken by the federal government and theFederal Reserve and other bank regulatory agencies to partially mitigate the economic effects of COVID-19 and related containment measures will also have an impact on our financial position and results of operations. These actions are further discussed below.
The
? 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 designed to enhance support for
small and mid-sized businesses.
The
The CARES Act, enacted on
? programs, a
"PPP") for fully guaranteed loans (which may then be forgiven) to small businesses.
The Consolidated Appropriations Act - 2021 (the "CAA") extended the term of a
number of initiatives under the CARES Act. One such example was the extension
? of the
under the PPP to
exhausted. The PPP Extension Act of 2021 later extended the covered period of
the PPP to
The American Rescue Plan Act of 2021 ("American Rescue Plan"), enacted on March
11, 2021, builds upon the measures established in the CARES Act and the CAA.
Through this legislation, unemployment benefits were extended to
? 2021, eligible individuals received direct stimulus payments of up to
an additional
include non-profit organizations previously excluded from the program, and
funds were allocated for COVID-19 vaccines, testing and contact tracing.
We are continuing to monitor the potential development of additional legislation
and further actions taken by the
43
Table of Contents
TheState of Hawaii received at least$1.25 billion in federal aid from the CARES Act. We expect that the majority of this federal aid will be used to help fund state and county government response efforts to COVID-19. Additional federal funding is expected to provide for unemployment assistance, direct cash payments toHawaii residents and funding to support local schools and colleges. The CAA provided an additional$1.7 billion in new federal funding, while extending the ability of theState of Hawaii and its local governments to use its previously received federal aid untilDecember 31, 2021 . The American Rescue Plan also provides an additional$2.2 billion of federal funding to theState of Hawaii . Impact to our Operations We saw a significant decrease in customer traffic in our branches in the past year. As a result, we strategically closed 26 of our branch locations on a temporary basis and closed four of them permanently inNovember 2020 . As ofMarch 2021 , we reopened 19 of the temporarily closed branch locations in connection with the reopening of local businesses. The temporary (or in certain cases, permanent) closures of bank branches and the safety precautions implemented at reopened branches could result in consumers becoming more comfortable with technology and seeing less need for face-to-face interaction. Our business is relationship driven and such changes could necessitate changes to our business practices to accommodate changing consumer behaviors. We continue to provide service to all customers and operate our businesses on all islands ofHawaii ,Guam and Saipan. Additionally, as part of our contingency plans, we have established a redundant operations center for our administrative operations. Many of our employees are working remotely 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.
Impact on our Financial Position and Results of Operations
Due to the widespread impact that COVID-19 is having onHawaii's economy, we expect that adverse economic conditions will continue. While its effects continue to materialize, the COVID-19 pandemic has resulted in a significant decrease in commercial activity throughout theState of Hawaii and nationally. This decrease in commercial activity has caused and may continue to cause our customers (including affected businesses and individuals), vendors and counterparties to be unable to meet existing payment or other obligations to us. AsHawaii's economy continues to reopen, we expect that local consumption of goods and services will improve. Additionally, the timing and extent of the return of air travel and the recovery of theHawaii tourism industry is highly uncertain and is dependent upon, among other things, the number of cases declining around the globe, inthe United States and, in particular, inHawaii , visitor receptiveness toHawaii's new pre-travel COVID-19 testing requirements, an extended period in which there is no subsequent "wave" of infections and the availability of a vaccine, treatment or testing, and tracking and tracing capabilities. During this time of uncertainty, we remain committed to servicing our customers. The economic pressures and uncertainties arising from the COVID-19 pandemic have resulted in and may continue to result in specific changes in consumer and business spending and borrowing and saving habits, affecting the demand for loans and other products and services we offer. For example, certain industries may take longer to recover (particularly those that rely on travel or in-person foot traffic) as consumers may be hesitant to travel or return to full social interaction. We lend to customers operating in such industries including tourism, hotels/lodging, restaurants, entertainment and commercial real estate, among others. We will continue to closely monitor the impact that COVID-19 and the recession inHawaii has on our customers and will adjust the means by which we assist our customers during this period of financial hardship. We are working with our customers impacted by COVID-19 by offering payment deferrals and forbearance on certain loan products. The shut-down ofHawaii's tourism industry, stay-at-home measures, the recession inHawaii and record low interest rates 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 has also been, and we expect that it will continue to 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, partially driven by certain measures we have taken to assist customers during the COVID-19 pandemic. 44 Table of Contents
In light of volatility in the capital markets and economic disruptions, we continue to carefully monitor our capital and liquidity positions. As ofMarch 31, 2021 , the Company was "well-capitalized" and met all applicable regulatory capital requirements, including a Common Equity Tier 1 capital ratio of 12.82%, 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 Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"). Selected Financial Data Our financial highlights for the periods indicated are presented in Table 1: Financial Highlights Table 1 For the Three Months Ended March 31, (dollars in thousands, except per share data) 2021 2020 Income Statement Data: Interest income$ 134,576 $ 158,532 Interest expense 5,418 19,849 Net interest income 129,158 138,683 Provision for credit losses - 41,200 Net interest income after provision for credit losses 129,158 97,483 Noninterest income 43,868 49,228 Noninterest expense 96,306 96,466
Income before provision for income taxes 76,720
50,245 Provision for income taxes 19,027 11,380 Net income$ 57,693 $ 38,865 Basic earnings per share $ 0.44$ 0.30 Diluted earnings per share $ 0.44$ 0.30 Basic weighted-average outstanding shares 129,933,104
129,895,706
Diluted weighted-average outstanding shares 130,589,878
130,351,585
Dividends declared per share $ 0.26 $
0.26
Dividend payout ratio 59.09 % 86.67 % Supplemental Income Statement Data (non-GAAP)(1): Core net interest income$ 129,158 $ 138,683 Core noninterest income 43,868 49,143 Core noninterest expense 96,306 96,466 Core net income 57,693 38,803
Core basic earnings per share 0.44
0.30
Core diluted earnings per share 0.44
0.30
Other Financial Information / Performance
Ratios(2):
Net interest margin 2.55 % 3.12 %
Core net interest margin (non-GAAP)(1),(3) 2.55 % 3.12 %
Efficiency ratio 55.53 % 51.33 %
Core efficiency ratio (non-GAAP)(1),(4) 55.53 % 51.35 %
Return on average total assets 1.02 % 0.77 %
Core return on average total assets
(non-GAAP)(1),(5) 1.02 % 0.77 %
Return on average tangible assets (non-GAAP)(11) 1.07 % 0.81 %
Core return on average tangible assets
(non-GAAP)(1),(6) 1.07 % 0.81 %
Return on average total stockholders' equity 8.58 % 5.87 %
Core return on average total stockholders' equity
(non-GAAP)(1),(7) 8.58 % 5.87 %
Return on average tangible stockholders' equity
(non-GAAP)(11) 13.51 % 9.39 %
Core return on average tangible stockholders'
equity (non-GAAP)(1),(8) 13.51 % 9.37 %
Noninterest expense to average assets 1.70 % 1.91 %
Core noninterest expense to average assets
(non-GAAP)(1),(9) 1.70 % 1.91 %
(continued)
45
Table of Contents
(continued) March 31, December 31,(dollars in thousands, except per share data) 2021
2020 Balance Sheet Data: Cash and cash equivalents$ 1,262,810 $ 1,040,944 Investment securities 6,692,479 6,071,415 Loans and leases 13,300,289 13,279,097
Allowance for credit losses for loans and leases 200,366
208,454
Goodwill 995,492 995,492
Total assets 23,497,596 22,662,831
Total deposits 20,133,681 19,227,723
Long-term borrowings 200,010 200,010
Total liabilities 20,813,966 19,918,727Total stockholders' equity 2,683,630
2,744,104
Book value per share$ 20.68 $
21.12
Tangible book value per share (non-GAAP)(11)$ 13.01 $
13.46
Asset Quality Ratios: Non-accrual loans and leases / total loans and leases 0.07 %
0.07 % Allowance for credit losses for loans and leases / total loans and leases
1.51 % 1.57 %
Net charge-offs / average total loans and leases(10) 0.14 %
0.23 %
March 31, December 31,
Capital Ratios: 2021 2020Common Equity Tier 1 Capital Ratio 12.82 %
12.47 %
Tier 1 Capital Ratio 12.82 % 12.47 %
Total Capital Ratio 14.07 % 13.73 %
Tier 1 Leverage Ratio 7.90 % 8.00 %Total stockholders' equity to total assets 11.42 % 12.11 % Tangible stockholders' equity to tangible assets (non-GAAP)(11) 7.50 %
8.07 %
(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.
46
Table of Contents
The following table provides a reconciliation of net interest income, noninterest income, noninterest expense and net income to their "core" non-GAAP financial measures:
GAAP to Non-GAAP Reconciliation
Table 2
For the Three Months Ended
March 31,
(dollars in thousands, except per share data) 2021 2020
Net interest income $ 129,158 $ 138,683
Core net interest income (non-GAAP)$ 129,158 $ 138,683 Noninterest income$ 43,868 $ 49,228 Gains on sale of securities - (85) Core noninterest income (non-GAAP)$ 43,868 $
49,143
Noninterest expense$ 96,306 $
96,466
Core noninterest expense (non-GAAP)$ 96,306 $ 96,466 Net income$ 57,693 $ 38,865 Gains on sale of securities - (85) Tax adjustments(a) - 23 Total core adjustments - (62) Core net income (non-GAAP)$ 57,693 $ 38,803 Basic earnings per share $ 0.44 $ 0.30 Diluted earnings per share $ 0.44 $ 0.30 Efficiency ratio 55.53 % 51.33 % Core basic earnings per share (non-GAAP) $ 0.44 $ 0.30 Core diluted earnings per share (non-GAAP) $ 0.44 $ 0.30 Core efficiency ratio (non-GAAP) 55.53 %
51.35 %
(a) 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 months ended March 31, 2021 and 2020.
(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.
47
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 is annualized for the three
months ended March 31, 2021 .
(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 asthe 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
March 31 ,(dollars in thousands, except per share data) 2021
2020
Income Statement Data:
Noninterest expense $ 96,306 $ 96,466
Core noninterest expense $ 96,306 $ 96,466
Net income $ 57,693 $ 38,865
Core net income $ 57,693 $ 38,803 Average total stockholders' equity$ 2,727,701 $ 2,660,811 Less: average goodwill 995,492
995,492
Average tangible stockholders' equity$ 1,732,209
$ 1,665,319 Average total assets$ 22,944,699 $ 20,313,304 Less: average goodwill 995,492 995,492 Average tangible assets$ 21,949,207 $ 19,317,812
Return on average total stockholders' equity(a) 8.58 % 5.87 % Core return on average total stockholders' equity (non-GAAP)(a) 8.58 % 5.87 % Return on average tangible stockholders' equity (non-GAAP)(a) 13.51 %
9.39 % Core return on average tangible stockholders' equity (non-GAAP)(a)
13.51 % 9.37 %
Return on average total assets(a) 1.02 % 0.77 % Core return on average total assets (non-GAAP)(a) 1.02 % 0.77 % Return on average tangible assets (non-GAAP)(a) 1.07 % 0.81 % Core return on average tangible assets (non-GAAP)(a) 1.07 %
0.81 %
Noninterest expense to average assets(a) 1.70 % 1.91 % Core noninterest expense to average assets (non-GAAP)(a) 1.70 %
1.91 %
(continued)
48
Table of Contents
As of As of
(continued) March 31, December 31,
(dollars in thousands, except share amount and per share
data) 2021 2020
Balance Sheet Data:
Total stockholders' equity $ 2,683,630 $ 2,744,104
Less: goodwill 995,492 995,492Tangible stockholders' equity$ 1,688,138
$ 1,748,612 Total assets$ 23,497,596 $ 22,662,831 Less: goodwill 995,492 995,492 Tangible assets$ 22,502,104 $ 21,667,339 Shares outstanding 129,749,890 129,912,272
Total stockholders' equity to total assets 11.42 % 12.11 % Tangible stockholders' equity to tangible assets (non-GAAP) 7.50 % 8.07 % Book value per share$ 20.68 $ 21.12
Tangible book value per share (non-GAAP)$ 13.01
(a) Annualized for the three months ended
Financial Highlights
Net income was$57.7 million for the three months endedMarch 31, 2021 , an increase of$18.8 million or 48% as compared to the same period in 2020. Basic and diluted earnings per share were$0.44 per share for the three months endedMarch 31, 2021 , an increase of$0.14 per share or 47% as compared to the same period in 2020. The increase in net income was primarily due to a$41.2 million decrease in the provision for credit losses (the "Provision") and a$0.2 million decrease in noninterest expense, partially offset by a$9.5 million decrease in net interest income, a$7.6 million increase in the provision for income taxes and a$5.4 million decrease in noninterest income for the three months endedMarch 31, 2021 . Our return on average total assets was 1.02% for the three months endedMarch 31, 2021 , an increase of 25 basis points from the same period in 2020, and our return on average total stockholders' equity was 8.58% for the three months endedMarch 31, 2021 , an increase of 271 basis points from the same period in 2020. Our return on average tangible assets was 1.07% for the three months endedMarch 31, 2021 , an increase of 26 basis points from the same period in 2020, and our return on average tangible stockholders' equity was 13.51% for the three months endedMarch 31, 2021 , up from 9.39% for the same period in 2020. Our efficiency ratio was 55.53% for the three months endedMarch 31, 2021 compared to 51.33% for the same period in 2020.
Our results for the three months ended
Net interest income was
in 2020. Our net interest margin was 2.55% for the three months ended
?
2020. The decrease in net interest income was primarily due to lower yields in
most loan categories and in our investment securities portfolio, partially
offset by lower deposit funding costs and an increase in the average balances
of our investment securities portfolio.
The Provision was nil for the three months ended
three months ended
a result of COVID-19 and its impact on
businesses and our customers. In comparison, recording nil for the Provision
? for the three months ended
expected credit losses in the commercial real estate portfolio. The Provision
is recorded to maintain the allowance for credit losses for loans and leases
(the "ACL") and reserve for unfunded commitments at levels deemed adequate to
absorb lifetime expected credit losses in our loan and lease portfolio and
off-balance sheet credit exposures as of the balance sheet date.
Noninterest income was
a decrease of
? decrease was primarily due to a
deposit accounts, a
million decrease in trust and investment services income, a$0.4 million decrease in credit and debit card fees and a$0.1 million decrease in 49 Table of Contents
the gains from the sale of available-for-sale investment securities, partially
offset by a
million increase in bank-owned life insurance ("BOLI") income.
Noninterest expense was $96.3 million for the three months ended
2020. The decrease in noninterest expense was primarily due to a
decrease in card rewards program expense, a
? and employee benefits expense, a
marketing expense and a
offset by a
increase in contracted services and professional fees, a
in equipment expense and a
fees.
Hawaii's economy continues to be significantly impacted by COVID-19 and the responses to it. 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 self-quarantine for visitors resulted in an unprecedented increase inHawaii unemployment. While we may continue to see a gradual improvement in unemployment as local businesses and theHawaii tourism industry continues to reopen in 2021 and the COVID-19 vaccine becomes more widely administered, the timing and extent of the return of air travel and the recovery of theHawaii tourism industry is highly uncertain and beyond our control. We continued to maintain high levels of liquidity and remained well-capitalized as ofMarch 31, 2021 .
Total loans and leases were
? increase in PPP loans, partially offset by decreases in our Shared National
Credits, dealer flooring portfolios, indirect automobile loans and other unsecured consumer loans.
The ACL was
4% from
? aforementioned lower expected credit losses in the commercial real estate
portfolio. The ratio of our ACL to total loans and leases outstanding was 1.51%
as ofMarch 31, 2021 , a decrease of six basis points compared toDecember 31, 2020 . 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
The increase was primarily due to purchases in this portfolio as we invested
excess liquidity into securities.
Total deposits were
million or 5% from
? primarily due to a
million increase in money market deposit balances and a
in savings deposit balances, partially offset by a
time deposit balances.
Total stockholders' equity was
? equity was primarily due to a net unrealized loss in the fair value of our
investment securities net of tax of
to the Company's stockholders of
million, partially offset by earnings for the period of$57.7 million . 50 Table of Contents
Analysis of Results of Operations
Net Interest Income For the three months endedMarch 31, 2021 and 2020, 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
March 31, 2021 March 31, 2020
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 $ 938.7 $ 0.2 0.10 % $ 516.8 $ 1.6 1.25 %
Available-for-Sale Investment Securities
Taxable 5,949.9 22.1 1.49 4,033.2 21.2 2.10
Non-Taxable 278.0 1.3 1.80 - - -
Total Available-for-Sale Investment Securities 6,227.9 23.4 1.50 4,033.2 21.2 2.10
Loans Held for Sale 9.2 0.1 2.46 15.8 0.1 1.70
Loans and Leases (1)
Commercial and industrial 3,026.7 20.4 2.74 2,776.2 24.6 3.56
Commercial real estate 3,385.2 24.9 2.98 3,433.2 34.6 4.05
Construction 746.8 5.8 3.16 538.5 5.7 4.27
Residential:
Residential mortgage 3,696.1 34.7 3.76 3,721.2 37.7 4.05
Home equity line 822.0 5.7 2.80 887.4 7.7 3.50
Consumer 1,323.7 17.7 5.43 1,611.7 23.0 5.75
Lease financing 241.8 1.8 3.02 223.2 1.6 2.85
Total Loans and Leases 13,242.3 111.0 3.39 13,191.4 134.9 4.11
Other Earning Assets 58.0 0.3 1.79 57.0 0.7 5.30
Total Earning Assets (2) 20,476.1 135.0 2.66 17,814.2 158.5 3.57
Cash and Due from Banks 294.0 327.4
Other Assets 2,174.6 2,171.7
Total Assets $ 22,944.7 $ 20,313.3
Interest-Bearing Liabilities
Interest-Bearing Deposits
Savings $ 5,975.1 $ 0.6 0.04 % $ 5,090.4 $ 3.3 0.26 %
Money Market 3,530.0 0.4 0.05 3,064.8 4.6 0.61
Time 2,288.5 3.0 0.53 2,534.7 7.7 1.23Total Interest-Bearing Deposits 11,793.6 4.0
0.14 10,689.9 15.6 0.59 Short-Term Borrowings - - - 401.7 2.8 2.88 Long-Term Borrowings 200.0 1.4 2.76 200.0 1.4 2.77
Total Interest-Bearing Liabilities 11,993.6 5.4
0.18 11,291.6 19.8 0.71 Net Interest Income$ 129.6 $ 138.7 Interest Rate Spread 2.48 % 2.86 % Net Interest Margin 2.55 % 3.12 %
Noninterest-Bearing Demand Deposits 7,709.5
5,853.4
Other Liabilities 513.9 507.5
Stockholders' Equity 2,727.7 2,660.8Total Liabilities and Stockholders' Equity$ 22,944.7
(1) Non-performing loans and leases are included in the respective average loan
and lease balances. Income, if any, on such loans and leases is recognized on
a cash basis.
(2) Interest income includes taxable-equivalent basis adjustments of
and nil for the three months ended March 31, 2021 and 2020, respectively.
51
Table of Contents
Analysis of Change in Net Interest Income
Table 5
Three Months Ended March 31, 2021
Compared to March 31, 2020
(dollars in millions) Volume Rate Total (1)
Change in Interest Income:Interest-Bearing Deposits in Other Banks$ 0.7 $ (2.1) $ (1.4) Available-for-Sale Investment Securities Taxable 8.2 (7.3) 0.9 Non-Taxable 1.3 - 1.3Total Available-for-Sale Investment Securities 9.5
(7.3) 2.2
Loans and Leases
Commercial and industrial 2.0 (6.2) (4.2)
Commercial real estate (0.5) (9.2) (9.7)
Construction 1.8 (1.7) 0.1
Residential:
Residential mortgage (0.3) (2.7) (3.0)
Home equity line (0.5) (1.5) (2.0)
Consumer (4.0) (1.3) (5.3)
Lease financing 0.1 0.1 0.2
Total Loans and Leases (1.4) (22.5) (23.9)
Other Earning Assets 0.1 (0.5) (0.4)Total Change in Interest Income 8.9
(32.4) (23.5)
Change in Interest Expense:
Interest-Bearing Deposits
Savings 0.5 (3.2) (2.7)
Money Market 0.6 (4.8) (4.2)
Time (0.7) (4.0) (4.7)Total Interest-Bearing Deposits 0.4 (12.0) (11.6) Short-term Borrowings (1.4) (1.4) (2.8) Total Change in Interest Expense (1.0)
(13.4) (14.4)
Change in Net Interest Income $ 9.9 $ (19.0) $ (9.1) (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 $129.6 million for
the three months ended March 31, 2021 , a decrease of $9.1 million or 7% compared
to the same period in 2020. Our net interest margin was 2.55% for the three
months ended March 31, 2021 , a decrease of 57 basis points from the same period
in 2020. 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, partially offset by lower deposit
funding costs and higher average balances in our investment securities portfolio
during the three months ended March 31, 2021 . Yields on our loans and leases
were 3.39% for the three months ended March 31, 2021 , a decrease of 72 basis
points as compared to the same period in 2020. 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. For the three months ended March 31, 2021 , the
average balance of our investment securities portfolio increased $2.2 billion or
54% to $6.2 billion . The yield in our investment securities portfolio was 1.50%
for the three months ended March 31, 2021 , a decrease of 60 basis points from
the same period in 2020. Deposit funding costs were $4.0 million for the three
months ended March 31, 2021 , a decrease of $11.6 million or 74% compared to the
same period in 2020. Rates paid on our interest-bearing deposits were 14 basis
points for the three months ended March 31, 2021 , a decrease of 45 basis points
compared to the same period in 2020.
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 2020 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 first quarter of 2021. As noted above, our loan portfolio is also impacted
by changes in the LIBOR. At March 31, 2021 , the one-month and three-month U.S.
dollar LIBOR interest rates were 0.11% and 0.19%, respectively, while at
March 31, 2020 , the one-month and three-month U.S. dollar LIBOR interest rates
were 0.14% and 0.24%, respectively. The target range for the federal funds rate,
which is the cost of immediately available overnight funds, began 2020 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
52
Table of Contents
at 0.00% to 0.25%, where it remained as at the end of the first quarter of 2021. InMarch 2021 , theFederal Reserve indicated that it expects to maintain the targeted federal funds rate at current levels through 2022. The decrease in the target range for the federal funds rate in 2020 was largely an emergency measure by theFederal Reserve aimed at mitigating the economic impact of COVID-19.
Provision for Credit Losses
The Provision was nil for the three months endedMarch 31, 2021 , which represented a decrease of$41.2 million compared to the same period in 2020. The decrease in the Provision was primarily due to an adjustment during the three months endedMarch 31, 2020 , which stemmed from higher expected credit losses as a result of COVID-19 and its impact onHawaii's economy, key industries, businesses and our customers. In comparison, recording nil for the Provision for the three months endedMarch 31, 2021 stemmed from a decrease in the expected credit losses in the commercial real estate portfolio. We recorded net charge-offs of loans and leases of$4.6 million and$6.1 million for the three months endedMarch 31, 2021 and 2020, respectively. This represented charge-offs of 0.14% and 0.19% of average loans and leases, on an annualized basis, for the three months endedMarch 31, 2021 and 2020, respectively. The ACL was$200.4 million as ofMarch 31, 2021 , a decrease of$8.1 million or 4% fromDecember 31, 2020 and represented 1.51% of total outstanding loans and leases as ofMarch 31, 2021 compared to 1.57% of total outstanding loans and leases as ofDecember 31, 2020 . The reserve for unfunded commitments was$34.1 million as ofMarch 31, 2021 , compared to$30.6 million as ofDecember 31, 2020 . The Provision is recorded to maintain the ACL and the reserve for unfunded commitments 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 MD&A. Noninterest Income
Table 6 presents the major components of noninterest income for the three months
ended
Noninterest Income Table 6
Three Months Ended
March 31, Dollar Percent
(dollars in thousands) 2021 2020 Change Change
Service charges on deposit accounts
(25) % Credit and debit card fees 14,551 14,949 (398)
(3)
Other service charges and fees 8,846 8,539 307
4
Trust and investment services income 8,492 9,591 (1,099)
(11)
Bank-owned life insurance 2,389 2,260 129
6
Investment securities gains, net - 85 (85)
n/m
Other 2,872 4,854 (1,982) (41)
Total noninterest income $ 43,868 $ 49,228 $ (5,360) (11) %
n/m - Denotes a variance that is not a meaningful metric to inform the change in
noninterest income for the three months ended March 31, 2021 to the same period
in 2020.
Total noninterest income was
Service charges on deposit accounts were$6.7 million for the three months endedMarch 31, 2021 , a decrease of$2.2 million or 25% as compared to the same period in 2020. This decrease was primarily due to a$1.4 million decrease in overdraft and checking account fees, a$0.4 million decrease in account analysis service charges and a$0.3 million decrease in checking account service fees.
Credit and debit card fees were
Other service charges and fees were
Trust and investment services income was$8.5 million for the three months endedMarch 31, 2021 , a decrease of$1.1 million or 11% as compared to the same period in 2020. This decrease was due to a$0.7 million decrease in business cash management fees, a$0.2 million decrease in tax services fees and a$0.2 million decrease in trust service fees. 53 Table of Contents
BOLI income was
Net gains on the sale of investment securities were nil for the three months endedMarch 31, 2021 , a decrease of$0.1 million as compared to the same period in 2020. Other noninterest income was$2.9 million for the three months endedMarch 31, 2021 , a decrease of$2.0 million or 41% as compared to the same period in 2020. This decrease was primarily due to a$1.4 million decrease in customer-related interest rate swap fees and a$1.1 million decrease in market value adjustments on mutual funds purchased, partially offset by a$0.7 million increase in volume-based incentives. Noninterest Expense
Table 7 presents the major components of noninterest expense for the three
months ended
Noninterest Expense Table 7
Three Months Ended
March 31, Dollar Percentage
(dollars in thousands) 2021 2020 Change ChangeSalaries and employee benefits$ 43,936 $ 44,829 $ (893) (2) % Contracted services and professional fees 17,188 16,055
1,133 7
Occupancy 7,170 7,243 (73) (1)
Equipment 5,491 4,708 783 17Regulatory assessment and fees 2,034 1,946
88 5
Advertising and marketing 1,591 1,823 (232) (13)
Card rewards program 4,835 7,015 (2,180) (31)
Other 14,061 12,847 1,214 9
Total noninterest expense $ 96,306 $ 96,466 $ (160) - %
Total noninterest expense was
Salaries and employee benefits expense was$43.9 million for the three months endedMarch 31, 2021 , a decrease of$0.9 million or 2% as compared to the same period in 2020. This was primarily due to a$4.3 million increase in payroll and benefit costs being deferred as loan origination costs and a$0.4 million decrease in incentive compensation. This was partially offset by a$1.4 million increase in other compensation, a$1.0 million increase in base salaries and related payroll taxes, a$0.7 million increase in temporary help expenses and a$0.4 million increase in retirement plan expenses. Contracted services and professional fees were$17.2 million for the three months endedMarch 31, 2021 , an increase of$1.1 million or 7% as compared to the same period in 2020. This increase was primarily due to a$1.0 million increase in outside services, primarily attributable to marketing and new customer services, and a$0.3 million increase in contracted data processing expenses, primarily related to system upgrades and product enhancements.
Occupancy expense was
Equipment expense was$5.5 million for the three months endedMarch 31, 2021 , an increase of$0.8 million or 17% as compared to the same period in 2020. This increase was primarily due to a$0.6 million increase in technology-related license and maintenance fees and a$0.3 million increase in furniture and equipment depreciation expense.
Regulatory assessment and fees were
Advertising and marketing expense was$1.6 million for the three months endedMarch 31, 2021 , a decrease of$0.2 million or 13% as compared to the same period in 2020. 54 Table of Contents Card rewards program expense was$4.8 million for the three months endedMarch 31, 2021 , a decrease of$2.2 million or 31% as compared to the same period in 2020. This decrease was primarily due to a$1.8 million decrease in priority rewards card redemptions and a$0.3 million decrease in credit card cash reward redemptions, as a result of decreased activity due to COVID-19 and its impact on our customers. Other noninterest expense was$14.1 million for the three months endedMarch 31, 2021 , an increase of$1.2 million or 9% as compared to the same period in 2020. This increase was primarily due to a$1.1 million increase in software depreciation, partially offset by a$0.3 million decrease in pension-related expenses. Provision for Income Taxes
The provision for income taxes was$19.0 million (an effective tax rate of 24.80%) for the three months endedMarch 31, 2021 , compared with the provision for income taxes of$11.4 million (an effective tax rate of 22.65%) for the same period in 2020. The increase in the effective tax rate was primarily from the recognition of a tax benefit for the period endedMarch 31, 2020 , due to a state tax settlement withBNP Paribas USA, Inc. related to periods during which the Company was included in the state combined returns ofBNP Paribas USA, Inc. A similar tax benefit was not recognized during the three months ended March
31, 2021. Analysis of Business Segments Our business segments are Retail Banking, Commercial Banking andTreasury and Other. Table 8 summarizes net income from our business segments for the three months endedMarch 31, 2021 and 2020. Additional information about operating segment performance is presented in "Note 17. Reportable Operating Segments" contained in our unaudited interim consolidated financial statements. Business Segment Net Income Table 8 Three Months Ended March 31, (dollars in thousands) 2021 2020 Retail Banking$ 46,637 $ 27,027 Commercial Banking 21,362 7,276 Treasury and Other (10,306) 4,562 Total$ 57,693 $ 38,865 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$46.6 million for the three months endedMarch 31, 2021 , an increase of$19.6 million or 73% as compared to the same period in 2020. The increase in net income for the Retail Banking segment was primarily due to a$21.5 million decrease in the Provision and a$11.0 million increase in net interest income, partially offset by a$8.0 million increase in the provision for income taxes, a$2.8 million decrease in noninterest income and a$2.2 million increase in noninterest expense. The decrease in the Provision was primarily due to the adjustment during the three months endedMarch 31, 2020 stemming from higher expected credit losses as a result of COVID-19 and the expected impact that it would have on our customers. The increase in net interest income was primarily due to an increase in loan fees and lower transfer pricing charges as a result of lower average yields in our loan portfolio. The increase in the provision for income taxes was primarily due to the increase in pretax income. The decrease in noninterest income was primarily due to decreases in overdraft and checking account fees and trust and investment services income. The increase in noninterest expense was primarily due to higher overall expenses that were allocated to the Retail Banking segment, partially offset by a decrease in salaries and benefits expense. Commercial Banking. Our Commercial Banking segment includes our corporate banking, commercial real estate loans, commercial lease financing, automobile loans and auto dealer financing, business deposit products and credit cards that we provide primarily to middle market and large companies inHawaii ,Guam ,
Saipan andCalifornia . 55 Table of Contents Net income for the Commercial Banking segment was$21.4 million for the three months endedMarch 31, 2021 , an increase of$14.1 million as compared to the same period in 2020. The increase in net income for the Commercial Banking segment was primarily due to a$22.8 million decrease in the Provision, partially offset by a$4.3 million increase in the provision for income taxes, a$2.6 million decrease in net interest income and a$1.8 million decrease in noninterest income. The decrease in the Provision was primarily due to the adjustment related to COVID-19 in 2020 and the expected impact that it would have on our customers. The increase in the provision for income taxes was primarily due to the increase in pretax income. The decrease in net interest income was primarily due to a decrease in credit card loan income. The decrease in noninterest income was primarily due to a decrease in customer-related interest rate swap fees.Treasury and Other. OurTreasury and Other segment includes our treasury business, which consists of corporate asset and liability management activities, including interest rate risk management. The assets and liabilities (and related interest income and expense) of our treasury business consist of interest-bearing deposits, investment securities, federal funds sold and purchased, government deposits, short- and long-term borrowings and bank-owned properties. Our primary sources of noninterest income are from bank-owned life insurance, net gains from the sale of investment securities, foreign exchange income related to customer driven currency requests from merchants and island visitors and management of bank-owned properties inHawaii andGuam . The net residual effect of the transfer pricing of assets and liabilities is included inTreasury and Other, along with the elimination of intercompany transactions. Other organizational units (Technology, Operations, Credit and Risk Management, Human Resources, Finance, Administration, Marketing andCorporate and Regulatory Administration ) provide a wide range of support to our other income earning segments. Expenses incurred by these support units are charged to the applicable business segments through an internal cost allocation process. Net loss for theTreasury and Other segment was$10.3 million for the three months endedMarch 31, 2021 , an increase in loss of$14.9 million as compared to the same period in 2020. The increase in the net loss was primarily due to a$17.9 million increase in net interest expense and a$3.1 million increase in the Provision, partially offset by a$4.7 million increase in the benefit for income taxes and a$2.4 million decrease in noninterest expense. The increase in net interest expense was primarily due to lower earnings credits as a result of lower average yields in our loan portfolio, partially offset by a decrease in transfer pricing charges as a result of lower yields on our deposit portfolio. The increase in the Provision was primarily due to the increase in the reserve for unfunded commitments. The increase in the benefit for income taxes was primarily due to the increase in pretax loss. The decrease in noninterest expense was primarily due to lower overall expenses that were allocated to theTreasury and Other segment, partially offset by increases in salaries and employee benefits expense, software depreciation, contracted services and professional fees, equipment expense, supplies and pension-related expenses.
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.
56
Table of Contents
Immediate liquid resources are available in cash, which is primarily on deposit
with the Federal Reserve Bank of San Francisco (the "FRB"). As of March 31, 2021
and December 31, 2020 , cash and cash equivalents were $1.3 billion and $1.0
billion , respectively. Potential sources of liquidity also include investment
securities in our available-for-sale portfolio. The carrying value of our
available-for-sale investment securities were $6.7 billion and $6.1 billion as
of March 31, 2021 and December 31, 2020 , respectively. As of March 31, 2021 and
December 31, 2020 , we maintained our excess liquidity primarily in
collateralized mortgage obligations issued by Ginnie Mae , Fannie Mae and Freddie
Mac. As of March 31, 2021 , our available-for-sale investment securities
portfolio was comprised of securities with a weighted average life of
approximately 5.4 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 March 31, 2021 , we have borrowing
capacity of $2.0 billion from the FHLB and $1.2 billion 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 $19.0 billion
and $17.9 billion as of March 31, 2021 and December 31, 2020 , which represented
94% and 93%, respectively, of our total deposits. These core deposits are
normally less volatile, often with customer relationships tied to other products
offered by the Company, however, deposit levels could decrease if interest rates
increase significantly or if corporate customers increase investing activities
and reduce deposit balances.
The Company's routine funding requirements are expected to consist primarily of
general corporate needs and capital to be returned to our shareholders. We
expect to meet these obligations from dividends paid by the Bank to the Parent.
Additional sources of liquidity available to us include selling residential real
estate loans in the secondary market, taking out short- and long-term borrowings
and issuing long-term debt and equity securities. At the start of the pandemic,
we increased our liquidity position through additional public time deposits in
anticipation of a surge in funding needs due to our participation in the PPP and
other additional liquidity needs. While our public time deposits have since
decreased from the fourth quarter of 2020, we have continued to maintain strong
levels of liquidity as of March 31, 2021 .
Investment Securities Table 9 presents the estimated fair value of our available-for-sale investment
securities portfolio as of
Investment Securities Table 9
March 31, December 31,
(dollars in thousands) 2021 2020U.S. Treasury and government agency debt securities$ 175,724 $ 171,421 Mortgage-backed securities: Residential - Government agency 133,894
160,462
Residential - Government-sponsored enterprises 800,920
447,200
Commercial - Government agency 527,516
599,650
Commercial - Government-sponsored enterprises 1,134,175
932,157
Collateralized mortgage obligations: Government agency 1,845,098
1,933,553
Government-sponsored enterprises 2,075,152
1,826,972
Total available-for-sale securities$ 6,692,479 $ 6,071,415 57 Table of Contents
Table 10 presents the maturity distribution at amortized cost and
weighted-average yield to maturity of our available-for-sale investment
securities portfolio as of
Maturities and Weighted-Average Yield on Securities(1) Table 10
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 March 31, 2021
Available-for-sale
securities
U.S. Treasury and
government agency debt
securities $ - - % $ 41.5 0.84 % $ 84.0 1.03 % $ 52.2 1.66 % $ 177.7 1.17 % $ 175.7
Mortgage-backed
securities(2):
Residential - Government
agency - - 129.9 2.34 - - - - 129.9 2.34 133.9
Residential -
Government-sponsored
enterprises - - 288.1 2.36 509.3 1.28 - - 797.4 1.68 800.9
Commercial - Government
agency - - 444.6 2.11 78.7 1.76 - - 523.3 2.06 527.5
Commercial -
Government-sponsored
enterprises - - 68.3 1.96 632.9 1.48 478.8 1.67 1,180.0 1.58 1,134.2
Collateralized mortgage
obligations(2):
Government agency 35.0 1.87 1,407.4 1.71 375.8 1.18 - - 1,818.2 1.60 1,845.1
Government-sponsored
enterprises 49.7 2.07 1,102.7 1.29 929.5 1.37 - - 2,081.9 1.34 2,075.2
Total available-for-sale
securities as of
March 31, 2021 $ 84.7 1.99 % $ 3,482.5 1.70 % $ 2,610.2 1.35 % $ 531.0 1.67 % $ 6,708.4 1.57 % $ 6,692.5 (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
$6.7 billion as of March 31, 2021 , an increase of $621.1 million or 10% compared
to December 31, 2020 . 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 ofMarch 31, 2021 , 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$3.9 billion invested in collateralized mortgage obligations issued byGinnie Mae , Fannie Mae and Freddie Mac. Our available-for-sale portfolio also included$2.6 billion in mortgage-backed securities issued byGinnie Mae , Freddie Mac, Fannie Mae andMunicipal Housing Authorities and$175.7 million in debt securities issued by theU.S Treasury and government agencies (US International Development Finance Corporation bonds). We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability and the level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities and change the composition of our investment securities portfolio. Gross unrealized gains in our investment securities portfolio were$70.5 million and$97.1 million as ofMarch 31, 2021 andDecember 31, 2020 , respectively. Gross unrealized losses in our investment securities portfolio were$86.4 million and$10.7 million as ofMarch 31, 2021 andDecember 31, 2020 , respectively. The increase in unrealized loss in our investment securities portfolio was primarily due to higher market interest rates as ofMarch 31, 2021 , relative toDecember 31, 2020 , resulting in a lower valuation. The increase in unrealized loss positions was primarily related to our commercial mortgage-backed securities, mortgage-backed securities and collateralized mortgage obligations, the fair values of which are sensitive to changes in market interest rates. 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 is 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 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 months endedMarch 31, 2021 , we did not record any credit losses related to our investment securities portfolio.
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 bothMarch 31, 2021 andDecember 31, 2020 , we held FHLB stock of$18.1 million , which is recorded as a component of other assets in our unaudited interim consolidated balance sheets. 58 Table of Contents
See "Note 2.
Loans and Leases
Table 11 presents the composition of our loan and lease portfolio by major
categories as of
Loans and Leases Table 11
March 31, December 31,
(dollars in thousands) 2021 2020Commercial and industrial: Commercial and industrial excluding Paycheck Protection $ Program loans
1,962,672 $ 2,218,266
Paycheck Protection Program loans 1,158,764 801,241
Total commercial and industrial 3,121,436
3,019,507
Commercial real estate 3,396,233 3,392,676
Construction 739,271 735,819
Residential:
Residential mortgage 3,715,676 3,690,218
Home equity line 805,746 841,624
Total residential 4,521,422 4,531,842
Consumer 1,283,779 1,353,842
Lease financing 238,148 245,411
Total loans and leases $ 13,300,289 $ 13,279,097 Total loans and leases were$13.3 billion as ofMarch 31, 2021 , an increase of$21.2 million or less than 1% fromDecember 31, 2020 with increases in commercial and industrial loans, commercial real estate loans and construction loans. The increase in total loans and leases was primarily due to our participation in the PPP which had a total amortized cost basis of$1.2 billion as ofMarch 31, 2021 . It is possible that the effects of COVID-19 on the economy could result in less demand for our loan products. Commercial and industrial loans are made primarily to corporations, middle market and small businesses for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes. We also offer a variety of automobile dealer flooring lines to our customers inHawaii andCalifornia to assist with the financing of their inventory. Commercial and industrial loans were$3.1 billion as ofMarch 31, 2021 , an increase of$101.9 million or 3% fromDecember 31, 2020 . This increase was primarily due to an increase in PPP loans totaling$357.5 million , partially offset by decreases in our Shared National Credits and dealer flooring portfolios during the three months endedMarch 31, 2021 . 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 and owner occupied property is cash flow from the property and operating cash flow from the business, respectively. Commercial real estate loans were$3.4 billion as ofMarch 31, 2021 , an increase of$3.6 million or less than 1% fromDecember 31, 2020 . 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$739.3 million as ofMarch 31, 2021 , an increase of$3.5 million or less than 1% fromDecember 31, 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 59
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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$4.5 billion as ofMarch 31, 2021 , a decrease of$10.4 million or less than 1% fromDecember 31, 2020 . This decrease was primarily due to a decrease in home equity lines of$35.9 million , partially offset by an increase in residential mortgages of$25.5 million during the three months endedMarch 31, 2021 . 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$1.3 billion as ofMarch 31, 2021 , a decrease of$70.1 million or 5% fromDecember 31, 2020 . The decrease in consumer loans was primarily due to decreases in indirect automobile loans and other unsecured consumer 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$238.1 million as ofMarch 31, 2021 , a decrease of$7.3 million or 3% fromDecember 31, 2020 . The decrease in lease financing was reflective of a weak demand for new business equipment and vehicles in theHawaii market. 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. 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 12 presents the recorded investment in our loan and lease portfolio as ofMarch 31, 2021 by rate type: Loans and Leases by Rate Type Table 12 March 31, 2021 Adjustable Rate Hybrid Fixed
(dollars in thousands) Prime LIBOR
Total Rate Rate Total Commercial and industrial
$ 196,587 $ 1,381,487 $ -$ 1,544
3,008,678 125,698 261,857 3,396,233
Construction 66,708 536,528 28 28,096631,360 3,474 104,437 739,271 Residential: Residential mortgage 17,519 164,936 81,025 57,898
321,378 337,039 3,057,259 3,715,676
Home equity line 346,174 - 6,872 - 353,046 452,670 30 805,746
Total residential 363,693 164,936 87,897 57,898 674,424 789,709 3,057,289 4,521,422
Consumer 283,895 14,083 1,208 105 299,291 76 984,412 1,283,779
Lease financing - - - - - - 238,148 238,148
Total loans and leases
% by rate type at
March 31, 2021 9 % 30 % 1 % 7 % 47 % 7 % 46 % 100 %
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Tables 13 and 14 present the geographic distribution of our loan and lease
portfolio as of
Geographic Distribution of Loan and Lease Portfolio
Table 13
March 31, 2021
U.S. Guam & Foreign &(dollars in thousands) Hawaii Mainland(1) Saipan Other Total Commercial and industrial$ 1,984,919 $ 905,124 $ 219,130 $ 12,263 $ 3,121,436 Commercial real estate 2,179,458 816,665 399,909 201 3,396,233 Construction 367,376 365,721 6,174 - 739,271 Residential: Residential mortgage 3,594,254 1,449 119,973 - 3,715,676 Home equity line 777,435 - 28,311 - 805,746 Total residential 4,371,689 1,449 148,284 - 4,521,422 Consumer 949,335 17,031 315,869 1,544 1,283,779 Lease financing 77,833 143,363 16,952 - 238,148 Total Loans and Leases$ 9,930,610 $
2,249,353
74% 17% 8% 1% 100%
(1) For secured loans and leases, classification as
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.
Geographic Distribution of Loan and Lease Portfolio Table 14
U.S. Guam & Foreign &
(dollars in thousands) Hawaii Mainland(1) Saipan Other Total
Commercial and industrial $ 1,755,804 $ 1,042,318 $ 193,829 $ 27,556 $ 3,019,507
Commercial real estate 2,180,829 809,493 402,142 212 3,392,676
Construction 333,112 398,218 4,489 - 735,819
Residential:
Residential mortgage 3,568,827 1,662 119,729 - 3,690,218
Home equity line 811,964 - 29,660 - 841,624
Total residential 4,380,791 1,662 149,389 - 4,531,842
Consumer 1,001,868 18,993 331,255 1,726 1,353,842
Lease financing 80,670 149,934 14,807 - 245,411
Total Loans and Leases $ 9,733,074 $
2,420,618
73% 18% 8% 1% 100%
(1) For secured loans and leases, classification as
on where the collateral is located. For unsecured loans and leases,
classification 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.
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Table 15 presents certain contractual loan maturity categories and the
sensitivities of those loans to changes in interest rates as of
Maturities for Selected Loan Categories(1) Table 15
March 31, 2021
Due in One Due After One Due After
(dollars in thousands) Year or Less to Five Years Five Years Total
Commercial and industrial $ 833,986 $ 2,058,821 $ 228,629 $ 3,121,436
Construction 173,543 445,067 120,661 739,271
Total Selected Loans $ 1,007,529 $ 2,503,888 $ 349,290 $ 3,860,707
Total of loans with:
Adjustable interest rates $ 897,901 $ 1,058,949 $ 254,128 $ 2,210,978
Hybrid interest rates 131 29,390 9,000 38,521
Fixed interest rates 109,497 1,415,549 86,162 1,611,208
Total Selected Loans $ 1,007,529 $
2,503,888
(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. 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.
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Non-Performing Assets and Loans and Leases Past Due 90 Days or More and Still Accruing Interest
Table 16 presents information on our non-performing assets and accruing loans
and leases past due 90 days or more as of
Non-Performing Assets and Accruing Loans and Leases Past
Due 90 Days or More Table 16
March 31, December 31,
(dollars in thousands) 2021 2020
Non-Performing Assets
Non-Accrual Loans and Leases
Commercial Loans:
Commercial and industrial $ 593 $ 518
Commercial real estate 937 80
Construction 579 2,043
Total Commercial Loans 2,109 2,641
Residential Loans:
Residential mortgage 6,999 6,441
Total Residential Loans 6,999 6,441Total Non-Accrual Loans and Leases 9,108
9,082
Other Real Estate Owned ("OREO") - -
Total Non-Performing Assets $ 9,108 $ 9,082
Accruing Loans and Leases Past Due 90 Days or More Commercial Loans: Commercial and industrial$ 1,365 $ 2,108 Commercial real estate 1,054 882 Construction 89 93 Total Commercial Loans 2,508 3,083 Residential Loans: Home equity line 4,975 4,818 Total Residential Loans 4,975 4,818 Consumer 2,024 3,266
Total Accruing Loans and Leases Past Due 90 Days or More
Restructured Loans on Accrual Status and Not Past Due 90 Days or More$ 39,831 $ 16,684 Total Loans and Leases$ 13,300,289 $ 13,279,097 Ratio of Non-Accrual Loans and Leases to Total Loans and Leases 0.07 %
0.07 % Ratio of Non-Performing Assets to Total Loans and Leases and OREO
0.07 % 0.07 % Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More to Total Loans and Leases and OREO
0.14 % 0.15 %
Table 17 presents the activity in Non-Performing Assets ("NPAs") for the three
months ended March 31, 2021 :
Non-Performing Assets Table 17
(dollars in thousands) Three Months Ended March 31, 2021
Balance at beginning of period $ 9,082
Additions 2,577
Reductions
Payments (367)
Return to accrual status (226)
Transfers to loans held for sale (1,840)
Charge-offs/write-downs (118)
Total Reductions (2,551)
Balance at end of period $ 9,108
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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 held for sale classification, 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 $9.1 million as of both March 31, 2021 and December 31, 2020 .
The ratio of our NPAs to total loans and leases and other real estate owned was
0.07% as of both March 31, 2021 and December 31, 2020 . During the three months
ended March 31, 2021 , construction non-accruals loans decreased by $1.5 million ,
offset by increases in commercial real estate non-accrual loans of $0.9 million ,
residential mortgage non-accrual loans of $0.6 million and commercial and
industrial non-accrual loans of $0.1 million .
As of
As of
As of
The largest component of our NPAs continues to be residential mortgage loans. The level of these NPAs can remain elevated due to a lengthy judicial foreclosure process inHawaii . As ofMarch 31, 2021 , residential mortgage non-accrual loans were$7.0 million , an increase of$0.6 million or 9% fromDecember 31, 2020 . This increase was primarily due to additions of residential mortgage non-accrual loans totaling$1.1 million , partially offset by payments of$0.2 million , returns to accrual status of$0.2 million and charge-offs of$0.1 million . As ofMarch 31, 2021 , our residential mortgage non-accrual loans were comprised of 37 loans with a weighted average current LTV ratio of 50%.
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 both
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$9.5 million as ofMarch 31, 2021 , a decrease of$1.7 million or 15% as compared toDecember 31, 2020 . Consumer loans and commercial and industrial loans that were past due 90 days or more and still accruing interest decreased by$1.2 million and$0.7 million , respectively, during the three months endedMarch 31, 2021 . This was partially offset by increases of$0.2 million in commercial real estate loans and$0.1 million in home equity lines that were past due 90 days or more and still accruing interest during the three months endedMarch 31, 2021 . 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. 64 Table of Contents Impaired loans were$49.2 million and$25.8 million as ofMarch 31, 2021 andDecember 31, 2020 , respectively. These impaired loans had a related ACL of$16.9 million and$2.4 million as ofMarch 31, 2021 andDecember 31, 2020 , respectively. The increase in impaired loans during the three months endedMarch 31, 2021 was due to increases in consumer loans of$15.8 million , residential mortgage loans of$4.9 million , commercial and industrial loans of$2.1 million and commercial real estate loans of$1.4 million , partially offset by a decrease in construction loans of$0.7 million . The change in the impaired loans balance includes charge-offs and paydowns. For the three months endedMarch 31, 2021 and 2020, we recorded charge-offs of$0.4 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 ofMarch 31, 2021 and 2020 had been accrued under the original terms, approximately$0.1 million in additional interest income would have been recorded during both the three months endedMarch 31, 2021 and 2020, respectively. Actual interest income recorded on these loans was$0.1 million for the three months endedMarch 31, 2021 , compared to nil for the same period in 2020.
COVID-19 Financial Hardship Relief Programs
Certain borrowers have been 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 were available on a case-by-case basis, including payment deferrals for up to six months. For certain consumer loans, loan assistance was being offered in the form of payment deferrals for up to three months, which extended the term of the loan by the number of months deferred, and interest continued 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. 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 18 presents information on our loans and leases that received payment
deferrals under our COVID-19 financial hardship relief programs as of
Loans and Leases that Received Payment Deferrals under COVID-19 Financial Hardship Relief Programs
Table 18
March 31, 2021
Number of Loans Amortized
(dollars in thousands) and Leases Cost Basis
Loans and Leases that Received Payment Deferrals under
COVID-19 Financial Hardship Relief Programs
Commercial and industrial 958 $ 654,178
Commercial real estate 414 1,136,547
Construction 29 54,436
Lease financing 57 10,788
Residential mortgage 1,433 592,613
Consumer 19,965 228,961 Total Loans and Leases that Received Payment Deferrals under COVID-19 Financial Hardship Relief Programs
22,856 $ 2,677,523
Total Loans and Leases Ratio of Loans and Leases that Received Payment Deferrals under COVID-19 Financial Hardship Relief Programs to Total Loans and Leases
20.1 %
In addition to the relief programs described above, we are also participating in
the PPP offered by the 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 payroll expenses, including employee benefits, and can
also be used for various other eligible expenses. 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 until the date the SBA remits the borrower's loan forgiveness amount
to the Bank, or if the borrower does not apply for loan forgiveness, 10 months
after the end of the borrower's loan forgiveness covered period. 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, and other eligible expenses incurred,
subject to limitations, in accordance with the PPP and CARES Act, as amended by
the PPPF Act and CAA. 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 eligible expenses, 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.
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Table 19 presents information on our PPP loans outstanding as ofMarch 31, 2021 to borrowers operating in industries we consider to be the most impacted by the COVID-19 pandemic ("high impact industries") and all other industries: PPP Loans Outstanding to Borrowers by Industry
Table 19
March 31, 2021
Number Amortized
(dollars in thousands) of Loans Cost Basis
PPP Loans Outstanding to Borrowers by Industry
High Impact Industries :
Food service 1,052 $ 200,519
Automobile dealers 76 62,667
Retail 810 72,049
Hospitality/Hotel 174 81,303
Transportation 247 43,105
Total PPP Loans Outstanding to Borrowers Operating in
2,359 459,643
All other industries (1) 6,665
699,121
Total PPP Loans Outstanding (2) 9,024 $
1,158,764
Total Loans and Leases $
13,300,289
Ratio of PPP Loans Outstanding to Borrowers Operating in
3.5 %
Ratio of PPP Loans Outstanding to Total Loans and Leases 8.7 %
(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, professional services,
and administrative and support services industries.
(2) Outstanding loan balances are reported net of deferred loan costs and fees of
$2.4 million and$25.4 million , respectively, atMarch 31, 2021 .
Loans Modified in a Troubled Debt Restructuring
Table 20 presents information on loans whose terms have been modified in a TDR
as of
Loans Modified in a Troubled Debt Restructuring Table 20
March 31, December 31,
(dollars in thousands) 2021 2020
Commercial and industrial $ 4,583 $ 2,298
Commercial real estate 7,635 7,126
Construction 716 -
Total commercial 12,934 9,424
Residential mortgage 11,929 7,553
Total residential 11,929 7,553
Consumer 15,763 -
Total $ 40,626 $ 16,977 Loans modified in a TDR were
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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 and "Analysis of Financial Condition - COVID-19 Financial Hardship Relief Programs" for more information and a description of the modification programs that we currently offer to our customers.
As noted above, we have been providing 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 changed 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 $16.3 million . The Company's ACL under CECL is significantly more
dependent on the quantitative model and less on the qualitative assessment,
compared to the previous incurred loss model. The increase in the ACL was
primarily related to our indirect auto, commercial real estate and consumer loan
products. This was partially offset by the decrease in the ACL related to our
commercial and industrial, home equity lines and residential real estate loan
products. These directional changes were predominantly due to differences
between the loss emergence periods previously used under the incurred loss
methodology and the remaining life of the loan as required under CECL. The large
increase to our reserve for unfunded commitments was primarily due to an
increase in utilization rates estimated using our CECL methodology.
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Table 21 presents an analysis of our ACL for the periods indicated:
Allowance for Credit Losses Table 21
Three Months Ended March 31,
(dollars in thousands) 2021 2020Balance at Beginning of Period$ 208,454 $ 130,530 Adjustment to Adopt ASC Topic 326 - 770 After Adoption of ASC Topic 326 208,454
131,300
Loans and Leases Charged-Off
Commercial Loans:
Commercial and industrial (963) (201)
Commercial real estate (66) -
Total Commercial Loans (1,029) (201)
Residential Loans:
Residential mortgage (98) -
Home equity line - (8)
Total Residential Loans (98) (8)
Consumer (6,541) (8,597)Total Loans and Leases Charged-Off (7,668)
(8,806)
Recoveries on Loans and Leases Previously Charged-Off Commercial Loans: Commercial and industrial 215 220 Commercial real estate 3 - Construction 166 110 Total Commercial Loans 384 330 Residential Loans: Residential mortgage 17 135 Home equity line 24 122 Total Residential Loans 41 257 Consumer 2,655 2,083 Total Recoveries on Loans and Leases Previously Charged-Off 3,080
2,670
Net Loans and Leases Charged-Off (4,588)
(6,136)
Provision for Credit Losses - Loans and Leases (3,500)
40,849
Balance at End of Period$ 200,366 $ 166,013 Average Loans and Leases Outstanding$ 13,242,270
0.14 % 0.19 % Ratio of Allowance for Credit Losses for Loans and Leases to Loans and Leases Outstanding
1.51 % 1.24 %
(1) Annualized for the three months ended
Tables 22 and 23 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 ofMarch 31, 2021 andDecember 31, 2020 : Allocation of the Allowance for Credit Losses by Loan and Lease Category Table 22 March 31, December 31, (dollars in thousands) 2021 2020 Commercial and industrial$ 27,322 $ 24,711 Commercial real estate 51,691 58,123 Construction 10,552 10,039 Lease financing 3,197 3,298 Total commercial 92,762 96,171 Residential mortgage 38,471 40,461 Home equity line 6,668 7,163 Total residential 45,139 47,624 Consumer 62,465 64,659
Total Allowance for Credit Losses for Loans and Leases
$ 208,454 68 Table of Contents
Allocation of the Allowance for Credit Losses by Loan and Lease Category (as a percentage of total loans and leases outstanding)
Table 23
March 31, December 31,
2021 2020
Allocated Loan Allocated Loan
ACL as category as ACL as category as
% of loan or % of total % of loan or % of total
lease loans and lease loans and
category leases category leases
Commercial and industrial 0.88 % 23.47 % 0.82 % 22.74 % Commercial real estate 1.52 25.54 1.71 25.55 Construction 1.43 5.56 1.36 5.54 Lease financing 1.34 1.79 1.34 1.85 Total commercial 1.24 56.36 1.30 55.68 Residential mortgage 1.04 27.93 1.10 27.78 Home equity line 0.83 6.06 0.85 6.34 Total residential 1.00 33.99 1.05 34.12 Consumer 4.87 9.65 4.78 10.20 Total 1.51 % 100.00 % 1.57 % 100.00 % As ofMarch 31, 2021 , the ACL was$200.4 million or 1.51% of total loans and leases outstanding, compared with an ACL of$208.5 million or 1.57% of total loans and leases outstanding as ofDecember 31, 2020 . The level of the ACL was commensurate with the adverse impacts that COVID-19 is having on theHawaii
and global economy. Net charge-offs of loans and leases were$4.6 million or 0.14% of total average loans and leases, on an annualized basis, for the three months endedMarch 31, 2021 , compared to net charge-offs of$6.1 million or 0.19% of total average loans and leases, on an annualized basis, for the three months endedMarch 31, 2020 . Net charge-offs in our commercial lending portfolio were$0.6 million for the three months endedMarch 31, 2021 . Net recoveries in our commercial lending portfolio were$0.1 million for the three months endedMarch 31, 2020 . Net charge-offs in our residential lending portfolio were$0.1 million for the three months endedMarch 31, 2021 . Net recoveries in our residential lending portfolio were$0.2 million for the three months endedMarch 31, 2020 . Net charge-offs in our consumer lending portfolio were$3.9 million and$6.5 million for the three months endedMarch 31, 2021 and 2020, 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. The decrease in the ACL during the first quarter of 2021 was primarily due to lower expected credit losses in the commercial real estate portfolio. However, we retained a COVID-19 related overlay as a component of the ACL asHawaii's economy continues to be significantly impacted by COVID-19. 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 while their businesses have closed. We continue to closely monitor the impact of COVID-19 on our tourism industry and the re-opening of theHawaii economy under new guidelines. While we have begun to see and may continue to see a gradual improvement in unemployment as local businesses and theHawaii tourism industry continues to reopen in 2021 and the COVID-19 vaccine becomes more widely administered, the timing and extent of the return of air travel and the recovery of theHawaii tourism industry is highly uncertain and beyond our control. As ofMarch 31, 2021 , while the allocation of our ACL to our commercial, residential and consumer portfolio segments was slightly lower as compared toDecember 31, 2020 , the ACL was considered adequate based on our ongoing analysis of estimated expected credit losses, credit risk profiles, current economic outlook, coverage ratios and other relevant factors. We will continue to monitor factors that drive expected credit losses including COVID-19 and the impact on theHawaii economy, local businesses and our customers. See "Note 4. Allowance for Credit Losses" contained in our unaudited interim consolidated financial statements for more information on the ACL.Goodwill Goodwill was$995.5 million as of bothMarch 31, 2021 andDecember 31, 2020 . Our goodwill originated from the acquisition of the Company byBNP Paribas 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. The Company's policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment is the condition that exists when the carrying amount of a reporting unit exceeds its fair value. There was no impairment in our goodwill for the three months endedMarch 31, 2021 . Future events, including the ongoing impacts of 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. 69 Table of Contents Other Assets
Other assets were$567.9 million as ofMarch 31, 2021 , a decrease of$35.6 million or 6% fromDecember 31, 2020 . This decrease was primarily due to a$49.7 million decrease in interest rate swap agreements, partially offset by a$13.7 million increase in current tax receivables and deferred tax assets. Deposits
Deposits are the primary funding source for the Bank and are acquired from a broad base of local markets, including both individual and corporate customers. We obtain funds from depositors by offering a range of deposit types, including demand, savings, money market and time. Table 24 presents the composition of our deposits as ofMarch 31, 2021 andDecember 31, 2020 : Deposits Table 24 March 31, December 31, (dollars in thousands) 2021 2020 Demand$ 8,175,075 $ 7,522,114 Savings 6,141,161 6,020,075 Money Market 3,642,604 3,337,236 Time 2,174,841 2,348,298 Total Deposits(1)$ 20,133,681 $ 19,227,723
(1) Public deposits were
million or 16% compared to December 31, 2020 .
Total deposits were $20.1 billion as of March 31, 2021 , an increase of $906.0
million or 5% from December 31, 2020 . The increase in deposit balances stemmed
primarily from a $634.7 million increase in non-public demand deposit balances,
a $348.4 million increase in non-public savings deposit balances and a $305.4
million increase in non-public money market deposit balances, partially offset
by a $227.3 million decrease in public savings deposit balances. We increased
our liquidity position in anticipation of a surge in funding needs, primarily
due to our participation in the PPP.
Long-term Borrowings
Long-term borrowings were $200.0 million as of both March 31, 2021 and
December 31, 2020 . 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 both March 31, 2021 and December 31, 2020 , the available remaining
borrowing capacity with the FHLB was $2.0 billion . The FHLB fixed-rate advances
and remaining borrowing capacity were secured by residential real estate loan
collateral as of March 31, 2021 and December 31, 2020 .
Pension and Postretirement Plan Obligations
We have a noncontributory qualified defined benefit pension plan, an unfunded supplemental executive retirement plan, a directors' retirement plan (a non-qualified pension plan for eligible directors) and a postretirement benefit plan providing life insurance and healthcare benefits that we offer to our directors and employees, as applicable. The noncontributory qualified defined benefit pension plan, the unfunded supplemental executive retirement plan and the directors' retirement plan are all frozen to new participants. OnMarch 11, 2019 , the Company's board of directors approved an amendment to the SERP to freeze the SERP. As a result of such amendment, effectiveJuly 1, 2019 , there are no new accruals of benefits, including service accruals. To calculate annual pension costs, we use the following key variables: (1) size of the employee population, length of service and estimated compensation increases; (2) actuarial assumptions and estimates; (3) expected long-term rate of return on plan assets; and (4) discount rate. Pension and postretirement benefit plan obligations, net of pension plan assets, were$127.6 million as ofMarch 31, 2021 , a nominal increase fromDecember 31, 2020 . This increase was primarily due to net periodic benefit costs for the three months endedMarch 31, 2021 of$2.6 million , offset by payments of$2.1 million . 70 Table of Contents
See "Note 15. 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 bothMarch 31, 2021 andDecember 31, 2020 , there were no aggregate cross-border outstandings in other countries which amounted to 0.75% to 1% of our total consolidated assets. Additionally, there were no cross-border outstandings in excess of 1% of our total consolidated assets as of bothMarch 31, 2021 andDecember 31, 2020 . 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.
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 ofMarch 31, 2021 , 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 25 below. There have been no conditions or events sinceMarch 31, 2021 that management believes have changed either the Company's or the Bank's capital classifications. 71 Table of Contents Regulatory Capital Table 25 March 31, December 31, (dollars in thousands) 2021 2020 Stockholders' Equity$ 2,683,630 $ 2,744,104 Less: Goodwill 995,492 995,492
Accumulated other comprehensive (loss) income, net (43,435)
31,604
Common Equity Tier 1 Capital and Tier 1 Capital$ 1,731,573 $ 1,717,008 Add: Qualifying allowance for credit losses and reserve for unfunded commitments 169,681 172,950 Total Capital$ 1,901,254 $ 1,889,958 Risk-Weighted Assets$ 13,509,716 $ 13,769,885 Key Regulatory Capital Ratios
Common Equity Tier 1 Capital Ratio 12.82 %
12.47 %
Tier 1 Capital Ratio 12.82 % 12.47 %
Total Capital Ratio 14.07 % 13.73 %
Tier 1 Leverage Ratio 7.90 % 8.00 %
Total stockholders' equity was $2.7 billion as of March 31, 2021 , a decrease of
$60.5 million or 2% from December 31, 2020 . The decrease in stockholders' equity
was primarily due to a net unrealized loss in the fair value of our investment
securities of $75.0 million , dividends declared and paid to the Company's
stockholders of $33.8 million and share repurchases of $9.5 million , partially
offset by earnings for the period of $57.7 million during the three monthsendedMarch 31, 2021 . InFebruary 2021 , the Company announced a stock repurchase program for up to$75.0 million of its outstanding common stock during 2021. The timing and amount of stock repurchases, if any, are influenced by various internal and external factors. InApril 2021 , 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 onJune 4, 2021 to shareholders of record at the close of business onMay 24, 2021 .
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 March
31, 2021 and December 31, 2020 , the unpaid principal balance of our portfolio of
residential mortgage loans sold was $2.0 billion and $2.2 billion , respectively.
The agreements under which we sell residential mortgage loans 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
72
Table of Contents
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 three months endedMarch 31, 2021 , there were two residential mortgage loan repurchases totaling$0.6 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 three months endedMarch 31, 2021 , we had no repurchase requests related to loan servicing activities, nor were there any pending repurchase requests as ofMarch 31, 2021 . 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 ofMarch 31, 2021 , 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 ofMarch 31, 2021 , 97% of our residential mortgage loans serviced for investors were current. We maintain ongoing communications with investors and continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in loans sold to investors. Contractual Obligations
Our contractual obligations have not changed materially since previously
reported as of
Future Application of Accounting Pronouncements
For a discussion of the expected impact of accounting pronouncements recently issued but not adopted by us as ofMarch 31, 2021 , see "Note 1. Organization and Basis of Presentation - Recent Accounting Pronouncements" to the unaudited interim consolidated financial statements for more information.
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