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BANK OF HAWAII CORP - Quarter Report: 2021 September (Form 10-Q)

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark One)

 

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2021

or

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition

period from              to

Commission File Number: 1-6887

 

BANK OF HAWAII CORP

(Exact name of registrant as specified in its charter)

 

Delaware

 

99-0148992

(State of incorporation)

 

(I.R.S. Employer Identification No.)

 

130 Merchant Street

 

Honolulu

 

Hawaii

 

96813

(Address of principal executive offices)

 

(City)

 

(State)

 

(Zip Code)

 

1-888-643-3888

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Trading Symbol

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

 

BOH

 

New York Stock Exchange

 

Depository Shares, Each Representing 1/40th Interest in a Share of 4.375% Fixed Rate Non-Cumulative Preferred Stock, Series A

 

BOH.PRA

 

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

Accelerated filer

 

Non-accelerated filer

 

 

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes   No 

As of October 20, 2021, there were 40,245,113 shares of common stock outstanding.

 

 


Table of Contents

 

 

Bank of Hawaii Corporation

Form 10-Q

Index

 

 

 

Page

 

 

 

Part I - Financial Information

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Statements of Income –
Three and nine months ended September 30, 2021, and September 30, 2020

2

 

 

 

 

Consolidated Statements of Comprehensive Income –
Three and nine months ended September 30, 2021, and September 30, 2020

3

 

 

 

 

Consolidated Statements of Condition –
September 30, 2021, and December 31, 2020

4

 

 

 

 

Consolidated Statements of Shareholders’ Equity –
Nine months ended September 30, 2021, and September 30, 2020

5

 

 

 

 

Consolidated Statements of Cash Flows –
Nine months ended September 30, 2021, and September 30, 2020

6

 

 

 

 

Notes to Consolidated Financial Statements

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

41

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

69

 

 

 

Item 4.

Controls and Procedures

69

 

 

 

Part II - Other Information

 

 

 

 

Item 1A.

Risk Factors

70

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

72

 

 

 

Item 6.

Exhibits

73

 

 

 

Signatures

 

74

 

 

1


Table of Contents

 

 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Income (Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(dollars in thousands, except per share amounts)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and Fees on Loans and Leases

 

$

100,570

 

 

$

103,189

 

 

$

300,763

 

 

$

319,027

 

Income on Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale

 

 

16,396

 

 

 

14,558

 

 

 

48,700

 

 

 

45,845

 

Held-to-Maturity

 

 

16,754

 

 

 

15,967

 

 

 

43,630

 

 

 

51,942

 

Deposits

 

 

2

 

 

 

3

 

 

 

9

 

 

 

13

 

Funds Sold

 

 

382

 

 

 

149

 

 

 

779

 

 

 

787

 

Other

 

 

159

 

 

 

151

 

 

 

526

 

 

 

494

 

Total Interest Income

 

 

134,263

 

 

 

134,017

 

 

 

394,407

 

 

 

418,108

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

3,837

 

 

 

5,891

 

 

 

12,318

 

 

 

28,105

 

Securities Sold Under Agreements to Repurchase

 

 

3,423

 

 

 

3,622

 

 

 

10,426

 

 

 

11,667

 

Funds Purchased

 

 

 

 

 

 

 

 

1

 

 

 

90

 

Short-Term Borrowings

 

 

 

 

 

1

 

 

 

 

 

 

62

 

Other Debt

 

 

184

 

 

 

337

 

 

 

760

 

 

 

1,361

 

Total Interest Expense

 

 

7,444

 

 

 

9,851

 

 

 

23,505

 

 

 

41,285

 

Net Interest Income

 

 

126,819

 

 

 

124,166

 

 

 

370,902

 

 

 

376,823

 

Provision for Credit Losses

 

 

(10,400

)

 

 

28,600

 

 

 

(40,800

)

 

 

102,600

 

Net Interest Income After Provision for Credit Losses

 

 

137,219

 

 

 

95,566

 

 

 

411,702

 

 

 

274,223

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trust and Asset Management

 

 

11,415

 

 

 

10,752

 

 

 

34,375

 

 

 

32,217

 

Mortgage Banking

 

 

3,136

 

 

 

4,047

 

 

 

12,056

 

 

 

11,020

 

Service Charges on Deposit Accounts

 

 

6,510

 

 

 

6,027

 

 

 

18,703

 

 

 

18,575

 

Fees, Exchange, and Other Service Charges

 

 

13,604

 

 

 

12,296

 

 

 

41,018

 

 

 

34,913

 

Investment Securities Gains (Losses), Net

 

 

(1,259

)

 

 

(1,121

)

 

 

(39

)

 

 

11,125

 

Annuity and Insurance

 

 

735

 

 

 

881

 

 

 

2,348

 

 

 

2,692

 

Bank-Owned Life Insurance

 

 

1,897

 

 

 

1,806

 

 

 

5,877

 

 

 

5,035

 

Other

 

 

5,340

 

 

 

7,046

 

 

 

14,441

 

 

 

23,574

 

Total Noninterest Income

 

 

41,378

 

 

 

41,734

 

 

 

128,779

 

 

 

139,151

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and Benefits

 

 

56,447

 

 

 

51,951

 

 

 

168,859

 

 

 

157,129

 

Net Occupancy

 

 

3,079

 

 

 

7,281

 

 

 

17,216

 

 

 

24,997

 

Net Equipment

 

 

8,924

 

 

 

9,223

 

 

 

26,598

 

 

 

25,874

 

Data Processing

 

 

4,722

 

 

 

4,691

 

 

 

15,601

 

 

 

13,895

 

Professional Fees

 

 

2,948

 

 

 

2,743

 

 

 

9,468

 

 

 

9,012

 

FDIC Insurance

 

 

1,594

 

 

 

1,282

 

 

 

4,917

 

 

 

4,296

 

Other

 

 

18,805

 

 

 

12,778

 

 

 

49,252

 

 

 

39,950

 

Total Noninterest Expense

 

 

96,519

 

 

 

89,949

 

 

 

291,911

 

 

 

275,153

 

Income Before Provision for Income Taxes

 

 

82,078

 

 

 

47,351

 

 

 

248,570

 

 

 

138,221

 

Provision for Income Taxes

 

 

20,025

 

 

 

9,511

 

 

 

59,035

 

 

 

26,731

 

Net Income

 

$

62,053

 

 

$

37,840

 

 

$

189,535

 

 

$

111,490

 

Preferred Stock Dividends

 

 

1,006

 

 

 

 

 

 

1,006

 

 

 

 

Net Income Available to Common Shareholders

 

$

61,047

 

 

$

37,840

 

 

$

188,529

 

 

$

111,490

 

Basic Earnings Per Common Share

 

$

1.53

 

 

$

0.95

 

 

$

4.73

 

 

$

2.81

 

Diluted Earnings Per Common Share

 

$

1.52

 

 

$

0.95

 

 

$

4.70

 

 

$

2.80

 

Dividends Declared Per Common Share

 

$

0.70

 

 

$

0.67

 

 

$

2.04

 

 

$

2.01

 

Basic Weighted Average Common Shares

 

 

39,881,437

 

 

 

39,745,120

 

 

 

39,870,450

 

 

 

39,710,252

 

Diluted Weighted Average Common Shares

 

 

40,080,919

 

 

 

39,869,135

 

 

 

40,088,899

 

 

 

39,872,406

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).

2


Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Net Income

 

$

62,053

 

 

$

37,840

 

 

$

189,535

 

 

$

111,490

 

Other Comprehensive Income (Loss), Net of Tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Unrealized Gains (Losses) on Investment Securities

 

 

(7,541

)

 

 

(4,900

)

 

 

(57,714

)

 

 

44,389

 

Defined Benefit Plans

 

 

441

 

 

 

374

 

 

 

1,324

 

 

 

1,122

 

Total Other Comprehensive Income (Loss)

 

 

(7,100

)

 

 

(4,526

)

 

 

(56,390

)

 

 

45,511

 

Comprehensive Income

 

$

54,953

 

 

$

33,314

 

 

$

133,145

 

 

$

157,001

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).

3


Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Condition (Unaudited)

 

(dollars in thousands)

 

September 30,

2021

 

 

December 31,

2020

 

Assets

 

 

 

 

 

 

 

 

Interest-Bearing Deposits in Other Banks

 

$

2,188

 

 

$

1,646

 

Funds Sold

 

 

422,063

 

 

 

333,022

 

Investment Securities

 

 

 

 

 

 

 

 

Available-for-Sale

 

 

4,353,520

 

 

 

3,791,689

 

Held-to-Maturity (Fair Value of $4,895,763 and $3,348,693)

 

 

4,899,880

 

 

 

3,262,727

 

Loans Held for Sale

 

 

21,965

 

 

 

82,565

 

Loans and Leases

 

 

12,072,750

 

 

 

11,940,020

 

Allowance for Credit Losses

 

 

(167,920

)

 

 

(216,252

)

Net Loans and Leases

 

 

11,904,830

 

 

 

11,723,768

 

Total Earning Assets

 

 

21,604,446

 

 

 

19,195,417

 

Cash and Due From Banks

 

 

231,711

 

 

 

279,420

 

Premises and Equipment, Net

 

 

199,144

 

 

 

199,695

 

Operating Lease Right-of-Use Assets

 

 

97,007

 

 

 

99,542

 

Accrued Interest Receivable

 

 

46,751

 

 

 

49,303

 

Foreclosed Real Estate

 

 

2,332

 

 

 

2,332

 

Mortgage Servicing Rights

 

 

22,099

 

 

 

19,652

 

Goodwill

 

 

31,517

 

 

 

31,517

 

Bank-Owned Life Insurance

 

 

293,230

 

 

 

291,480

 

Other Assets

 

 

437,146

 

 

 

435,293

 

Total Assets

 

$

22,965,383

 

 

$

20,603,651

 

Liabilities

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Noninterest-Bearing Demand

 

$

7,111,693

 

 

$

5,749,612

 

Interest-Bearing Demand

 

 

4,768,725

 

 

 

4,040,733

 

Savings

 

 

7,540,345

 

 

 

6,759,213

 

Time

 

 

1,072,915

 

 

 

1,662,063

 

Total Deposits

 

 

20,493,678

 

 

 

18,211,621

 

Securities Sold Under Agreements to Repurchase

 

 

450,490

 

 

 

600,590

 

Other Debt

 

 

10,414

 

 

 

60,481

 

Operating Lease Liabilities

 

 

104,452

 

 

 

107,412

 

Retirement Benefits Payable

 

 

49,802

 

 

 

51,197

 

Accrued Interest Payable

 

 

3,415

 

 

 

5,117

 

Taxes Payable

 

 

9,815

 

 

 

2,463

 

Other Liabilities

 

 

246,208

 

 

 

190,263

 

Total Liabilities

 

 

21,368,274

 

 

 

19,229,144

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Preferred Stock ($.01 par value; authorized 180,000 shares;

   issued and outstanding: September 30, 2021 - 180,000 shares)

 

 

180,000

 

 

 

 

Common Stock ($.01 par value; authorized 500,000,000 shares;

   issued / outstanding: September 30, 2021 - 58,559,089 / 40,305,801

   and December 31, 2020 - 58,285,624 / 40,119,312)

 

 

580

 

 

 

580

 

Capital Surplus

 

 

598,341

 

 

 

591,360

 

Accumulated Other Comprehensive Income (Loss)

 

 

(48,568

)

 

 

7,822

 

Retained Earnings

 

 

1,916,861

 

 

 

1,811,979

 

Treasury Stock, at Cost (Shares; September 30, 2021 - 18,253,288

   and December 31, 2020 - 18,166,312)

 

 

(1,050,105

)

 

 

(1,037,234

)

Total Shareholders’ Equity

 

 

1,597,109

 

 

 

1,374,507

 

Total Liabilities and Shareholders’ Equity

 

$

22,965,383

 

 

$

20,603,651

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).

4


Table of Contents

 

Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Shareholders’ Equity (Unaudited)

 

(dollars in thousands)

 

Preferred

Shares

Outstanding

 

 

Preferred

Stock

 

 

Common

Shares

Outstanding

 

 

Common

Stock

 

 

Capital

Surplus

 

 

Accum. Other

Compre-

hensive

Income(Loss)

 

 

Retained

Earnings

 

 

Treasury

Stock

 

 

Total

 

Balance as of December 31, 2020

 

 

 

 

$

 

 

 

40,119,312

 

 

$

580

 

 

$

591,360

 

 

$

7,822

 

 

$

1,811,979

 

 

$

(1,037,234

)

 

$

1,374,507

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

59,949

 

 

 

 

 

 

59,949

 

Other Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(49,609

)

 

 

 

 

 

 

 

 

(49,609

)

Share-Based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,780

 

 

 

 

 

 

 

 

 

 

 

 

2,780

 

Common Stock Issued under Purchase and

   Equity Compensation Plans

 

 

 

 

 

 

 

 

310,905

 

 

 

 

 

 

664

 

 

 

 

 

 

(845

)

 

 

2,990

 

 

 

2,809

 

Common Stock Repurchased

 

 

 

 

 

 

 

 

(35,983

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,189

)

 

 

(3,189

)

Cash Dividends Declared Common Stock

   ($0.67 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,026

)

 

 

 

 

 

(27,026

)

Balance as of March 31, 2021

 

 

 

 

$

 

 

 

40,394,234

 

 

$

580

 

 

$

594,804

 

 

$

(41,787

)

 

$

1,844,057

 

 

$

(1,037,433

)

 

$

1,360,221

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

67,533

 

 

 

 

 

 

67,533

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

319

 

 

 

 

 

 

 

 

 

319

 

Share-Based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,342

 

 

 

 

 

 

 

 

 

 

 

 

3,342

 

Preferred Stock Issued, Net

 

 

180,000

 

 

 

180,000

 

 

 

 

 

 

 

 

 

(4,513

)

 

 

 

 

 

 

 

 

 

 

 

175,487

 

Common Stock Issued under Purchase and

   Equity Compensation Plans

 

 

 

 

 

 

 

 

72,421

 

 

 

 

 

 

628

 

 

 

 

 

 

(46

)

 

 

3,269

 

 

 

3,851

 

Common Stock Repurchased

 

 

 

 

 

 

 

 

(1,173

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(109

)

 

 

(109

)

Cash Dividends Declared Common Stock

   ($0.67 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(27,113

)

 

 

 

 

 

(27,113

)

Balance as of June 30, 2021

 

 

180,000

 

 

$

180,000

 

 

 

40,465,482

 

 

$

580

 

 

$

594,261

 

 

$

(41,468

)

 

$

1,884,431

 

 

$

(1,034,273

)

 

$

1,583,531

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

62,053

 

 

 

 

 

 

62,053

 

Other Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,100

)

 

 

 

 

 

 

 

 

(7,100

)

Share-Based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,536

 

 

 

 

 

 

 

 

 

 

 

 

3,536

 

Common Stock Issued under Purchase and

   Equity Compensation Plans

 

 

 

 

 

 

 

 

82,939

 

 

 

 

 

 

544

 

 

 

 

 

 

(327

)

 

 

4,282

 

 

 

4,499

 

Common Stock Repurchased

 

 

 

 

 

 

 

 

(242,620

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,114

)

 

 

(20,114

)

Cash Dividends Declared Common Stock

   ($0.70 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(28,290

)

 

 

 

 

 

(28,290

)

Cash Dividends Declared Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,006

)

 

 

 

 

 

(1,006

)

Balance as of September 30, 2021

 

 

180,000

 

 

$

180,000

 

 

 

40,305,801

 

 

$

580

 

 

$

598,341

 

 

$

(48,568

)

 

$

1,916,861

 

 

$

(1,050,105

)

 

$

1,597,109

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2019

 

 

 

 

$

 

 

 

40,039,695

 

 

$

579

 

 

$

582,566

 

 

$

(31,112

)

 

$

1,761,415

 

 

$

(1,026,616

)

 

$

1,286,832

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34,742

 

 

 

 

 

 

34,742

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41,933

 

 

 

 

 

 

 

 

 

41,933

 

Cumulative Change in Accounting Principle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,632

 

 

 

 

 

 

3,632

 

Share-Based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,497

 

 

 

 

 

 

 

 

 

 

 

 

1,497

 

Common Stock Issued under Purchase and

   Equity Compensation Plans

 

 

 

 

 

 

 

 

154,091

 

 

 

 

 

 

329

 

 

 

 

 

 

653

 

 

 

2,779

 

 

 

3,761

 

Common Stock Repurchased

 

 

 

 

 

 

 

 

(197,276

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,633

)

 

 

(17,633

)

Cash Dividends Declared Common Stock

   ($0.67 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,835

)

 

 

 

 

 

(26,835

)

Balance as of March 31, 2020

 

 

 

 

$

 

 

 

39,996,510

 

 

$

579

 

 

$

584,392

 

 

$

10,821

 

 

$

1,773,607

 

 

$

(1,041,470

)

 

$

1,327,929

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38,908

 

 

 

 

 

 

38,908

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,104

 

 

 

 

 

 

 

 

 

8,104

 

Share-Based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,207

 

 

 

 

 

 

 

 

 

 

 

 

2,207

 

Common Stock Issued under Purchase and

   Equity Compensation Plans

 

 

 

 

 

 

 

 

53,672

 

 

 

1

 

 

 

347

 

 

 

 

 

 

680

 

 

 

898

 

 

 

1,926

 

Common Stock Repurchased

 

 

 

 

 

 

 

 

(2,488

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(148

)

 

 

(148

)

Cash Dividends Declared Common Stock

   ($0.67 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,844

)

 

 

 

 

 

(26,844

)

Balance as of June 30, 2020

 

 

 

 

$

 

 

 

40,047,694

 

 

$

580

 

 

$

586,946

 

 

$

18,925

 

 

$

1,786,351

 

 

$

(1,040,720

)

 

$

1,352,082

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37,840

 

 

 

 

 

 

37,840

 

Other Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,526

)

 

 

 

 

 

 

 

 

(4,526

)

Share-Based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,643

 

 

 

 

 

 

 

 

 

 

 

 

1,643

 

Common Stock Issued under Purchase and

   Equity Compensation Plans

 

 

 

 

 

 

 

 

14,919

 

 

 

 

 

 

43

 

 

 

 

 

 

429

 

 

 

1,201

 

 

 

1,673

 

Common Stock Repurchased

 

 

 

 

 

 

 

 

(1,938

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(116

)

 

 

(116

)

Cash Dividends Declared Common Stock

   ($0.67 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,857

)

 

 

 

 

 

(26,857

)

Balance as of September 30, 2020

 

 

 

 

$

 

 

 

40,060,675

 

 

$

580

 

 

$

588,632

 

 

$

14,399

 

 

$

1,797,763

 

 

$

(1,039,635

)

 

$

1,361,739

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).

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Bank of Hawaii Corporation and Subsidiaries

Consolidated Statements of Cash Flows (Unaudited)

 

 

Nine Months Ended

 

 

 

September 30,

 

(dollars in thousands)

 

2021

 

 

2020

 

Operating Activities

 

 

 

 

 

 

 

 

Net Income

 

$

189,535

 

 

$

111,490

 

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

 

 

 

 

 

 

 

 

Provision for Credit Losses

 

 

(40,800

)

 

 

102,600

 

Depreciation and Amortization

 

 

15,751

 

 

 

14,929

 

Amortization of Deferred Loan and Lease (Fees) Costs, Net

 

 

(13,431

)

 

 

(1,640

)

Amortization and Accretion of Premiums/Discounts on Investment Securities, Net

 

 

27,147

 

 

 

19,043

 

Amortization of Operating Lease Right-of-Use Assets

 

 

8,562

 

 

 

9,192

 

Share-Based Compensation

 

 

9,658

 

 

 

5,347

 

Benefit Plan Contributions

 

 

(1,274

)

 

 

(1,071

)

Deferred Income Taxes

 

 

5,308

 

 

 

(31,725

)

Gains on Sale of Premises and Equipment

 

 

(9,893

)

 

 

(1,850

)

Net Gains on Sales of Loans and Leases

 

 

(12,639

)

 

 

(9,779

)

Net Losses (Gains) on Sales of Investment Securities

 

 

39

 

 

 

(11,125

)

Proceeds from Sales of Loans Held for Sale

 

 

412,153

 

 

 

333,770

 

Originations of Loans Held for Sale

 

 

(319,274

)

 

 

(316,203

)

Net Tax Benefits from Share-Based Compensation

 

 

1,349

 

 

 

469

 

Net Change in Other Assets and Other Liabilities

 

 

68,084

 

 

 

(135,753

)

Net Cash Provided by Operating Activities

 

 

340,275

 

 

 

87,694

 

Investing Activities

 

 

 

 

 

 

 

 

Investment Securities Available-for-Sale:

 

 

 

 

 

 

 

 

Proceeds from Sales, Prepayments and Maturities

 

 

1,138,809

 

 

 

733,619

 

Purchases

 

 

(1,789,229

)

 

 

(1,238,926

)

Investment Securities Held-to-Maturity:

 

 

 

 

 

 

 

 

Proceeds from Prepayments and Maturities

 

 

914,953

 

 

 

1,000,743

 

Purchases

 

 

(2,569,229

)

 

 

(1,170,928

)

Net Change in Loans and Leases

 

 

(149,765

)

 

 

(782,613

)

Purchases of Premises and Equipment

 

 

(14,314

)

 

 

(25,693

)

Proceeds from Sale of Premises and Equipment

 

 

9,008

 

 

 

1,981

 

Net Cash Used in Investing Activities

 

 

(2,459,767

)

 

 

(1,481,817

)

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

Net Change in Deposits

 

 

2,282,057

 

 

 

1,954,401

 

Net Change in Short-Term Borrowings

 

 

(150,100

)

 

 

(2,200

)

Proceeds from Long-Term Debt

 

 

 

 

 

50,000

 

Repayments of Long-Term Debt

 

 

(50,067

)

 

 

(75,063

)

Net Proceeds from Issuance of Preferred Stock

 

 

175,487

 

 

 

 

Proceeds from Issuance of Common Stock

 

 

10,836

 

 

 

7,684

 

Repurchase of Common Stock

 

 

(23,412

)

 

 

(17,897

)

Cash Dividends Paid on Common Stock

 

 

(82,429

)

 

 

(80,536

)

Cash Dividends Paid on Preferred Stock

 

 

(1,006

)

 

 

 

Net Cash Provided by Financing Activities

 

 

2,161,366

 

 

 

1,836,389

 

Net Change in Cash and Cash Equivalents

 

 

41,874

 

 

 

442,266

 

Cash and Cash Equivalents at Beginning of Period

 

 

614,088

 

 

 

558,658

 

Cash and Cash Equivalents at End of Period

 

$

655,962

 

 

$

1,000,924

 

Supplemental Information

 

 

 

 

 

 

 

 

Cash Paid for Interest

 

$

25,207

 

 

$

42,712

 

Cash Paid for Income Taxes

 

 

41,193

 

 

 

46,949

 

Non-Cash Investing and Financing Activities:

 

 

 

 

 

 

 

 

Transfer from Loans to Loans Held for Sale

 

 

23,888

 

 

 

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements (Unaudited).

 

6


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Bank of Hawaii Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

Note 1.  Summary of Significant Accounting Policies

Basis of Presentation

Bank of Hawaii Corporation (the “Parent”) is a Delaware corporation and a bank holding company headquartered in Honolulu, Hawaii.  Bank of Hawaii Corporation and its subsidiaries (collectively, the “Company”) provide a broad range of financial products and services to customers in Hawaii, Guam, and other Pacific Islands.  The majority of the Company’s operations consist of customary commercial and consumer banking services including, but not limited to, lending, leasing, deposit services, trust and investment activities, brokerage services, and trade financing.  The accompanying consolidated financial statements include the accounts of the Parent and its subsidiaries.  The Parent’s principal operating subsidiary is Bank of Hawaii (the “Bank”).

The consolidated financial statements in this report have not been audited by an independent registered public accounting firm, but, in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the interim periods.  All such adjustments are of a normal recurring nature.  Intercompany accounts and transactions have been eliminated in consolidation.  Certain prior period information has been reclassified to conform to the current period presentation.  Operating results for the interim periods disclosed herein are not necessarily indicative of the results that may be expected for the full fiscal year or for any future period.

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“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 and should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Preferred Stock Issuance

 

On June 15, 2021, the Company issued and sold 7,200,000 depositary shares (the “depositary shares”), each representing a 1/40th ownership interest in a share of 4.375% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share (the “Series A Preferred Stock”).  The Series A Preferred Stock has a liquidation preference of $1,000 per share.  Net proceeds, after underwriting discounts and expenses, totaled $175.5 million.  Dividends on the Series A Preferred Stock are not cumulative and will be paid when declared by the Parent’s Board of Directors to the extent that we have legally available funds to pay dividends.  If declared, dividends will accrue and be payable quarterly, in arrears, on the liquidation preference amount, on a non-cumulative basis, at a rate of 4.375% per annum.  Holders of the Series A Preferred Stock will not have voting rights, except with respect to certain changes in the terms of the preferred stock, certain dividend non-payments and as otherwise required by applicable law.  The Company may redeem the Series A Preferred Stock at its option, (i) in whole or in part, from time to time, on any dividend payment date on or after August 1, 2026 or (ii) in whole but not in part, at any time within 90 days following a regulatory capital treatment event, in either case at a redemption price equal to $1,000 per share (equivalent to $25 per depositary share), plus any declared and unpaid dividends.

 

On October 5, 2021, the Parent’s Board of Directors declared a cash dividend payment of $10.94 per share on its Series A Preferred Stock.  This dividend equals $0.2735 per depositary share.  The dividend will be payable on November 1, 2021, to shareholders of record of the Series A Preferred Stock at the close of business on October 18, 2021.

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Table of Contents

 

Accounting Standards Adopted in 2021

 

In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes.”  This ASU simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.  The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill.  Finally, it clarifies that single-member limited liability companies and similar disregarded entities that are not subject to income tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, but they could elect to do so.  ASU 2019-12 is effective for interim and annual reporting periods beginning after December 15, 2020.  ASU 2019-12 did not have a material impact on the Company’s Consolidated Financial Statements.

Note 2.  Cash and Cash Equivalents

The following table provides a reconciliation of cash and cash equivalents reported within the consolidated statements of condition that sum to the total of the same such amounts shown in the consolidated statements of cash flows:

 

(dollars in thousands)

 

September 30,

2021

 

 

December 31,

2020

 

Interest-Bearing Deposits in Other Banks

 

$

2,188

 

 

$

1,646

 

Funds Sold

 

 

422,063

 

 

 

333,022

 

Cash and Due From Banks

 

 

231,711

 

 

 

279,420

 

Total Cash and Cash Equivalents

 

$

655,962

 

 

$

614,088

 

 

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Note 3.  Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of the Company’s investment securities as of September 30, 2021, and December 31, 2020, were as follows:

 

(dollars in thousands)

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Issued by the U.S. Treasury and Government Agencies

 

$

143,409

 

 

$

1,561

 

 

$

(106

)

 

$

144,864

 

Debt Securities Issued by States and Political Subdivisions

 

 

20,231

 

 

 

839

 

 

 

(2

)

 

 

21,068

 

Debt Securities Issued by U.S. Government-Sponsored Enterprises

 

 

1,509

 

 

 

47

 

 

 

(1

)

 

 

1,555

 

Debt Securities Issued by Corporations

 

 

385,787

 

 

 

3,630

 

 

 

(1,543

)

 

 

387,874

 

Mortgage-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential - Government Agencies

 

 

1,410,231

 

 

 

15,435

 

 

 

(8,483

)

 

 

1,417,183

 

Residential - U.S. Government-Sponsored Enterprises

 

 

2,223,697

 

 

 

8,395

 

 

 

(32,040

)

 

 

2,200,052

 

Commercial - Government Agencies

 

 

177,721

 

 

 

3,877

 

 

 

(674

)

 

 

180,924

 

Total Mortgage-Backed Securities

 

 

3,811,649

 

 

 

27,707

 

 

 

(41,197

)

 

 

3,798,159

 

Total

 

$

4,362,585

 

 

$

33,784

 

 

$

(42,849

)

 

$

4,353,520

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Issued by the U.S. Treasury and Government Agencies

 

$

131,465

 

 

$

277

 

 

$

(184

)

 

$

131,558

 

Debt Securities Issued by States and Political Subdivisions

 

 

33,254

 

 

 

125

 

 

 

 

 

 

33,379

 

Debt Securities Issued by Corporations

 

 

21,133

 

 

 

140

 

 

 

(271

)

 

 

21,002

 

Mortgage-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential - Government Agencies

 

 

1,877,804

 

 

 

18,683

 

 

 

(14,525

)

 

 

1,881,962

 

Residential - U.S. Government-Sponsored Enterprises

 

 

2,371,155

 

 

 

22,683

 

 

 

(24,397

)

 

 

2,369,441

 

Commercial - Government Agencies

 

 

465,069

 

 

 

900

 

 

 

(7,548

)

 

 

458,421

 

Total Mortgage-Backed Securities

 

 

4,714,028

 

 

 

42,266

 

 

 

(46,470

)

 

 

4,709,824

 

Total

 

$

4,899,880

 

 

$

42,808

 

 

$

(46,925

)

 

$

4,895,763

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Issued by the U.S. Treasury and Government Agencies

 

$

174,409

 

 

$

427

 

 

$

(591

)

 

$

174,245

 

Debt Securities Issued by States and Political Subdivisions

 

 

23,540

 

 

 

1,301

 

 

 

(1

)

 

 

24,840

 

Debt Securities Issued by U.S. Government-Sponsored Enterprises

 

 

985

 

 

 

77

 

 

 

 

 

 

1,062

 

Debt Securities Issued by Corporations

 

 

220,717

 

 

 

4,844

 

 

 

(956

)

 

 

224,605

 

Mortgage-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential - Government Agencies

 

 

1,561,603

 

 

 

33,657

 

 

 

(445

)

 

 

1,594,815

 

Residential - U.S. Government-Sponsored Enterprises

 

 

1,497,353

 

 

 

21,254

 

 

 

(324

)

 

 

1,518,283

 

Commercial - Government Agencies

 

 

243,029

 

 

 

10,868

 

 

 

(58

)

 

 

253,839

 

Total Mortgage-Backed Securities

 

 

3,301,985

 

 

 

65,779

 

 

 

(827

)

 

 

3,366,937

 

Total

 

$

3,721,636

 

 

$

72,428

 

 

$

(2,375

)

 

$

3,791,689

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Issued by the U.S. Treasury and Government Agencies

 

$

7,500

 

 

$

8

 

 

$

(8

)

 

$

7,500

 

Debt Securities Issued by States and Political Subdivisions

 

 

33,763

 

 

 

741

 

 

 

 

 

 

34,504

 

Debt Securities Issued by Corporations

 

 

12,031

 

 

 

251

 

 

 

 

 

 

12,282

 

Mortgage-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential - Government Agencies

 

 

917,459

 

 

 

30,580

 

 

 

(29

)

 

 

948,010

 

Residential - U.S. Government-Sponsored Enterprises

 

 

2,099,053

 

 

 

51,735

 

 

 

(291

)

 

 

2,150,497

 

Commercial - Government Agencies

 

 

192,921

 

 

 

3,179

 

 

 

(200

)

 

 

195,900

 

Total Mortgage-Backed Securities

 

 

3,209,433

 

 

 

85,494

 

 

 

(520

)

 

 

3,294,407

 

Total

 

$

3,262,727

 

 

$

86,494

 

 

$

(528

)

 

$

3,348,693

 

 

The Company elected to exclude accrued interest receivable (“AIR”) from the amortized cost basis of debt securities disclosed throughout this footnote.  For available-for-sale (“AFS”) debt securities, AIR totaled $7.9 million and $6.6 million as of September 30, 2021, and December 31, 2020, respectively.  For held-to-maturity (“HTM”) debt securities, AIR totaled $9.0 million and $6.8 million as of September 30, 2021, and December 31, 2020, respectively.  AIR is included in the “accrued interest receivable” line item on the Company’s consolidated statements of condition.

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Table of Contents

 

The table below presents an analysis of the contractual maturities of the Company’s investment securities as of September 30, 2021.  Debt securities issued by government agencies (Small Business Administration securities) and mortgage-backed securities are disclosed separately in the table below as these investment securities may prepay prior to their scheduled contractual maturity dates.

 

(dollars in thousands)

 

Amortized

Cost

 

 

Fair Value

 

Available-for-Sale:

 

 

 

 

 

 

 

 

Due in One Year or Less

 

$

26,227

 

 

$

26,290

 

Due After One Year Through Five Years

 

 

111,281

 

 

 

113,889

 

Due After Five Years Through Ten Years

 

 

270,764

 

 

 

271,069

 

 

 

 

408,272

 

 

 

411,248

 

Debt Securities Issued by Government Agencies

 

 

142,664

 

 

 

144,113

 

Mortgage-Backed Securities:

 

 

 

 

 

 

 

 

Residential - Government Agencies

 

 

1,410,231

 

 

 

1,417,183

 

Residential - U.S. Government-Sponsored Enterprises

 

 

2,223,697

 

 

 

2,200,052

 

Commercial - Government Agencies

 

 

177,721

 

 

 

180,924

 

Total Mortgage-Backed Securities

 

 

3,811,649

 

 

 

3,798,159

 

Total

 

$

4,362,585

 

 

$

4,353,520

 

Held-to-Maturity:

 

 

 

 

 

 

 

 

Due in One Year or Less

 

 

33,254

 

 

 

33,379

 

Due After One Year Through Five Years

 

 

17,290

 

 

 

17,285

 

Due After Five Year Through Ten Years

 

 

123,966

 

 

 

124,204

 

Due After Ten Years

 

 

11,342

 

 

 

11,071

 

 

 

 

185,852

 

 

 

185,939

 

Mortgage-Backed Securities:

 

 

 

 

 

 

 

 

Residential - Government Agencies

 

 

1,877,804

 

 

 

1,881,962

 

Residential - U.S. Government-Sponsored Enterprises

 

 

2,371,155

 

 

 

2,369,441

 

Commercial - Government Agencies

 

 

465,069

 

 

 

458,421

 

Total Mortgage-Backed Securities

 

 

4,714,028

 

 

 

4,709,824

 

Total

 

$

4,899,880

 

 

$

4,895,763

 

 

Investment securities with carrying values of $3.5 billion and $3.6 billion as of September 30, 2021, and December 31, 2020, respectively, were pledged to secure deposits of governmental entities, securities sold under agreements to repurchase, and FRB discount window borrowing.

The table below presents the gains and losses from the sales of investment securities for the three and nine months ended September 30, 2021, and September 30, 2020:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Gross Gains on Sales of Investment Securities

 

$

110

 

 

$

 

 

$

3,785

 

 

$

14,257

 

Gross Losses on Sales of Investment Securities

 

 

(1,369

)

 

 

(1,121

)

 

 

(3,824

)

 

 

(3,132

)

Net Gains (Losses) on Sales of Investment Securities

 

$

(1,259

)

 

$

(1,121

)

 

$

(39

)

 

$

11,125

 

 

Net investment securities losses totaled $1.3 million in the third quarter of 2021 compared to $1.1 million during the same period in 2020.  The net loss in the third quarter of 2021 was primarily due to the fees paid to the counterparties of our prior Visa Class B share sale transactions.  The net losses of $39 thousand in the first nine months of 2021 was primarily due to $3.8 million of the fees paid to the counterparties of our prior Visa Class B shares and was partially offset by the net gain from the sale of mortgage-backed securities, corporate and government debt securities.  The net gain of $11.2 million in the first nine months of 2020 was primarily due to the sale of 80,214 Visa Class B shares.

  

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Table of Contents

 

 

The following table summarizes the Company’s AFS debt securities in an unrealized loss position for which an allowance for credit losses was not deemed necessary, aggregated by major security type and length of time in a continuous unrealized loss position:

 

 

 

Less Than 12 Months

 

 

12 Months or Longer

 

 

Total

 

(dollars in thousands)

 

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

Gross

Unrealized

Losses

 

 

Fair Value

 

 

Gross

Unrealized

Losses

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Issued by the U.S. Treasury

   and Government Agencies

 

$

1,772

 

 

$

(4

)

 

$

10,458

 

 

$

(102

)

 

$

12,230

 

 

$

(106

)

Debt Securities Issued by States

   and Political Subdivisions

 

 

413

 

 

 

(2

)

 

 

 

 

 

 

 

 

413

 

 

 

(2

)

Debt Securities Issued by U.S. Government-

   Sponsored Enterprises

 

 

99

 

 

 

(1

)

 

 

 

 

 

 

 

 

99

 

 

 

(1

)

Debt Securities Issued by Corporations

 

 

123,230

 

 

 

(734

)

 

 

64,190

 

 

 

(809

)

 

 

187,420

 

 

 

(1,543

)

Mortgage-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential - Government Agencies

 

 

804,605

 

 

 

(8,313

)

 

 

7,954

 

 

 

(170

)

 

 

812,559

 

 

 

(8,483

)

Residential - U.S. Government-Sponsored

   Enterprises

 

 

1,756,938

 

 

 

(30,015

)

 

 

43,773

 

 

 

(2,025

)

 

 

1,800,711

 

 

 

(32,040

)

Commercial-Government Agencies

 

 

 

 

 

 

 

 

23,688

 

 

 

(674

)

 

 

23,688

 

 

 

(674

)

Total Mortgage-Backed Securities

 

 

2,561,543

 

 

 

(38,328

)

 

 

75,415

 

 

 

(2,869

)

 

 

2,636,958

 

 

 

(41,197

)

Total

 

$

2,687,057

 

 

$

(39,069

)

 

$

150,063

 

 

$

(3,780

)

 

$

2,837,120

 

 

$

(42,849

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Issued by the U.S. Treasury

   and Government Agencies

 

$

21,338

 

 

$

(42

)

 

$

87,070

 

 

$

(549

)

 

$

108,408

 

 

$

(591

)

Debt Securities Issued by States

   and Political Subdivisions

 

 

 

 

 

 

 

 

26

 

 

 

(1

)

 

 

26

 

 

 

(1

)

Debt Securities Issued by Corporations

 

 

65,000

 

 

 

(853

)

 

 

50,000

 

 

 

(103

)

 

 

115,000

 

 

 

(956

)

Mortgage-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential - Government Agencies

 

 

113,538

 

 

 

(222

)

 

 

28,063

 

 

 

(223

)

 

 

141,601

 

 

 

(445

)

Residential - U.S. Government-Sponsored Enterprises

 

 

94,002

 

 

 

(324

)

 

 

 

 

 

 

 

 

94,002

 

 

 

(324

)

Commercial - Government Agencies

 

 

25,075

 

 

 

(58

)

 

 

 

 

 

 

 

 

25,075

 

 

 

(58

)

Total Mortgage-Backed Securities

 

 

232,615

 

 

 

(604

)

 

 

28,063

 

 

 

(223

)

 

 

260,678

 

 

 

(827

)

Total

 

$

318,953

 

 

$

(1,499

)

 

$

165,159

 

 

$

(876

)

 

$

484,112

 

 

$

(2,375

)

1  The fair value and gross unrealized losses as of December 31, 2020, have been updated to properly reflect the length of time they were in a continuous unrealized loss position.

 

The Company does not believe that the AFS debt securities that were in an unrealized loss position as of September 30, 2021, which were comprised of 213 individual securities, represent a credit loss impairment.  The gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased.  As of September 30, 2021, and December 31, 2020, the gross unrealized losses reported for mortgage-backed securities were mostly related to investment securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac.  The Company does not intend to sell the investment securities that were in an unrealized loss position and it is not more likely than not that the Company will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity.

 

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Table of Contents

 

 

Substantially all of the Company’s HTM debt securities are issued by U.S. government agencies or U.S. government-sponsored enterprises.  These securities carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as “risk free,” and have a long history of zero credit loss.  Therefore, an allowance for credit losses for these securities was not deemed necessary as of September 30, 2021.  

Interest income from taxable and non-taxable investment securities for the three and nine months ended September 30, 2021, and September 30, 2020, were as follows:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Taxable

 

$

32,889

 

 

$

30,027

 

 

$

91,510

 

 

$

96,150

 

Non-Taxable

 

 

261

 

 

 

498

 

 

 

820

 

 

 

1,637

 

Total Interest Income from Investment Securities

 

$

33,150

 

 

$

30,525

 

 

$

92,330

 

 

$

97,787

 

 

As of September 30, 2021, and December 31, 2020, the carrying value of the Company’s Federal Home Loan Bank of Des Moines stock and Federal Reserve Bank stock was as follows:

 

(dollars in thousands)

 

September 30,

2021

 

 

December 31,

2020

 

Federal Home Loan Bank of Des Moines Stock

 

$

10,000

 

 

$

12,000

 

Federal Reserve Bank Stock

 

 

21,574

 

 

 

21,340

 

Total

 

$

31,574

 

 

$

33,340

 

 

These securities can only be redeemed or sold at their par value and only to the respective issuing institution or to another member institution.  The Company records these non-marketable equity securities as a component of other assets and periodically evaluates these securities for impairment.  Management considers these non-marketable equity securities to be long-term investments.  Accordingly, when evaluating these securities for impairment, management considers the ultimate recoverability of the par value rather than recognizing temporary declines in value.

Visa Class B Restricted Shares

In 2008, the Company received Visa Class B restricted shares as part of Visa’s initial public offering.  These shares are transferable only under limited circumstances until they can be converted into the publicly traded Class A common shares.  This conversion will not occur until the settlement of certain litigation which will be indemnified by Visa members, including the Company.  Visa funded an escrow account from its initial public offering to settle these litigation claims.  Should this escrow account be insufficient to cover these litigation claims, Visa is entitled to fund additional amounts to the escrow account by reducing each member bank’s Class B conversion ratio to unrestricted Class A shares.  As of September 30, 2021, the conversion ratio was 1.6228.  See Note 11 Derivative Financial Instruments for more information.

During the second quarter of 2020, the Company sold its remaining 80,214 Visa Class B Shares and recorded a $14.2 million gain on sale.  As a result of this sale, the Company no longer owns any Visa Class B shares.

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Note 4.    Loans and Leases and the Allowance for Credit Losses

Loans and Leases

The Company’s loan and lease portfolio was comprised of the following as of September 30, 2021, and December 31, 2020:

 

(dollars in thousands)

 

September 30,

2021

 

 

December 31,

2020

 

Commercial

 

 

 

 

 

 

 

 

Commercial and Industrial

 

$

1,325,446

 

 

$

1,357,610

 

PPP 1

 

 

268,480

 

 

 

517,683

 

Commercial Mortgage

 

 

2,994,520

 

 

 

2,854,829

 

Construction

 

 

296,052

 

 

 

259,798

 

Lease Financing

 

 

107,526

 

 

 

110,766

 

Total Commercial

 

 

4,992,024

 

 

 

5,100,686

 

Consumer

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

4,272,540

 

 

 

4,130,513

 

Home Equity

 

 

1,680,229

 

 

 

1,604,538

 

Automobile

 

 

727,234

 

 

 

708,800

 

Other 2

 

 

400,723

 

 

 

395,483

 

Total Consumer

 

 

7,080,726

 

 

 

6,839,334

 

Total Loans and Leases

 

$

12,072,750

 

 

$

11,940,020

 

 

1

The PPP amounts presented, which are reported net of deferred costs and fees, were previously included as a component of the Commercial and Industrial loan class.

2

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

 

The majority of the Company’s lending activity is with customers located in the State of Hawaii.  A substantial portion of the Company’s real estate loans are secured by real estate in Hawaii.

Net gains related to sales of residential mortgage loans, recorded as a component of mortgage banking income were $1.2 million and $3.4 million for the three months ended September 30, 2021, and September 30, 2020, respectively, and $5.9 million and $9.0 million for the nine months ended September 30, 2021, and September 30, 2020, respectively.

The Company elected to exclude AIR from the amortized cost basis of loans disclosed throughout this footnote.  As of September 30, 2021, and December 31, 2020, AIR for loans totaled $29.9 million and $35.9 million, respectively, and is included in the “accrued interest receivable” line item on the Company’s consolidated statements of condition.

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was passed by Congress and signed into law on March 27, 2020.  The CARES Act established the PPP, which provides loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their eligible costs during the COVID-19 emergency.  PPP loans carry an interest rate of one percent, and a maturity of two or five years.  These loans are fully guaranteed by the Small Business Administration (“SBA”) and may be eligible for forgiveness by the SBA to the extent that the proceeds are used to cover eligible costs over a period of up to 24 weeks after the loan is made as long as certain conditions are met regarding employee retention and compensation levels.  PPP loans deemed eligible for forgiveness by the SBA will be repaid by the SBA to the Company.  The SBA pays the Company fees for processing PPP loans. These processing fees are accounted for as loan origination fees and recognized over the contractual loan term as a yield adjustment on the loans.  

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Table of Contents

 

Allowance for Credit Losses (the “Allowance”)

The following presents by portfolio segment, the activity in the Allowance for the three and nine months ended September 30, 2021, and September 30, 2020.

 

(dollars in thousands)

 

Commercial

 

 

Consumer

 

 

Total

 

Three Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Credit Losses:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at Beginning of Period

 

$

78,639

 

 

$

101,746

 

 

$

180,385

 

Loans and Leases Charged-Off

 

 

(196

)

 

 

(3,249

)

 

 

(3,445

)

Recoveries on Loans and Leases Previously Charged-Off

 

 

118

 

 

 

2,134

 

 

 

2,252

 

Net Loans and Leases Recovered (Charged-Off)

 

 

(78

)

 

 

(1,115

)

 

 

(1,193

)

Provision for Credit Losses

 

 

(9,894

)

 

 

(1,378

)

 

 

(11,272

)

Balance at End of Period

 

$

68,667

 

 

$

99,253

 

 

$

167,920

 

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Credit Losses:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at Beginning of Period

 

$

84,847

 

 

$

131,405

 

 

$

216,252

 

Loans and Leases Charged-Off

 

 

(900

)

 

 

(13,145

)

 

 

(14,045

)

Recoveries on Loans and Leases Previously Charged-Off

 

 

374

 

 

 

8,378

 

 

 

8,752

 

Net Loans and Leases Recovered (Charged-Off)

 

 

(526

)

 

 

(4,767

)

 

 

(5,293

)

Provision for Credit Losses

 

 

(15,654

)

 

 

(27,385

)

 

 

(43,039

)

Balance at End of Period

 

$

68,667

 

 

$

99,253

 

 

$

167,920

 

Three Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Credit Losses:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at Beginning of Period

 

$

72,522

 

 

$

100,917

 

 

$

173,439

 

Loans and Leases Charged-Off

 

 

(171

)

 

 

(2,176

)

 

 

(2,347

)

Recoveries on Loans and Leases Previously Charged-Off

 

 

231

 

 

 

3,573

 

 

 

3,804

 

Net Loans and Leases Recovered (Charged-Off)

 

 

60

 

 

 

1,397

 

 

 

1,457

 

Provision for Credit Losses

 

 

7,685

 

 

 

20,915

 

 

 

28,600

 

Balance at End of Period

 

$

80,267

 

 

$

123,229

 

 

$

203,496

 

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Credit Losses:

 

 

 

 

 

 

 

 

 

 

 

 

Balance at Beginning of Period (December 31, 2020)

 

$

73,801

 

 

$

36,226

 

 

$

110,027

 

CECL Adoption (Day 1) Impact

 

 

(18,789

)

 

 

17,052

 

 

 

(1,737

)

Balance at Beginning of Period (January 1, 2020)

 

 

55,012

 

 

 

53,278

 

 

 

108,290

 

Loans and Leases Charged-Off

 

 

(1,520

)

 

 

(16,287

)

 

 

(17,807

)

Recoveries on Loans and Leases Previously Charged-Off

 

 

2,084

 

 

 

8,329

 

 

 

10,413

 

Net Loans and Leases Recovered (Charged-Off)

 

 

564

 

 

 

(7,958

)

 

 

(7,394

)

Provision for Credit Losses

 

 

24,691

 

 

 

77,909

 

 

 

102,600

 

Balance at End of Period

 

$

80,267

 

 

$

123,229

 

 

$

203,496

 

 

Credit Quality Indicators

The Company uses several credit quality indicators to manage credit risk in an ongoing manner.  The Company uses an internal credit risk rating system that categorizes loans and leases into pass, special mention, or classified categories.  Credit risk ratings are applied individually to those classes of loans and leases that have significant or unique credit characteristics that benefit from a case-by-case evaluation.  These are typically loans and leases to businesses or individuals in the classes which comprise the commercial portfolio segment.  Groups of loans and leases that are underwritten and structured using standardized criteria and characteristics, such as statistical models (e.g., credit scoring or payment performance), are typically risk-rated and monitored collectively.  These are typically loans and leases to individuals in the classes which comprise the consumer portfolio segment.

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Table of Contents

 

The following are the definitions of the Company’s credit quality indicators:

 

Pass:

Loans and leases in all classes within the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan or lease agreement.  Residential mortgage loans that are past due 90 days or more as to principal or interest may be considered Pass if the current loan-to-value ratio is 60% or less.  Home equity loans that are past due 90 days or more as to principal or interest may be considered Pass if the first mortgage is with the Company and the current combined loan-to-value ratio is 60% or less.  

 

Special Mention:

Loans and leases in all classes within the commercial portfolio segment that have potential weaknesses that deserve management’s close attention.  If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease.  The Special Mention credit quality indicator is not used for the consumer portfolio segment.

 

Classified:

Loans and leases in the classes within the commercial portfolio segment that are inadequately protected by the sound worth and paying capacity of the borrower or of the collateral pledged, if any.  Classified loans and leases are also those in the classes within the consumer portfolio segment that are past due 90 days or more as to principal or interest.  Residential mortgage and home equity loans may be current as to principal and interest, but may be considered Classified for a period of generally up to six months following a loan modification.  Following a period of demonstrated performance in accordance with the modified contractual terms, the loan may be removed from Classified status.  

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Table of Contents

 

For pass rated credits, risk ratings are certified at a minimum annually.  For special mention or classified credits, risk ratings are reviewed for appropriateness on an ongoing basis, monthly, or at a minimum, quarterly.  The following presents by credit quality indicator, loan class, and year of origination, the amortized cost basis of the Company’s loans and leases as of September 30, 2021.

 

 

 

Term Loans by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

YTD

September 30,

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

Prior

 

 

Revolving

Loans

 

 

Revolving

Loans

Converted

to Term

Loans

 

 

Total Loans

and Leases

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

335,503

 

 

$

341,306

 

 

$

91,475

 

 

$

80,521

 

 

$

31,948

 

 

$

89,088

 

 

$

257,097

 

 

$

589

 

 

$

1,227,527

 

Special Mention

 

 

2,008

 

 

 

33,200

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

153

 

 

 

25,343

 

 

 

26

 

 

 

60,730

 

Classified

 

 

188

 

 

 

2,024

 

 

 

88

 

 

 

2,055

 

 

 

573

 

 

 

18,409

 

 

 

13,785

 

 

 

67

 

 

 

37,189

 

Total Commercial and

   Industrial

 

$

337,699

 

 

$

376,530

 

 

$

91,563

 

 

$

82,576

 

 

$

32,521

 

 

$

107,650

 

 

$

296,225

 

 

$

682

 

 

$

1,325,446

 

PPP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

196,837

 

 

$

71,643

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

268,480

 

Total PPP

 

$

196,837

 

 

$

71,643

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

268,480

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

608,445

 

 

$

774,572

 

 

$

362,497

 

 

$

264,407

 

 

$

196,531

 

 

$

554,832

 

 

$

61,212

 

 

$

-

 

 

$

2,822,496

 

Special Mention

 

 

39,129

 

 

 

69,618

 

 

 

-

 

 

 

30,286

 

 

 

-

 

 

 

6,122

 

 

 

-

 

 

 

-

 

 

 

145,155

 

Classified

 

 

1,589

 

 

 

10,566

 

 

 

644

 

 

 

-

 

 

 

4,784

 

 

 

9,286

 

 

 

-

 

 

 

-

 

 

 

26,869

 

Total Commercial

   Mortgage

 

$

649,163

 

 

$

854,756

 

 

$

363,141

 

 

$

294,693

 

 

$

201,315

 

 

$

570,240

 

 

$

61,212

 

 

$

-

 

 

$

2,994,520

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

101,403

 

 

$

118,076

 

 

$

61,403

 

 

$

-

 

 

$

894

 

 

$

-

 

 

$

14,276

 

 

$

-

 

 

$

296,052

 

Total Construction

 

$

101,403

 

 

$

118,076

 

 

$

61,403

 

 

$

-

 

 

$

894

 

 

$

-

 

 

$

14,276

 

 

$

-

 

 

$

296,052

 

Lease Financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

18,997

 

 

$

15,935

 

 

$

16,836

 

 

$

10,749

 

 

$

2,586

 

 

$

41,531

 

 

$

-

 

 

$

-

 

 

$

106,634

 

Special Mention

 

 

-

 

 

 

-

 

 

 

-

 

 

 

892

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

892

 

Total Lease

Financing

 

$

18,997

 

 

$

15,935

 

 

$

16,836

 

 

$

11,641

 

 

$

2,586

 

 

$

41,531

 

 

$

-

 

 

$

-

 

 

$

107,526

 

Total Commercial

 

$

1,304,099

 

 

$

1,436,940

 

 

$

532,943

 

 

$

388,910

 

 

$

237,316

 

 

$

719,421

 

 

$

371,713

 

 

$

682

 

 

$

4,992,024

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

1,120,627

 

 

$

1,173,498

 

 

$

403,404

 

 

$

201,297

 

 

$

285,312

 

 

$

1,083,359

 

 

$

-

 

 

$

-

 

 

$

4,267,497

 

Classified

 

 

-

 

 

 

-

 

 

 

294

 

 

 

-

 

 

 

2,281

 

 

 

2,468

 

 

 

-

 

 

 

-

 

 

 

5,043

 

Total Residential

   Mortgage

 

$

1,120,627

 

 

$

1,173,498

 

 

$

403,698

 

 

$

201,297

 

 

$

287,593

 

 

$

1,085,827

 

 

$

-

 

 

$

-

 

 

$

4,272,540

 

Home Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

3,282

 

 

$

1,636,803

 

 

$

34,308

 

 

$

1,674,393

 

Classified

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

113

 

 

 

4,920

 

 

 

803

 

 

 

5,836

 

Total Home Equity

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

3,395

 

 

$

1,641,723

 

 

$

35,111

 

 

$

1,680,229

 

Automobile

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

233,401

 

 

$

166,682

 

 

$

155,905

 

 

$

105,933

 

 

$

40,967

 

 

$

23,952

 

 

$

-

 

 

$

-

 

 

$

726,840

 

Classified

 

 

26

 

 

 

53

 

 

 

87

 

 

 

55

 

 

 

17

 

 

 

156

 

 

 

-

 

 

 

-

 

 

 

394

 

Total Automobile

 

$

233,427

 

 

$

166,735

 

 

$

155,992

 

 

$

105,988

 

 

$

40,984

 

 

$

24,108

 

 

$

-

 

 

$

-

 

 

$

727,234

 

Other1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

127,788

 

 

$

54,794

 

 

$

105,858

 

 

$

55,663

 

 

$

21,442

 

 

$

6,949

 

 

$

26,151

 

 

$

1,485

 

 

$

400,130

 

Classified

 

 

-

 

 

 

93

 

 

 

244

 

 

 

95

 

 

 

78

 

 

 

10

 

 

 

70

 

 

 

3

 

 

 

593

 

Total Other

 

$

127,788

 

 

$

54,887

 

 

$

106,102

 

 

$

55,758

 

 

$

21,520

 

 

$

6,959

 

 

$

26,221

 

 

$

1,488

 

 

$

400,723

 

Total Consumer

 

$

1,481,842

 

 

$

1,395,120

 

 

$

665,792

 

 

$

363,043

 

 

$

350,097

 

 

$

1,120,289

 

 

$

1,667,944

 

 

$

36,599

 

 

$

7,080,726

 

Total Loans and Leases

 

$

2,785,941

 

 

$

2,832,060

 

 

$

1,198,735

 

 

$

751,953

 

 

$

587,413

 

 

$

1,839,710

 

 

$

2,039,657

 

 

$

37,281

 

 

$

12,072,750

 

 

1

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

For the nine months ended September 30, 2021, and September 30, 2020, $2.5 million and $1.3 million revolving loans, respectively, were converted to term loans.

16


Table of Contents

 

The following presents by credit quality indicator, loan class, and year of origination, the amortized cost basis of the Company’s loans and leases as of December 31, 2020.

 

 

 

Term Loans by Origination Year

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

Revolving

Loans

 

 

Revolving

Loans

Converted

to Term

Loans

 

 

Total Loans

and Leases

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

426,780

 

 

$

149,024

 

 

$

149,468

 

 

$

49,385

 

 

$

52,354

 

 

$

68,269

 

 

$

342,339

 

 

$

847

 

 

$

1,238,466

 

Special Mention

 

 

11,702

 

 

 

42

 

 

 

-

 

 

 

-

 

 

 

110

 

 

 

95

 

 

 

32,319

 

 

 

52

 

 

 

44,320

 

Classified

 

 

32,208

 

 

 

1,734

 

 

 

2,266

 

 

 

777

 

 

 

19

 

 

 

19,166

 

 

 

18,529

 

 

 

125

 

 

 

74,824

 

Total Commercial and

   Industrial

 

$

470,690

 

 

$

150,800

 

 

$

151,734

 

 

$

50,162

 

 

$

52,483

 

 

$

87,530

 

 

$

393,187

 

 

$

1,024

 

 

$

1,357,610

 

PPP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

517,683

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

517,683

 

Total PPP

 

$

517,683

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

517,683

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

847,676

 

 

$

458,472

 

 

$

350,363

 

 

$

245,157

 

 

$

267,860

 

 

$

425,157

 

 

$

76,869

 

 

$

-

 

 

$

2,671,554

 

Special Mention

 

 

66,523

 

 

 

28,418

 

 

 

291

 

 

 

7,117

 

 

 

8,665

 

 

 

5,035

 

 

 

-

 

 

 

-

 

 

 

116,049

 

Classified

 

 

49,640

 

 

 

655

 

 

 

2,783

 

 

 

274

 

 

 

4,742

 

 

 

9,132

 

 

 

-

 

 

 

-

 

 

 

67,226

 

Total Commercial

   Mortgage

 

$

963,839

 

 

$

487,545

 

 

$

353,437

 

 

$

252,548

 

 

$

281,267

 

 

$

439,324

 

 

$

76,869

 

 

$

-

 

 

$

2,854,829

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

106,508

 

 

$

105,731

 

 

$

11,275

 

 

$

8,133

 

 

$

-

 

 

$

-

 

 

$

28,151

 

 

$

-

 

 

$

259,798

 

Total Construction

 

$

106,508

 

 

$

105,731

 

 

$

11,275

 

 

$

8,133

 

 

$

-

 

 

$

-

 

 

$

28,151

 

 

$

-

 

 

$

259,798

 

Lease Financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

19,906

 

 

$

20,132

 

 

$

13,785

 

 

$

4,202

 

 

$

9,657

 

 

$

41,755

 

 

$

-

 

 

$

-

 

 

$

109,437

 

Classified

 

 

33

 

 

 

67

 

 

 

1,092

 

 

 

42

 

 

 

95

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,329

 

Total Lease

Financing

 

$

19,939

 

 

$

20,199

 

 

$

14,877

 

 

$

4,244

 

 

$

9,752

 

 

$

41,755

 

 

$

-

 

 

$

-

 

 

$

110,766

 

Total Commercial

 

$

2,078,659

 

 

$

764,275

 

 

$

531,323

 

 

$

315,087

 

 

$

343,502

 

 

$

568,609

 

 

$

498,207

 

 

$

1,024

 

 

$

5,100,686

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

1,300,831

 

 

$

576,452

 

 

$

295,522

 

 

$

454,165

 

 

$

545,798

 

 

$

954,120

 

 

$

-

 

 

$

-

 

 

$

4,126,888

 

Classified

 

 

-

 

 

 

294

 

 

 

-

 

 

 

1,032

 

 

 

-

 

 

 

2,299

 

 

 

-

 

 

 

-

 

 

 

3,625

 

Total Residential

   Mortgage

 

$

1,300,831

 

 

$

576,746

 

 

$

295,522

 

 

$

455,197

 

 

$

545,798

 

 

$

956,419

 

 

$

-

 

 

$

-

 

 

$

4,130,513

 

Home Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

4,449

 

 

$

1,556,671

 

 

$

37,559

 

 

$

1,598,679

 

Classified

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

88

 

 

 

4,693

 

 

 

1,078

 

 

 

5,859

 

Total Home Equity

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

4,537

 

 

$

1,561,364

 

 

$

38,637

 

 

$

1,604,538

 

Automobile

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

219,218

 

 

$

213,914

 

 

$

158,216

 

 

$

68,776

 

 

$

33,899

 

 

$

13,850

 

 

$

-

 

 

$

-

 

 

$

707,873

 

Classified

 

 

101

 

 

 

245

 

 

 

171

 

 

 

113

 

 

 

161

 

 

 

136

 

 

 

-

 

 

 

-

 

 

 

927

 

Total Automobile

 

$

219,319

 

 

$

214,159

 

 

$

158,387

 

 

$

68,889

 

 

$

34,060

 

 

$

13,986

 

 

$

-

 

 

$

-

 

 

$

708,800

 

Other1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Pass

 

$

71,042

 

 

$

145,549

 

 

$

92,993

 

 

$

39,770

 

 

$

9,225

 

 

$

2,189

 

 

$

32,070

 

 

$

1,485

 

 

$

394,323

 

Classified

 

 

51

 

 

 

419

 

 

 

375

 

 

 

167

 

 

 

42

 

 

 

21

 

 

 

85

 

 

 

-

 

 

 

1,160

 

Total Other

 

$

71,093

 

 

$

145,968

 

 

$

93,368

 

 

$

39,937

 

 

$

9,267

 

 

$

2,210

 

 

$

32,155

 

 

$

1,485

 

 

$

395,483

 

Total Consumer

 

$

1,591,243

 

 

$

936,873

 

 

$

547,277

 

 

$

564,023

 

 

$

589,125

 

 

$

977,152

 

 

$

1,593,519

 

 

$

40,122

 

 

$

6,839,334

 

Total Loans and Leases

 

$

3,669,902

 

 

$

1,701,148

 

 

$

1,078,600

 

 

$

879,110

 

 

$

932,627

 

 

$

1,545,761

 

 

$

2,091,726

 

 

$

41,146

 

 

$

11,940,020

 

 

1

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

  

17


Table of Contents

 

 

Aging Analysis

Loans and leases are considered to be past due once becoming 30 days delinquent.  For the consumer portfolio, this generally represents two missed monthly payments.  The following presents by class, an aging analysis of the Company’s loan and lease portfolio as of September 30, 2021, and December 31, 2020.

 

(dollars in thousands)

 

30 - 59

Days

Past Due

 

 

60 - 89

Days

Past Due

 

 

Past Due

90 Days

or More

 

 

Non-

Accrual

 

 

Total

Past Due

and Non-

Accrual

 

 

Current

 

 

Total

Loans and

Leases

 

 

Non-

Accrual

Loans

and Leases

that are

Current 2

 

As of September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

$

130

 

 

$

1,887

 

 

$

 

 

$

209

 

 

$

2,226

 

 

$

1,323,220

 

 

$

1,325,446

 

 

$

172

 

PPP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

268,480

 

 

 

268,480

 

 

 

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

8,309

 

 

 

8,309

 

 

 

2,986,211

 

 

 

2,994,520

 

 

 

8,309

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

296,052

 

 

 

296,052

 

 

 

 

Lease Financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

107,526

 

 

 

107,526

 

 

 

 

Total Commercial

 

 

130

 

 

 

1,887

 

 

 

 

 

 

8,518

 

 

 

10,535

 

 

 

4,981,489

 

 

 

4,992,024

 

 

 

8,481

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

1,074

 

 

 

3,253

 

 

 

4,776

 

 

 

4,348

 

 

 

13,451

 

 

 

4,259,089

 

 

 

4,272,540

 

 

 

528

 

Home Equity

 

 

2,219

 

 

 

689

 

 

 

2,946

 

 

 

5,422

 

 

 

11,276

 

 

 

1,668,953

 

 

 

1,680,229

 

 

 

1,234

 

Automobile

 

 

6,427

 

 

 

1,110

 

 

 

395

 

 

 

 

 

 

7,932

 

 

 

719,302

 

 

 

727,234

 

 

 

 

Other 1

 

 

2,067

 

 

 

743

 

 

 

593

 

 

 

 

 

 

3,403

 

 

 

397,320

 

 

 

400,723

 

 

 

 

Total Consumer

 

 

11,787

 

 

 

5,795

 

 

 

8,710

 

 

 

9,770

 

 

 

36,062

 

 

 

7,044,664

 

 

 

7,080,726

 

 

 

1,762

 

Total

 

$

11,917

 

 

$

7,682

 

 

$

8,710

 

 

$

18,288

 

 

$

46,597

 

 

$

12,026,153

 

 

$

12,072,750

 

 

$

10,243

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

$

191

 

 

$

59

 

 

$

 

 

$

441

 

 

$

691

 

 

$

1,356,919

 

 

$

1,357,610

 

 

$

285

 

PPP

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

517,683

 

 

 

517,683

 

 

 

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

8,527

 

 

 

8,527

 

 

 

2,846,302

 

 

 

2,854,829

 

 

 

4,983

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

259,798

 

 

 

259,798

 

 

 

 

Lease Financing

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

110,766

 

 

 

110,766

 

 

 

 

Total Commercial

 

 

191

 

 

 

59

 

 

 

 

 

 

8,968

 

 

 

9,218

 

 

 

5,091,468

 

 

 

5,100,686

 

 

 

5,268

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

4,049

 

 

 

2,083

 

 

 

5,274

 

 

 

3,223

 

 

 

14,629

 

 

 

4,115,884

 

 

 

4,130,513

 

 

 

2,100

 

Home Equity

 

 

3,423

 

 

 

3,378

 

 

 

3,187

 

 

 

3,958

 

 

 

13,946

 

 

 

1,590,592

 

 

 

1,604,538

 

 

 

987

 

Automobile

 

 

6,358

 

 

 

2,215

 

 

 

925

 

 

 

 

 

 

9,498

 

 

 

699,302

 

 

 

708,800

 

 

 

 

Other 1

 

 

2,556

 

 

 

1,612

 

 

 

1,160

 

 

 

 

 

 

5,328

 

 

 

390,155

 

 

 

395,483

 

 

 

 

Total Consumer

 

 

16,386

 

 

 

9,288

 

 

 

10,546

 

 

 

7,181

 

 

 

43,401

 

 

 

6,795,933

 

 

 

6,839,334

 

 

 

3,087

 

Total

 

$

16,577

 

 

$

9,347

 

 

$

10,546

 

 

$

16,149

 

 

$

52,619

 

 

$

11,887,401

 

 

$

11,940,020

 

 

$

8,355

 

 

1

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

2

Represents non-accrual loans that are not past due 30 days or more; however, full payment of principal and interest is still not expected.

18


Table of Contents

 

 

Non-Accrual Loans and Leases

The following presents the non-accrual loans and leases as of September 30, 2021, and December 31, 2020.

 

 

 

September 30, 2021

 

 

December 31, 2020

 

(dollars in thousands)

 

Non-accrual

loans with a

related ACL

 

 

Non-accrual

loans without

a related ACL

 

 

Total Non-

accrual loans

 

 

Non-accrual

loans with a

related ACL

 

 

Non-accrual

loans without

a related ACL

 

 

Total Non-

accrual loans

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

$

209

 

 

$

 

 

$

209

 

 

$

441

 

 

$

 

 

$

441

 

Commercial Mortgage

 

 

4,765

 

 

 

3,544

 

 

 

8,309

 

 

 

8,527

 

 

 

 

 

 

8,527

 

Total Commercial

 

 

4,974

 

 

 

3,544

 

 

 

8,518

 

 

 

8,968

 

 

 

 

 

 

8,968

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

3,989

 

 

 

359

 

 

 

4,348

 

 

 

3,096

 

 

 

127

 

 

 

3,223

 

Home Equity

 

 

5,422

 

 

 

 

 

 

5,422

 

 

 

3,958

 

 

 

 

 

 

3,958

 

Total Consumer

 

 

9,411

 

 

 

359

 

 

 

9,770

 

 

 

7,054

 

 

 

127

 

 

 

7,181

 

Total

 

$

14,385

 

 

$

3,903

 

 

$

18,288

 

 

$

16,022

 

 

$

127

 

 

$

16,149

 

 

All payments received while on non-accrual status are applied against the principal balance of the loan or lease.  The Company does not recognize interest income while loans or leases are on non-accrual status.

Modifications

A modification of a loan constitutes a troubled debt restructuring (“TDR”) when the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider.  Loans modified in a TDR were $72.7 million as of September 30, 2021, and $72.5 million as of December 31, 2020.  There were $0.2 million and $0.5 million commitments to lend additional funds on loans modified in a TDR as of September 30, 2021, and December 31, 2020, respectively.

Loans modified in a TDR are typically already on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance.  As a result, loans modified in a TDR may have the financial effect of increasing the specific Allowance associated with the loan.  An Allowance for impaired commercial and consumer loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent.  Management exercises significant judgment in developing these estimates.

The following presents by class, information related to loans modified in a TDR during the three and nine months ended September 30, 2021, and September 30, 2020.

 

 

 

Loans Modified as a TDR for the

Three Months Ended September 30, 2021

 

 

Loans Modified as a TDR for the

Three Months Ended September 30, 2020

 

 

 

 

 

 

 

Recorded

 

 

Increase in

 

 

 

 

 

 

Recorded

 

 

Increase in

 

Troubled Debt Restructurings

 

 

 

 

 

Investment

 

 

Allowance

 

 

 

 

 

 

Investment

 

 

Allowance

 

(dollars in thousands)

 

Number of Contracts

 

 

(as of period end)1

 

 

(as of period end)

 

 

Number of Contracts

 

 

(as of period end)1

 

 

(as of period end)

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

 

2

 

 

$

153

 

 

$

2

 

 

 

 

 

$

 

 

$

 

Construction

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

92

 

 

 

1

 

Total Commercial

 

 

2

 

 

 

153

 

 

 

2

 

 

 

1

 

 

 

92

 

 

 

1

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

2

 

 

 

796

 

 

 

21

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

2

 

 

 

779

 

 

 

46

 

 

 

2

 

 

 

134

 

 

 

 

Automobile

 

 

71

 

 

 

1,632

 

 

 

22

 

 

 

12

 

 

 

227

 

 

 

4

 

Other 2

 

 

51

 

 

 

439

 

 

 

16

 

 

 

7

 

 

 

93

 

 

 

4

 

Total Consumer

 

 

126

 

 

 

3,646

 

 

 

105

 

 

 

21

 

 

 

454

 

 

 

8

 

Total

 

 

128

 

 

$

3,799

 

 

$

107

 

 

 

22

 

 

$

546

 

 

$

9

 

 

1

The period end balances reflect all paydowns and charge-offs since the modification date.  TDRs fully paid-off, charged-off, or foreclosed upon by period end are not included.

2

Comprised of other revolving credit and installment financing.

19


Table of Contents

 

 

 

 

 

 

Loans Modified as a TDR for the

Nine Months Ended September 30, 2021

 

 

Loans Modified as a TDR for the

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

Recorded

 

 

Increase in

 

 

 

 

 

 

Recorded

 

 

Increase in

 

Troubled Debt Restructurings

 

 

 

 

 

Investment

 

 

Allowance

 

 

 

 

 

 

Investment

 

 

Allowance

 

(dollars in thousands)

 

Number of Contracts

 

 

(as of period end)1

 

 

(as of period end)

 

 

Number of Contracts

 

 

(as of period end)1

 

 

(as of period end)

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

 

7

 

 

$

258

 

 

$

4

 

 

 

3

 

 

$

188

 

 

$

3

 

Construction

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

1,099

 

 

 

 

Total Commercial

 

 

7

 

 

 

258

 

 

 

4

 

 

 

4

 

 

 

1,287

 

 

 

3

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

14

 

 

 

5,785

 

 

 

584

 

 

 

 

 

 

 

 

 

 

Home Equity

 

 

9

 

 

 

1,488

 

 

 

80

 

 

 

2

 

 

 

134

 

 

 

 

Automobile

 

 

331

 

 

 

6,902

 

 

 

95

 

 

 

81

 

 

 

1,346

 

 

 

22

 

Other 2

 

 

144

 

 

 

1,321

 

 

 

48

 

 

 

42

 

 

 

357

 

 

 

15

 

Total Consumer

 

 

498

 

 

 

15,496

 

 

 

807

 

 

 

125

 

 

 

1,837

 

 

 

37

 

Total

 

 

505

 

 

$

15,754

 

 

$

811

 

 

 

129

 

 

$

3,124

 

 

$

40

 

 

1 The period end balances reflect all paydowns and charge-offs since the modification date.  TDRs fully paid-off, charged-off, or foreclosed upon by period end are not included.

2

Comprised of other revolving credit and installment financing.

 

The following presents by class, all loans modified in a TDR that defaulted during the three and nine months ended September 30, 2021, and September 30, 2020, and within twelve months of their modification date.  A TDR is considered to be in default once it becomes 60 days or more past due following a modification.

 

 

 

Three Months Ended

September 30, 2021

 

 

Three Months Ended

September 30, 2020

 

TDRs that Defaulted During the Period,

 

 

 

 

 

Recorded

 

 

 

 

 

 

Recorded

 

Within Twelve Months of their Modification Date

 

Number of

 

 

Investment

 

 

Number of

 

 

Investment

 

(dollars in thousands)

 

Contracts

 

 

(as of period end)1

 

 

Contracts

 

 

(as of period end)1

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Automobile

 

 

8

 

 

$

157

 

 

 

1

 

 

$

6

 

Other 2

 

 

5

 

 

 

27

 

 

 

0

 

 

 

0

 

Total Consumer

 

 

13

 

 

 

184

 

 

 

1

 

 

 

6

 

Total

 

 

13

 

 

$

184

 

 

 

1

 

 

$

6

 

 

 

 

Nine Months Ended

September 30, 2021

 

 

Nine Months Ended

September 30, 2020

 

TDRs that Defaulted During the Period,

 

 

 

 

 

Recorded

 

 

 

 

 

 

Recorded

 

Within Twelve Months of their Modification Date

 

Number of

 

 

Investment

 

 

Number of

 

 

Investment

 

(dollars in thousands)

 

Contracts

 

 

(as of period end)1

 

 

Contracts

 

 

(as of period end)1

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

1

 

 

$

528

 

 

 

 

 

$

 

Automobile

 

 

12

 

 

 

213

 

 

 

33

 

 

 

591

 

Other 2

 

 

12

 

 

 

112

 

 

 

6

 

 

 

38

 

Total Consumer

 

 

25

 

 

 

853

 

 

 

39

 

 

 

629

 

Total

 

 

25

 

 

$

853

 

 

 

39

 

 

$

629

 

 

1

The period end balances reflect all paydowns and charge-offs since the modification date.  TDRs fully paid-off, charged-off, or foreclosed upon by period end are not included.

2

Comprised of other revolving credit and installment financing.

Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default.  If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment.  The specific Allowance associated with the loan may be increased, adjustments may be made in the allocation of the Allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan.

20


Table of Contents

 

Modifications in response to COVID-19

 The Company initially offered short-term loan modifications to assist borrowers during the COVID-19 national emergency.  These modifications generally involve principal and/or interest payment deferrals for up to six months.  Similar to the initial modifications granted, the additional round of loan modifications generally involve principal and/or interest payment deferrals for up to an additional six months for commercial and consumer loans, and principal-only deferrals for up to an additional 12 months for selected commercial loans.  The Company generally continues to accrue and recognize interest income during the deferral period.  The Company offers several repayment options such as immediate repayment, repayment over a designated time period or as a balloon payment at maturity, or by extending the loan term.  These modifications generally do not involve forgiveness or interest rate reductions.  Although our formal assistance programs have ended, the Company continues to work with our customers who are still being impacted by the pandemic.  In addition, the Company evaluates the need to record an allowance for the related AIR.  As of September 30, 2021, and December 31, 2020, the Company recorded an AIR allowance of $0.7 million and $2.7 million, respectively.  The allowance was recorded as a contra-asset against AIR with the offset to provision for credit losses.  In addition, the Company elected to deduct the AIR from the AIR Allowance (rather than reversing interest income) when the AIR is deemed uncollectible, which generally occurs when the related loan is placed on nonaccrual status or is charged-off.

Company, as lessor, also granted short-term lease concessions on some of its sales-type finance leases for equipment and automobiles.  The concessions primarily consists of six-month extension programs whereby lease payments currently due are deferred and shifted to the end of the lease term.  Interest income continues to accrue, and in certain cases paid during the deferral period.  Additional rounds of lease concessions were not material.  

In accordance with Section 4013 of the CARES Act and the joint agency statement issued by banking agencies, these COVID-19 related loan and lease modifications are not accounted for as TDRs.  These loan and lease modifications totaled $130.4 million (23 loans and leases) for the commercial segment and $7.5 million (31 loans and leases) for the consumer segment as of September 30, 2021, and $311.6 million (210 loans and leases) for the commercial segment and $178.1 million (1,920 loans and leases) for the consumer segment as of December 31, 2020.

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $1.5 million as of September 30, 2021.

Note 5.  Mortgage Servicing Rights

The Company’s portfolio of residential mortgage loans serviced for third parties was $2.7 billion as of September 30, 2021, and $2.8 billion as of December 31, 2020.  Substantially all of these loans were originated by the Company and sold to third parties on a non-recourse basis with servicing rights retained.  These retained servicing rights are recorded as a servicing asset and are initially recorded at fair value (see Note 13 Fair Value of Assets and Liabilities for more information).  Changes to the balance of mortgage servicing rights are recorded in mortgage banking income in the Company’s consolidated statements of income.

The Company’s mortgage servicing activities include collecting principal, interest, and escrow payments from borrowers; making tax and insurance payments on behalf of borrowers; monitoring delinquencies and executing foreclosure proceedings; and accounting for and remitting principal and interest payments to investors.  Servicing income, including late and ancillary fees, was $1.6 million and $1.7 million for the three months ended September 30, 2021, and September 30, 2020, and $4.8 million and $5.4 million for the nine months ended September 30, 2021, and September 30, 2020, respectively.  Servicing income is recorded in mortgage banking income in the Company’s consolidated statements of income.  The Company’s residential mortgage investor loan servicing portfolio is primarily comprised of fixed rate loans concentrated in Hawaii.

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Table of Contents

 

For the three and nine months ended September 30, 2021, and September 30, 2020, the change in the carrying value of the Company’s mortgage servicing rights accounted for under the fair value measurement method was as follows:

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Balance at Beginning of Period

 

$

875

 

 

$

1,068

 

 

$

958

 

 

$

1,126

 

Change in Fair Value Due to Payoffs:

 

 

(49

)

 

 

(50

)

 

 

(132

)

 

 

(108

)

Balance at End of Period

 

$

826

 

 

$

1,018

 

 

$

826

 

 

$

1,018

 

 

For the three and nine months ended September 30, 2021, and September 30, 2020, the change in the carrying value of the Company’s mortgage servicing rights accounted for under the amortization method was as follows:

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Balance at Beginning of Period

 

$

20,598

 

 

$

21,836

 

 

$

18,694

 

 

$

23,896

 

Servicing Rights that Resulted From Asset Transfers

 

 

1,082

 

 

 

872

 

 

 

4,022

 

 

 

3,042

 

Amortization

 

 

(1,069

)

 

 

(1,271

)

 

 

(3,228

)

 

 

(3,684

)

Valuation Allowance Recovery (Provision)

 

 

662

 

 

 

(568

)

 

 

1,785

 

 

 

(2,385

)

Balance at End of Period

 

$

21,273

 

 

$

20,869

 

 

$

21,273

 

 

$

20,869

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Valuation Allowance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at Beginning of Period

 

$

(2,769

)

 

$

(1,817

)

 

$

(3,892

)

 

$

 

Valuation Allowance Recovery (Provision)

 

 

662

 

 

 

(568

)

 

 

1,785

 

 

 

(2,385

)

Balance at End of Period

 

$

(2,107

)

 

$

(2,385

)

 

$

(2,107

)

 

$

(2,385

)

Fair Value of Mortgage Servicing Rights Accounted for

   Under the Amortization Method

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of Period

 

$

20,598

 

 

$

21,836

 

 

$

18,694

 

 

$

25,714

 

End of Period

 

$

21,273

 

 

$

20,870

 

 

$

21,273

 

 

$

20,870

 

 

The key data and assumptions used in estimating the fair value of the Company’s mortgage servicing rights as of September 30, 2021, and December 31, 2020, were as follows:

 

September 30,

2021

 

 

December 31,

2020

 

Weighted-Average Constant Prepayment Rate 1

 

 

11.50

%

 

 

14.42

%

Weighted-Average Life (in years)

 

 

6.00

 

 

 

4.99

 

Weighted-Average Note Rate

 

 

3.67

%

 

 

3.87

%

Weighted-Average Discount Rate 2

 

 

6.67

%

 

 

5.81

%

 

1

Represents annualized loan prepayment rate assumption.

2

Derived from multiple interest rate scenarios that incorporate a spread to a market yield curve and market volatilities.

A sensitivity analysis of the Company’s fair value of mortgage servicing rights to changes in certain key assumptions as of September 30, 2021, and December 31, 2020, is presented in the following table.

(dollars in thousands)

 

September 30,

2021

 

 

December 31,

2020

 

Constant Prepayment Rate

 

 

 

 

 

 

 

 

Decrease in fair value from 25 basis points (“bps”) adverse change

 

$

(246

)

 

$

(203

)

Decrease in fair value from 50 bps adverse change

 

 

(487

)

 

 

(401

)

Discount Rate

 

 

 

 

 

 

 

 

Decrease in fair value from 25 bps adverse change

 

 

(223

)

 

 

(184

)

Decrease in fair value from 50 bps adverse change

 

 

(441

)

 

 

(365

)

 

This analysis generally cannot be extrapolated because the relationship of a change in one key assumption to the change in the fair value of the Company’s mortgage servicing rights usually is not linear.  Also, the effect of changing one key assumption without changing other assumptions is not realistic.

22


Table of Contents

 

Note 6.  Affordable Housing Projects Tax Credit Partnerships

The Company makes equity investments in various limited partnerships or limited liability companies that sponsor affordable housing projects utilizing the Low Income Housing Tax Credit (“LIHTC”) pursuant to Section 42 of the Internal Revenue Code.  The purpose of these investments is to achieve a satisfactory return on capital, to facilitate the sale of affordable housing product offerings, and to assist in achieving goals associated with the Community Reinvestment Act.  The primary activities of these entities include the identification, development, and operation of multi-family housing that is leased to qualifying residential tenants.  Generally, these types of investments are funded through a combination of debt and equity.

The Company is a limited partner or non-managing member in each LIHTC limited partnership or limited liability company, respectively.  Each of these entities is managed by an unrelated third-party general partner or managing member who exercises significant control over the affairs of the entity.  The general partner or managing member has all the rights, powers and authority granted or permitted to be granted to a general partner of a limited partnership or managing member of a limited liability company.  Duties entrusted to the general partner or managing member include, but are not limited to: investment in operating companies, company expenditures, investment of excess funds, borrowing funds, employment of agents, disposition of fund property, prepayment and refinancing of liabilities, votes and consents, contract authority, disbursement of funds, accounting methods, tax elections, bank accounts, insurance, litigation, cash reserve, and use of working capital reserve funds.  Except for limited rights granted to the limited partner(s) or non-managing member(s) relating to the approval of certain transactions, the limited partner(s) and non-managing member(s) may not participate in the operation, management, or control of the entity’s business, transact any business in the entity’s name or have any power to sign documents for or otherwise bind the entity.  In addition, the general partner or managing member may only be removed by the limited partner(s) or managing member(s) in the event of a failure to comply with the terms of the agreement or negligence in performing its duties.

The general partner or managing member of each entity has both the power to direct the activities which most significantly affect the performance of each entity and the obligation to absorb losses or the right to receive benefits that could be significant to the entities.  Therefore, the Company has determined that it is not the primary beneficiary of any LIHTC entity.  The Company uses the effective yield method to account for its pre-2015 investments in these entities.  Beginning January 1, 2015, any new investments that meet the requirements of the proportional amortization method are recognized using the proportional amortization method.  The Company’s net affordable housing tax credit investments and related unfunded commitments were $126.9 million and $138.9 million as of September 30, 2021, and December 31, 2020, respectively, and are included in other assets in the consolidated statements of condition.

Unfunded Commitments

As of September 30, 2021, the expected payments for unfunded affordable housing commitments were as follows:

 

(dollars in thousands)

 

Amount

 

2021

 

$

12,710

 

2022

 

 

6,757

 

2023

 

 

19,025

 

2024

 

 

173

 

2025

 

 

56

 

Thereafter

 

 

3,424

 

Total Unfunded Commitments

 

$

42,145

 

 

23


Table of Contents

 

 

The following table presents tax credits and other tax benefits recognized and amortization expense related to affordable housing for the three and nine months ended September 30, 2021, and September 30, 2020.

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Effective Yield Method

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax credits and other tax benefits recognized

 

$

2,151

 

 

$

2,938

 

 

$

6,453

 

 

$

8,814

 

Amortization Expense in Provision for Income Taxes

 

 

1,670

 

 

 

2,347

 

 

 

5,032

 

 

 

7,042

 

Proportional Amortization Method

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax credits and other tax benefits recognized

 

$

2,708

 

 

$

1,794

 

 

$

8,178

 

 

$

4,839

 

Amortization Expense in Provision for Income Taxes

 

 

2,332

 

 

 

1,345

 

 

 

7,043

 

 

 

3,580

 

 

There were no impairment losses related to LIHTC investments during the nine months ended September 30, 2021, and September 30, 2020.

Note 7.  Balance Sheet Offsetting

 

The following table presents the fair value of the related collateral pledged against repurchase agreements as of September 30, 2021, and December 31, 2020.  

 

 

 

Remaining Contractual Maturity of Repurchase Agreements

 

(dollars in thousands)

 

Up to

90 days

 

 

91-365

days

 

 

1-3 Years

 

 

After

3 Years

 

 

Total

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class of Collateral Pledged:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Issued by States and Political Subdivisions

 

$

 

 

$

 

 

$

 

 

$

490

 

 

$

490

 

Mortgage-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential - Government Agencies

 

 

 

 

 

 

 

 

43,461

 

 

 

13,602

 

 

 

57,063

 

Residential - U.S. Government-Sponsored Enterprises

 

 

 

 

 

 

 

 

231,539

 

 

 

161,398

 

 

 

392,937

 

Total

 

$

 

 

$

 

 

$

275,000

 

 

$

175,490

 

 

$

450,490

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Class of Collateral Pledged:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Issued by States and Political Subdivisions

 

$

100

 

 

$

 

 

$

 

 

$

490

 

 

$

590

 

Mortgage-Backed Securities: 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential - Government Agencies

 

 

 

 

 

 

 

 

20,210

 

 

 

83,599

 

 

 

103,809

 

Residential - U.S. Government-Sponsored Enterprises

 

 

 

 

 

 

 

 

4,790

 

 

 

491,401

 

 

 

496,191

 

Total

 

$

100

 

 

$

 

 

$

25,000

 

 

$

575,490

 

 

$

600,590

 

 

1 The class of collateral pledged as of December 31, 2020, have been updated to properly reflect the remaining contractual maturity of repurchase agreements.

 

 

24


Table of Contents

 

 

The following table presents the assets and liabilities subject to an enforceable master netting arrangement, or repurchase agreements as of September 30, 2021, and December 31, 2020.  The swap agreements the Company has with our commercial banking customers are not subject to an enforceable master netting arrangement, and therefore, are excluded from this table.  Centrally cleared swap agreements between the Company and institutional counterparties are also excluded from this table.  See Note 11 Derivative Financial Instruments for more information on swap agreements.

 

 

 

(i)

 

 

(ii)

 

 

(iii) = (i)-(ii)

 

 

(iv)

 

 

(v) = (iii)-(iv)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Amounts Not Offset in

the Statements of Condition

 

 

 

 

 

(dollars in thousands)

 

Gross Amounts

Recognized in

the Statements

of Condition

 

 

Gross Amounts

Offset in

the Statements

of Condition

 

 

Net Amounts

Presented in

the Statements

of Condition

 

 

Netting

Adjustments

per Master

Netting

Arrangements

 

 

Fair Value

of Collateral

Pledged/

Received 1

 

 

Net Amount

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap Agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional Counterparties

 

$

22

 

 

$

 

 

$

22

 

 

$

22

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap Agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional Counterparties

 

$

8,297

 

 

$

 

 

$

8,297

 

 

$

22

 

 

$

53,265

 

 

$

(44,990

)

Repurchase Agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Private Institutions

 

 

450,000

 

 

 

 

 

 

450,000

 

 

 

 

 

 

450,000

 

 

 

 

Government Entities

 

 

490

 

 

 

 

 

 

490

 

 

 

 

 

 

490

 

 

 

 

 

 

$

450,490

 

 

$

 

 

$

450,490

 

 

$

 

 

$

450,490

 

 

$

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap Agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional Counterparties

 

$

5

 

 

$

 

 

$

5

 

 

$

5

 

 

$

 

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Swap Agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional Counterparties

 

 

17,202

 

 

 

 

 

 

17,202

 

 

 

5

 

 

 

7,911

 

 

 

9,286

 

Repurchase Agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Private Institutions

 

 

600,000

 

 

 

 

 

 

600,000

 

 

 

 

 

 

600,000

 

 

 

 

Government Entities

 

 

590

 

 

 

 

 

 

590

 

 

 

 

 

 

590

 

 

 

 

 

 

$

600,590

 

 

$

 

 

$

600,590

 

 

$

 

 

$

600,590

 

 

$

 

 

1

The application of collateral cannot reduce the net amount below zero.  Therefore, excess collateral is not reflected in this table.  For repurchase agreements with private institutions, the fair value of investment securities pledged was $538.1 million and $635.2 million as of September 30, 2021, and December 31, 2020, respectively.  For repurchase agreements with government entities, the fair value of investment securities pledged was $1.5 million and $2.5 million as of September 30, 2021, and December 31, 2020, respectively.

 


25


Table of Contents

 

 

Note 8.  Accumulated Other Comprehensive Income (Loss)

The following table presents the components of other comprehensive income (loss) for the three and nine months ended September 30, 2021, and September 30, 2020:

 

(dollars in thousands)

 

Before Tax

 

 

Tax Effect

 

 

Net of Tax

 

Three Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Net Unrealized Gains (Losses) on Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Net Unrealized Gains (Losses) Arising During the Period

 

$

(10,263

)

 

$

(2,719

)

 

$

(7,544

)

Amounts Reclassified from Accumulated Other Comprehensive Income

   (Loss) that (Increase) Decrease Net Income:

 

 

 

 

 

 

 

 

 

 

 

 

(Gain) Loss on Sale

 

 

(83

)

 

 

(22

)

 

 

(61

)

Amortization of Unrealized Holding (Gains) Losses on Held-to-

   Maturity Securities 1

 

 

87

 

 

 

23

 

 

 

64

 

Net Unrealized Gains (Losses) on Investment Securities

 

 

(10,259

)

 

 

(2,718

)

 

 

(7,541

)

Defined Benefit Plans:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of Net Actuarial Losses (Gains)

 

 

662

 

 

 

175

 

 

 

487

 

Amortization of Prior Service Credit

 

 

(62

)

 

 

(16

)

 

 

(46

)

Defined Benefit Plans, Net

 

 

600

 

 

 

159

 

 

 

441

 

Other Comprehensive Income (Loss)

 

$

(9,659

)

 

$

(2,559

)

 

$

(7,100

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Net Unrealized Gains (Losses) on Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Net Unrealized Gains (Losses) Arising During the Period

 

$

(6,771

)

 

$

(1,795

)

 

$

(4,976

)

Amounts Reclassified from Accumulated Other Comprehensive Income

   (Loss) that (Increase) Decrease Net Income:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of Unrealized Holding (Gains) Losses on Held-to-

   Maturity Securities 1

 

 

103

 

 

 

27

 

 

 

76

 

Net Unrealized Gains (Losses) on Investment Securities

 

 

(6,668

)

 

 

(1,768

)

 

 

(4,900

)

Defined Benefit Plans:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of Net Actuarial Losses (Gains)

 

 

570

 

 

 

151

 

 

 

419

 

Amortization of Prior Service Credit

 

 

(61

)

 

 

(16

)

 

 

(45

)

Defined Benefit Plans, Net

 

 

509

 

 

 

135

 

 

 

374

 

Other Comprehensive Income (Loss)

 

$

(6,159

)

 

$

(1,633

)

 

$

(4,526

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Net Unrealized Gains (Losses) on Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Net Unrealized Gains (Losses) Arising During the Period

 

$

(75,360

)

 

$

(19,954

)

 

$

(55,406

)

Amounts Reclassified from Accumulated Other Comprehensive Income

   (Loss) that (Increase) Decrease Net Income:

 

 

 

 

 

 

 

 

 

 

 

 

(Gain) Loss on Sale

 

 

(3,758

)

 

 

(1,014

)

 

 

(2,744

)

Amortization of Unrealized Holding (Gains) Losses on Held-to-

   Maturity Securities 1

 

 

593

 

 

 

157

 

 

 

436

 

Net Unrealized Gains (Losses) on Investment Securities

 

 

(78,525

)

 

 

(20,811

)

 

 

(57,714

)

Defined Benefit Plans:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of Net Actuarial Losses (Gains)

 

 

1,985

 

 

 

525

 

 

 

1,460

 

Amortization of Prior Service Credit

 

 

(185

)

 

 

(49

)

 

 

(136

)

Defined Benefit Plans, Net

 

 

1,800

 

 

 

476

 

 

 

1,324

 

Other Comprehensive Income (Loss)

 

$

(76,725

)

 

$

(20,335

)

 

$

(56,390

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Net Unrealized Gains (Losses) on Investment Securities:

 

 

 

 

 

 

 

 

 

 

 

 

Net Unrealized Gains (Losses) Arising During the Period

 

$

60,177

 

 

$

15,945

 

 

$

44,232

 

Amounts Reclassified from Accumulated Other Comprehensive Income

   (Loss) that (Increase) Decrease Net Income:

 

 

 

 

 

 

 

 

 

 

 

 

(Gain) Loss on Sale

 

 

(77

)

 

 

(21

)

 

 

(56

)

Amortization of Unrealized Holding (Gains) Losses on Held-to-

   Maturity Securities 1

 

 

289

 

 

 

76

 

 

 

213

 

Net Unrealized Gains (Losses) on Investment Securities

 

 

60,389

 

 

 

16,000

 

 

 

44,389

 

Defined Benefit Plans:

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of Net Actuarial Losses (Gains)

 

 

1,711

 

 

 

454

 

 

 

1,257

 

Amortization of Prior Service Credit

 

 

(184

)

 

 

(49

)

 

 

(135

)

Defined Benefit Plans, Net

 

 

1,527

 

 

 

405

 

 

 

1,122

 

Other Comprehensive Income (Loss)

 

$

61,916

 

 

$

16,405

 

 

$

45,511

 

 

1

The amount relates to the amortization/accretion of unrealized net gains and losses related to the Company’s reclassification of available-for-sale investment securities to the held-to-maturity category.  The unrealized net gains/losses will be amortized/accreted over the remaining life of the investment securities as an adjustment of yield.

 


26


Table of Contents

 

 

The following table presents the changes in each component of accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2021, and September 30, 2020:

 

(dollars in thousands)

 

Investment

Securities-

Available-

for-Sale

 

 

Investment

Securities-

Held-to-Maturity

 

 

Defined Benefit

Plans

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

Three Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at Beginning of Period

 

$

950

 

 

$

(51

)

 

$

(42,367

)

 

$

(41,468

)

Other Comprehensive Income (Loss) Before Reclassifications

 

 

(7,544

)

 

 

 

 

 

 

 

 

(7,544

)

Amounts Reclassified from Accumulated Other

   Comprehensive Income (Loss)

 

 

(61

)

 

 

64

 

 

 

441

 

 

 

444

 

Total Other Comprehensive Income (Loss)

 

 

(7,605

)

 

 

64

 

 

 

441

 

 

 

(7,100

)

Balance at End of Period

 

$

(6,655

)

 

$

13

 

 

$

(41,926

)

 

$

(48,568

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at Beginning of Period

 

$

57,511

 

 

$

(578

)

 

$

(38,008

)

 

$

18,925

 

Other Comprehensive Income (Loss) Before Reclassifications

 

 

(4,976

)

 

 

 

 

 

 

 

 

(4,976

)

Amounts Reclassified from Accumulated Other

   Comprehensive Income (Loss)

 

 

 

 

 

76

 

 

 

374

 

 

 

450

 

Total Other Comprehensive Income (Loss)

 

 

(4,976

)

 

 

76

 

 

 

374

 

 

 

(4,526

)

Balance at End of Period

 

$

52,535

 

 

$

(502

)

 

$

(37,634

)

 

$

14,399

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at Beginning of Period

 

$

51,495

 

 

$

(423

)

 

$

(43,250

)

 

$

7,822

 

Other Comprehensive Income (Loss) Before Reclassifications

 

 

(55,406

)

 

 

 

 

 

 

 

 

(55,406

)

Amounts Reclassified from Accumulated Other

   Comprehensive Income (Loss)

 

 

(2,744

)

 

 

436

 

 

 

1,324

 

 

 

(984

)

Total Other Comprehensive Income (Loss)

 

 

(58,150

)

 

 

436

 

 

 

1,324

 

 

 

(56,390

)

Balance at End of Period

 

$

(6,655

)

 

$

13

 

 

$

(41,926

)

 

$

(48,568

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at Beginning of Period

 

$

8,359

 

 

$

(715

)

 

$

(38,756

)

 

$

(31,112

)

Other Comprehensive Income (Loss) Before Reclassifications

 

 

44,232

 

 

 

 

 

 

 

 

 

44,232

 

Amounts Reclassified from Accumulated Other

   Comprehensive Income (Loss)

 

 

(56

)

 

 

213

 

 

 

1,122

 

 

 

1,279

 

Total Other Comprehensive Income (Loss)

 

 

44,176

 

 

 

213

 

 

 

1,122

 

 

 

45,511

 

Balance at End of Period

 

$

52,535

 

 

$

(502

)

 

$

(37,634

)

 

$

14,399

 

 


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The following table presents the amounts reclassified out of each component of accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2021, and September 30, 2020:

 

Details about Accumulated Other

Comprehensive Income (Loss) Components

 

Amount Reclassified from Accumulated

Other Comprehensive Income (Loss)1

 

 

Affected Line Item in the Statement

Where Net Income Is Presented

 

 

Three Months Ended September 30,

 

 

 

(dollars in thousands)

 

2021

 

 

2020

 

 

 

Amortization of Unrealized Holding Gains (Losses) on

   Investment Securities Held-to-Maturity

 

$

(87

)

 

$

(103

)

 

Interest Income

 

 

 

23

 

 

 

27

 

 

Provision for Income Tax

 

 

 

(64

)

 

 

(76

)

 

Net of Tax

Sale of Investment Securities Available-for-Sale

 

 

83

 

 

 

 

 

Investment Securities Gains (Losses), Net

 

 

 

(22

)

 

 

 

 

Provision for Income Tax

 

 

 

61

 

 

 

 

 

Net of tax

 

 

 

 

 

 

 

 

 

 

 

Amortization of Defined Benefit Plan Items

 

 

 

 

 

 

 

 

 

 

Prior Service Credit 2

 

 

62

 

 

 

62

 

 

 

Net Actuarial Losses 2

 

 

(662

)

 

 

(571

)

 

 

 

 

 

(600

)

 

 

(509

)

 

Total Before Tax

 

 

 

159

 

 

 

135

 

 

Provision for Income Tax

 

 

 

(441

)

 

 

(374

)

 

Net of Tax

 

 

 

 

 

 

 

 

 

 

 

Total Reclassifications for the Period

 

$

(444

)

 

$

(450

)

 

Net of Tax

 

 

 

 

 

 

 

 

 

 

 

Details about Accumulated Other

Comprehensive Income (Loss) Components

 

Amount Reclassified from Accumulated

Other Comprehensive Income (Loss)1

 

 

Affected Line Item in the Statement

Where Net Income Is Presented

 

 

Nine Months Ended September 30,

 

 

 

(dollars in thousands)

 

2021

 

 

2020

 

 

 

Amortization of Unrealized Holding Gains (Losses) on

   Investment Securities Held-to-Maturity

 

$

(593

)

 

$

(289

)

 

Interest Income

 

 

 

157

 

 

 

76

 

 

Provision for Income Tax

 

 

 

(436

)

 

 

(213

)

 

Net of Tax

Sale of Investment Securities Available-for-Sale

 

 

3,758

 

 

 

77

 

 

Investment Securities Gains (Losses), Net

 

 

 

(1,014

)

 

 

(21

)

 

Provision for Income Tax

 

 

 

2,744

 

 

 

56

 

 

Net of tax

 

 

 

 

 

 

 

 

 

 

 

Amortization of Defined Benefit Plan Items

 

 

 

 

 

 

 

 

 

 

Prior Service Credit 2

 

 

185

 

 

 

185

 

 

 

Net Actuarial Losses 2

 

 

(1,985

)

 

 

(1,712

)

 

 

 

 

 

(1,800

)

 

 

(1,527

)

 

Total Before Tax

 

 

 

476

 

 

 

405

 

 

Provision for Income Tax

 

 

 

(1,324

)

 

 

(1,122

)

 

Net of Tax

 

 

 

 

 

 

 

 

 

 

 

Total Reclassifications for the Period

 

$

984

 

 

$

(1,279

)

 

Net of Tax

 

1

Amounts in parentheses indicate reductions to net income.

2

These accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost and are included in Other Noninterest Expense on the consolidated statements of income.

 


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Table of Contents

 

 

Note 9.  Earnings Per Common Share

Earnings per common share is computed using the two-class method.  The following is a reconciliation of the weighted average number of common shares used in the calculation of basic and diluted earnings per common share and antidilutive stock options and restricted stock outstanding for the three and nine months ended September 30, 2021, and September 30, 2020:

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(dollars in thousands, except shares and per share amounts)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Available to Common Shareholders

 

$

61,047

 

 

$

37,840

 

 

$

188,529

 

 

$

111,490

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average Common Shares Outstanding - Basic

 

 

39,881,437

 

 

 

39,745,120

 

 

 

39,870,450

 

 

 

39,710,252

 

Dilutive Effect of Equity Based Awards

 

 

199,482

 

 

 

124,015

 

 

 

218,449

 

 

 

162,154

 

Weighted Average Common Shares Outstanding - Diluted

 

 

40,080,919

 

 

 

39,869,135

 

 

 

40,088,899

 

 

 

39,872,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.53

 

 

$

0.95

 

 

$

4.73

 

 

$

2.81

 

Diluted

 

$

1.52

 

 

$

0.95

 

 

$

4.70

 

 

$

2.80

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Antidilutive Stock Options and Restricted Stock Outstanding

 

 

47,087

 

 

 

108,207

 

 

 

44,217

 

 

 

106,140

 

 

Note 10.  Business Segments

The Company’s business segments are defined as Consumer Banking, Commercial Banking, and Treasury and Other.  The Company’s internal management accounting process measures the performance of these business segments.  This process, which is not necessarily comparable with the process used by any other financial institution, uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of income, expense, the provision for credit losses, and capital.  This process is dynamic and requires certain allocations based on judgment and other subjective factors.  Unlike financial accounting, there is no comprehensive authoritative guidance for management accounting that is equivalent to GAAP.  Previously reported results have been reclassified to conform to the current reporting structure.

The net interest income of the business segments reflects the results of a funds transfer pricing process that matches assets and liabilities with similar interest rate sensitivity and maturity characteristics and reflects the allocation of net interest income related to the Company’s overall asset and liability management activities on a proportionate basis.  The basis for the allocation of net interest income is a function of the Company’s assumptions that are subject to change based on changes in current interest rates and market conditions.  Funds transfer pricing also serves to transfer interest rate risk to Treasury.  However, the other business segments have some latitude to retain certain interest rate exposures related to customer pricing decisions within guidelines.

The provision for credit losses for the Consumer Banking and Commercial Banking business segments reflects the actual net charge-offs of those business segments.  The amount of the consolidated provision for loan and lease losses is based on the methodology that we use to estimate our consolidated Allowance.  The residual provision for credit losses to arrive at the consolidated provision for credit losses is included in Treasury and Other.

Noninterest income and expense includes allocations from support units to business units.  These allocations are based on actual usage where practicably calculated or by management’s estimate of such usage.

The provision for income taxes is allocated to business segments using a 26% effective income tax rate.  However, the provision for income taxes for our Leasing business unit (included in the Commercial Banking segment) and Auto Leasing portfolio and Pacific Century Life Insurance business unit (both included in the Consumer Banking segment) are assigned their actual effective income tax rates due to the unique relationship that income taxes have with their products.  The residual income tax expense or benefit to arrive at the consolidated effective tax rate is included in Treasury and Other.

29


Table of Contents

 

Consumer Banking

Consumer Banking offers a broad range of financial products and services, including loan, deposit and insurance products; private banking and international client banking services; trust services; investment management; and institutional investment advisory services.  Consumer Banking also provides a full service brokerage offering equities, mutual funds, life insurance, and annuity products.  Loan and lease products include residential mortgage loans, home equity lines of credit, automobile loans and leases, personal lines of credit, installment loans, small business loans and leases, and credit cards.  Deposit products include checking, savings, and time deposit accounts. Private banking and personal trust groups assist individuals and families in building and preserving their wealth by providing investment, credit, and trust services to high-net-worth individuals. The investment management group manages portfolios utilizing a variety of investment products.  Also within Consumer Banking, institutional client services offer investment advice to corporations, government entities, and foundations.  Products and services from Consumer Banking are delivered to customers through 54 branch locations and 303 ATMs throughout Hawaii and the Pacific Islands, e-Bankoh (on-line banking service), a customer service center, and a mobile banking service.

Commercial Banking

Commercial Banking offers products including corporate banking, commercial real estate loans, commercial lease financing, auto dealer financing, and deposit products.  Commercial lending and deposit products are offered to middle-market and large companies in Hawaii and the Pacific Islands.  In addition, Commercial Banking offers deposit products to government entities in Hawaii. Commercial real estate mortgages focus on customers that include investors, developers, and builders predominantly domiciled in Hawaii.  Commercial Banking also includes international banking and provides merchant services to its customers.

Treasury and Other

Treasury consists of corporate asset and liability management activities, including interest rate risk management and a foreign currency exchange business.  This segment’s assets and liabilities (and related interest income and expense) consist of interest-bearing deposits, investment securities, federal funds sold and purchased, and short and long-term borrowings.  The primary sources of noninterest income are from bank-owned life insurance, net gains from the sale of investment securities, and foreign exchange income related to customer-driven currency requests from merchants and island visitors.  The net residual effect of the transfer pricing of assets and liabilities is included in Treasury, along with the elimination of intercompany transactions.

Other organizational units (Technology, Operations, Marketing, Human Resources, Finance, Credit and Risk Management, and Corporate and Regulatory Administration) provide a wide-range of support to the Company’s other income earning segments.  Expenses incurred by these support units are charged to the business segments through an internal cost allocation process.

30


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Selected business segment financial information as of and for the three and nine months ended September 30, 2021, and September 30, 2020, were as follows:

 

(dollars in thousands)

 

Consumer

Banking

 

 

Commercial

Banking

 

 

Treasury

and Other

 

 

Consolidated

Total

 

Three Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

$

72,062

 

 

$

50,088

 

 

$

4,669

 

 

$

126,819

 

Provision for Credit Losses

 

 

1,235

 

 

 

(42

)

 

 

(11,593

)

 

 

(10,400

)

Net Interest Income After Provision for Credit Losses

 

 

70,827

 

 

 

50,130

 

 

 

16,262

 

 

 

137,219

 

Noninterest Income

 

 

32,046

 

 

 

7,906

 

 

 

1,426

 

 

 

41,378

 

Noninterest Expense

 

 

(71,377

)

 

 

(15,924

)

 

 

(9,218

)

 

 

(96,519

)

Income Before Provision for Income Taxes

 

 

31,496

 

 

 

42,112

 

 

 

8,470

 

 

 

82,078

 

Provision for Income Taxes

 

 

(8,001

)

 

 

(10,373

)

 

 

(1,651

)

 

 

(20,025

)

Net Income

 

$

23,495

 

 

$

31,739

 

 

$

6,819

 

 

$

62,053

 

Total Assets as of September 30, 2021

 

$

7,530,513

 

 

$

5,087,831

 

 

$

10,347,039

 

 

$

22,965,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

$

73,868

 

 

$

47,797

 

 

$

2,501

 

 

$

124,166

 

Provision for Credit Losses

 

 

(1,372

)

 

 

(85

)

 

 

30,057

 

 

 

28,600

 

Net Interest Income (Loss) After Provision for Credit Losses

 

 

75,240

 

 

 

47,882

 

 

 

(27,556

)

 

 

95,566

 

Noninterest Income

 

 

31,776

 

 

 

7,672

 

 

 

2,286

 

 

 

41,734

 

Noninterest Expense

 

 

(69,408

)

 

 

(15,430

)

 

 

(5,111

)

 

 

(89,949

)

Income (Loss) Before Provision for Income Taxes

 

 

37,608

 

 

 

40,124

 

 

 

(30,381

)

 

 

47,351

 

Provision for Income Taxes

 

 

(9,627

)

 

 

(9,784

)

 

 

9,900

 

 

 

(9,511

)

Net Income (Loss)

 

$

27,981

 

 

$

30,340

 

 

$

(20,481

)

 

$

37,840

 

Total Assets as of September 30, 2020

 

$

7,383,822

 

 

$

5,027,836

 

 

$

7,697,831

 

 

$

20,109,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

$

212,991

 

 

$

146,269

 

 

$

11,642

 

 

$

370,902

 

Provision for Credit Losses

 

 

5,088

 

 

 

205

 

 

 

(46,093

)

 

 

(40,800

)

Net Interest Income After Provision for Credit Losses

 

 

207,903

 

 

 

146,064

 

 

 

57,735

 

 

 

411,702

 

Noninterest Income

 

 

98,344

 

 

 

22,339

 

 

 

8,096

 

 

 

128,779

 

Noninterest Expense

 

 

(222,426

)

 

 

(47,343

)

 

 

(22,142

)

 

 

(291,911

)

Income Before Provision for Income Taxes

 

 

83,821

 

 

 

121,060

 

 

 

43,689

 

 

 

248,570

 

Provision for Income Taxes

 

 

(20,840

)

 

 

(29,634

)

 

 

(8,561

)

 

 

(59,035

)

Net Income

 

$

62,981

 

 

$

91,426

 

 

$

35,128

 

 

$

189,535

 

Total Assets as of September 30, 2021

 

$

7,530,513

 

 

$

5,087,831

 

 

$

10,347,039

 

 

$

22,965,383

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

$

221,003

 

 

$

144,253

 

 

$

11,567

 

 

$

376,823

 

Provision for Credit Losses

 

 

8,215

 

 

 

(819

)

 

 

95,204

 

 

 

102,600

 

Net Interest Income (Loss) After Provision for Credit Losses

 

 

212,788

 

 

 

145,072

 

 

 

(83,637

)

 

 

274,223

 

Noninterest Income

 

 

93,309

 

 

 

26,483

 

 

 

19,359

 

 

 

139,151

 

Noninterest Expense

 

 

(210,744

)

 

 

(47,552

)

 

 

(16,857

)

 

 

(275,153

)

Income (Loss) Before Provision for Income Taxes

 

 

95,353

 

 

 

124,003

 

 

 

(81,135

)

 

 

138,221

 

Provision for Income Taxes

 

 

(24,235

)

 

 

(30,278

)

 

 

27,782

 

 

 

(26,731

)

Net Income (Loss)

 

$

71,118

 

 

$

93,725

 

 

$

(53,353

)

 

$

111,490

 

Total Assets as of September 30, 2020

 

$

7,383,822

 

 

$

5,027,836

 

 

$

7,697,831

 

 

$

20,109,489

 

 

 

31


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Note 11.  Derivative Financial Instruments

The notional amount and fair value of the Company’s derivative financial instruments as of September 30, 2021, and December 31, 2020, were as follows:

 

 

 

September 30, 2021

 

 

December 31, 2020

 

(dollars in thousands)

 

Notional Amount

 

 

Fair Value

 

 

Notional Amount

 

 

Fair Value

 

Interest Rate Lock Commitments

 

$

48,993

 

 

$

1,222

 

 

$

102,881

 

 

$

4,947

 

Forward Commitments

 

 

60,163

 

 

 

213

 

 

 

158,759

 

 

 

(740

)

Interest Rate Swap Agreements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Receive Fixed/Pay Variable Swaps

 

 

1,440,485

 

 

 

38,162

 

 

 

1,362,778

 

 

 

90,130

 

Pay Fixed/Receive Variable Swaps

 

 

1,440,485

 

 

 

(8,275

)

 

 

1,362,778

 

 

 

(17,197

)

Foreign Exchange Contracts

 

 

97,172

 

 

 

(645

)

 

 

90,587

 

 

 

866

 

Conversion Rate Swap Agreement

 

 

135,735

 

 

 

 

 

 

133,286

 

 

 

 

 

The following table presents the Company’s derivative financial instruments, their fair values, and their location in the consolidated statements of condition as of September 30, 2021, and December 31, 2020:

 

Derivative Financial Instruments

 

September 30, 2021

 

 

December 31, 2020

 

Not Designated as Hedging Instruments 1

 

Asset

 

 

Liability

 

 

Asset

 

 

Liability

 

(dollars in thousands)

 

Derivatives

 

 

Derivatives

 

 

Derivatives

 

 

Derivatives

 

Interest Rate Lock Commitments

 

$

1,222

 

 

$

 

 

$

4,947

 

 

$

 

Forward Commitments

 

 

227

 

 

 

14

 

 

 

 

 

 

740

 

Interest Rate Swap Agreements

 

 

47,211

 

 

 

17,324

 

 

 

90,342

 

 

 

17,409

 

Foreign Exchange Contracts

 

 

61

 

 

 

706

 

 

 

878

 

 

 

12

 

Total

 

$

48,721

 

 

$

18,044

 

 

$

96,167

 

 

$

18,161

 

 

1

Asset derivatives are included in other assets and liability derivatives are included in other liabilities in the consolidated statements of condition.

The following table presents the Company’s derivative financial instruments and the amount and location of the net gains or losses recognized in the consolidated statements of income for the three and nine months ended September 30, 2021, and September 30, 2020:

 

 

 

Location of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Financial Instruments

 

Net Gains (Losses)

 

Three Months Ended

 

 

Nine Months Ended

 

Not Designated as Hedging Instruments

 

Recognized in the

 

September 30,

 

 

September 30,

 

(dollars in thousands)

 

Statements of Income

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Interest Rate Lock Commitments

 

Mortgage Banking

 

$

2,083

 

 

$

4,903

 

 

$

6,927

 

 

$

15,556

 

Forward Commitments

 

Mortgage Banking

 

 

(53

)

 

 

(595

)

 

 

1,598

 

 

 

(3,652

)

Interest Rate Swap Agreements

 

Other Noninterest Income

 

 

2,147

 

 

 

2,575

 

 

 

4,848

 

 

 

12,041

 

Foreign Exchange Contracts

 

Other Noninterest Income

 

 

401

 

 

 

467

 

 

 

1,120

 

 

 

1,403

 

Total

 

 

 

$

4,578

 

 

$

7,350

 

 

$

14,493

 

 

$

25,348

 

As of September 30, 2021, and December 31, 2020, the Company did not designate any derivative financial instruments as formal hedging relationships.  The Company’s free-standing derivative financial instruments are required to be carried at their fair value on the Company’s consolidated statements of condition. 

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Table of Contents

 

Interest Rate Swap Agreements

The Company enters into interest rate swap agreements to facilitate the risk management strategies of a small number of commercial banking customers.  The Company mitigates the risk of entering into these agreements by entering into equal and offsetting swap agreements with third-party financial institutions.  The swap agreements are free-standing derivatives and are recorded at fair value in the Company’s consolidated statements of condition (asset positions are included in other assets and liability positions are included in other liabilities).  The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes.  The master netting arrangements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract.  Collateral, usually in the form of cash or marketable securities, is posted by the party (i.e., the Company or the financial institution counterparty) with net liability positions in accordance with contract thresholds.  The Company had net liability positions with its financial institution counterparties totaling $8.3 million and $17.2 million as of September 30, 2021, and December 31, 2020, respectively.  

Parties to over-the-counter derivatives which are centrally cleared through a clearinghouse exchange daily payments that reflect the daily change in value of the derivatives.  Effective 2017, these payments, commonly referred to as variation margin, are recorded as settlements of the derivatives’ mark-to-market exposure rather than collateral against the exposures.  This rule change effectively results in all centrally cleared derivatives having a fair value that approximates zero on a daily basis.  Substantially all of our swap agreements originated after the rule change are centrally cleared.

Conversion Rate Swap Agreements

As certain sales of Visa Class B restricted shares were completed, the Company entered into a conversion rate swap agreement with the buyer that requires payment to the buyer in the event Visa further reduces the conversion ratio of Class B into Class A unrestricted common shares.  In the event of Visa increasing the conversion ratio, the buyer would be required to make payment to the Company.  As of September 30, 2021, and December 31, 2020, the conversion rate swap agreement was valued at zero (i.e., no contingent liability recorded) as further reductions to the conversion ratio were deemed neither probable nor reasonably estimable by management.  See Note 3 Investment Securities for more information.

Note 12.  Commitments, Contingencies, and Guarantees

The Company’s credit commitments as of September 30, 2021, and December 31, 2020, were as follows:

 

(dollars in thousands)

 

September 30,

2021

 

 

December 31,

2020

 

Unfunded Commitments to Extend Credit

 

$

2,973,153

 

 

$

2,787,123

 

Standby Letters of Credit

 

 

125,932

 

 

 

100,186

 

Commercial Letters of Credit

 

 

16,715

 

 

 

10,511

 

Total Credit Commitments

 

$

3,115,800

 

 

$

2,897,820

 

 

Unfunded Commitments to Extend Credit

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of the terms or conditions established in the contract.  Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.  Since commitments may expire without being drawn, the total commitment amount does not necessarily represent future cash requirements.

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Table of Contents

 

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party.  Standby letters of credit generally become payable upon the failure of the customer to perform according to the terms of the underlying contract with the third-party, while commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and a third party.  The contractual amount of these letters of credit represents the maximum potential future payments guaranteed by the Company.  The Company has recourse against the customer for any amount it is required to pay to a third-party under a standby letter of credit, and generally holds cash or deposits as collateral on those standby letters of credit for which collateral is deemed necessary.

Contingencies

The Company is subject to various pending and threatened legal proceedings arising out of the normal course of business or operations.  On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with outstanding legal proceedings using the most recent information available.  On a case-by-case basis, reserves are established for those legal claims for which it is probable that a loss will be incurred and the amount of such loss can be reasonably estimated.  Based on information currently available, management believes that the eventual outcome of these claims against the Company will not be materially in excess of such amounts reserved by the Company.  However, in the event of unexpected future developments, it is possible that the ultimate resolution of these matters may result in a loss that materially exceeds the reserves established by the Company.

Note 13.  Fair Value of Assets and Liabilities

Fair Value Hierarchy

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date.  GAAP established a fair value hierarchy that prioritizes the use of inputs used in valuation methodologies into the following three levels:

 

Level 1:

Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets.  A quoted price in an active market provides the most reliable evidence of fair value and is used to measure fair value whenever available.  A contractually binding sales price also provides reliable evidence of fair value.

 

 

Level 2:

Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that utilize model-based techniques for which all significant assumptions are observable in the market.

 

 

Level 3:

Inputs to the valuation methodology are unobservable and significant to the fair value measurement; inputs to the valuation methodology that utilize model-based techniques for which significant assumptions are not observable in the market; or inputs to the valuation methodology that require significant management judgment or estimation, some of which may be internally developed.

 

In some instances, an instrument may fall into multiple levels of the fair value hierarchy.  In such instances, the instrument’s level within the fair value hierarchy is based on the lowest of the three levels (with Level 3 being the lowest) that is significant to the fair value measurement.  Our assessment of the significance of an input requires judgment and considers factors specific to the instrument.

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Table of Contents

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Investment Securities Available-for-Sale

Level 1 investment securities are comprised of debt securities issued by the U.S. Treasury, as quoted prices were available, unadjusted, for identical securities in active markets.  Level 2 investment securities were primarily comprised of debt securities issued by the Small Business Administration, states and municipalities, corporations, as well as mortgage-backed securities issued by government agencies and government sponsored enterprises.  Fair values were estimated primarily by obtaining quoted prices for similar assets in active markets or through the use of pricing models.  In cases where there may be limited or less transparent information provided by the Company’s third-party pricing service, fair value may be estimated by the use of secondary pricing services or through the use of non-binding third-party broker quotes.

Loans Held for Sale

The fair value of the Company’s residential mortgage loans held for sale was determined based on quoted prices for similar loans in active markets, and therefore, is classified as a Level 2 measurement.

Mortgage Servicing Rights

The Company estimates the fair value of mortgage servicing rights by using a discounted cash flow model to calculate the present value of estimated future net servicing income.  The Company stratifies its mortgage servicing portfolio on the basis of loan type.  The assumptions used in the discounted cash flow model are those that the Company believes market participants would use in estimating future net servicing income.  Significant assumptions in the valuation of mortgage servicing rights include estimated loan repayment rates, the discount rate, servicing costs, and the timing of cash flows, among other factors.  Mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.

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Table of Contents

 

Other Assets

Other assets recorded at fair value on a recurring basis are primarily comprised of investments related to deferred compensation arrangements.  Quoted prices for these investments, primarily in mutual funds, are available in active markets.  Thus, the Company’s investments related to deferred compensation arrangements are classified as Level 1 measurements in the fair value hierarchy.

Derivative Financial Instruments

Derivative financial instruments recorded at fair value on a recurring basis are comprised of IRLCs, forward commitments, interest rate swap agreements, foreign exchange contracts, and Visa Class B to Class A shares conversion rate swap agreements.  The fair values of IRLCs are calculated based on the value of the underlying loan held for sale, which in turn is based on quoted prices for similar loans in the secondary market.  However, this value is adjusted by a factor which considers the likelihood that the loan in a locked position will ultimately close.  This factor, the closing ratio, is derived from the Bank’s internal data and is adjusted using significant management judgment.  As such, IRLCs are classified as Level 3 measurements.  Forward commitments are classified as Level 2 measurements as they are primarily based on quoted prices from the secondary market based on the settlement date of the contracts, interpolated or extrapolated, if necessary, to estimate a fair value as of the end of the reporting period.  The fair values of interest rate swap agreements are calculated using a discounted cash flow approach and utilize Level 2 observable inputs such as a market yield curve, effective date, maturity date, notional amount, and stated interest rate. The valuation methodology for cleared interest rate swaps with financial institution counterparties (and the related customer interest rate swaps) is based on the Secured Overnight Financing Rate, while the valuation methodology for uncleared interest rate swaps is based on the Effective Federal Funds Rate.  In addition, the Company includes in its fair value calculation a credit factor adjustment which is based primarily on management judgment.  Thus, interest rate swap agreements are classified as a Level 3 measurement.  The fair values of foreign exchange contracts are calculated using the Bank’s multi-currency accounting system which utilizes contract specific information such as currency, maturity date, contractual amount, and strike price, along with market data information such as the spot rates of specific currency and yield curves.  Foreign exchange contracts are classified as Level 2 measurements because while they are valued using the Bank’s multi-currency accounting system, significant management judgment or estimation is not required.  The fair value of the Visa Class B restricted shares to Class A unrestricted common shares conversion rate swap agreements represent the amount owed by the Company to the buyer of the Visa Class B shares as a result of a reduction of the conversion ratio subsequent to the sales date.  As of September 30, 2021, and December 31, 2020, the conversion rate swap agreements were valued at zero as reductions to the conversion ratio were neither probable nor reasonably estimable by management.  See Note 11 Derivative Financial Instruments for more information.

The Company is exposed to credit risk if borrowers or counterparties fail to perform.  The Company seeks to minimize credit risk through credit approvals, limits, monitoring procedures, and collateral requirements.  The Company generally enters into transactions with borrowers and counterparties that carry high quality credit ratings.  Credit risk associated with borrowers or counterparties as well as the Company’s non-performance risk is factored into the determination of the fair value of derivative financial instruments.

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Table of Contents

 

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis as of September 30, 2021, and December 31, 2020:

 

 

 

Quoted Prices

in Active

Markets for

Identical Assets

or Liabilities

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

 

 

 

 

(dollars in thousands)

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Issued by the U.S. Treasury and Government

   Agencies

 

$

751

 

 

$

144,113

 

 

$

 

 

$

144,864

 

Debt Securities Issued by States and Political Subdivisions

 

 

 

 

 

21,068

 

 

 

 

 

 

21,068

 

Debt Securities Issued by U.S. Government-Sponsored

   Enterprises

 

 

 

 

 

1,555

 

 

 

 

 

 

1,555

 

Debt Securities Issued by Corporations

 

 

 

 

 

387,874

 

 

 

 

 

 

387,874

 

Mortgage-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential - Government Agencies

 

 

 

 

 

1,417,183

 

 

 

 

 

 

1,417,183

 

Residential - U.S. Government-Sponsored Enterprises

 

 

 

 

 

2,200,052

 

 

 

 

 

 

2,200,052

 

Commercial - Government Agencies

 

 

 

 

 

180,924

 

 

 

 

 

 

180,924

 

Total Mortgage-Backed Securities

 

 

 

 

 

3,798,159

 

 

 

 

 

 

3,798,159

 

Total Investment Securities Available-for-Sale

 

 

751

 

 

 

4,352,769

 

 

 

 

 

 

4,353,520

 

Loans Held for Sale

 

 

 

 

 

21,965

 

 

 

 

 

 

21,965

 

Mortgage Servicing Rights

 

 

 

 

 

 

 

 

826

 

 

 

826

 

Other Assets

 

 

55,167

 

 

 

 

 

 

 

 

 

55,167

 

Derivatives 1

 

 

 

 

 

288

 

 

 

48,433

 

 

 

48,721

 

Total Assets Measured at Fair Value on a Recurring Basis as of

   September 30, 2021

 

$

55,918

 

 

$

4,375,022

 

 

$

49,259

 

 

$

4,480,199

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives 1

 

$

 

 

$

720

 

 

$

17,324

 

 

$

18,044

 

Total Liabilities Measured at Fair Value on a

   Recurring Basis as of September 30, 2021

 

$

 

 

$

720

 

 

$

17,324

 

 

$

18,044

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Securities Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt Securities Issued by the U.S. Treasury and

   Government Agencies

 

$

921

 

 

$

173,324

 

 

$

 

 

$

174,245

 

Debt Securities Issued by States and Political Subdivisions

 

 

 

 

 

24,840

 

 

 

 

 

 

24,840

 

Debt Securities Issued by U.S. Government-Sponsored

   Enterprises

 

 

 

 

 

1,062

 

 

 

 

 

 

1,062

 

Debt Securities Issued by Corporations

 

 

 

 

 

224,605

 

 

 

 

 

 

224,605

 

Mortgage-Backed Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential - Government Agencies

 

 

 

 

 

1,594,815

 

 

 

 

 

 

1,594,815

 

Residential - U.S. Government-Sponsored Enterprises

 

 

 

 

 

1,518,283

 

 

 

 

 

 

1,518,283

 

Commercial - Government Agencies

 

 

 

 

 

253,839

 

 

 

 

 

 

253,839

 

Total Mortgage-Backed Securities

 

 

 

 

 

3,366,937

 

 

 

 

 

 

3,366,937

 

Total Investment Securities Available-for-Sale

 

 

921

 

 

 

3,790,768

 

 

 

 

 

 

3,791,689

 

Loans Held for Sale

 

 

 

 

 

82,565

 

 

 

 

 

 

82,565

 

Mortgage Servicing Rights

 

 

 

 

 

 

 

 

958

 

 

 

958

 

Other Assets

 

 

53,410

 

 

 

 

 

 

 

 

 

53,410

 

Derivatives 1

 

 

 

 

 

878

 

 

 

95,289

 

 

 

96,167

 

Total Assets Measured at Fair Value on a Recurring Basis as of

   December 31, 2020

 

$

54,331

 

 

$

3,874,211

 

 

$

96,247

 

 

$

4,024,789

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives 1

 

$

 

 

$

752

 

 

$

17,409

 

 

$

18,161

 

Total Liabilities Measured at Fair Value on a Recurring Basis as of

   December 31, 2020

 

$

 

 

$

752

 

 

$

17,409

 

 

$

18,161

 

 

1

The fair value of each class of derivatives is shown in Note 11 Derivative Financial Instruments.

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Table of Contents

 

 

For the three and nine months ended September 30, 2021, and September 30, 2020, the changes in Level 3 assets and liabilities measured at fair value on a recurring basis were as follows:

 

(dollars in thousands)

 

Mortgage

Servicing

Rights 1

 

 

Net Derivative

Assets and

Liabilities 2

 

Three Months Ended September 30, 2021

 

 

 

 

 

 

 

 

Balance as of July 1, 2021

 

$

875

 

 

$

37,957

 

Realized and Unrealized Net Gains (Losses):

 

 

 

 

 

 

 

 

Included in Net Income

 

 

(49

)

 

 

2,095

 

Transfers to Loans Held for Sale

 

 

 

 

 

(3,068

)

Variation Margin Payments

 

 

 

 

 

(5,875

)

Balance as of September 30, 2021

 

$

826

 

 

$

31,109

 

Total Unrealized Net Gains (Losses) Included in Net Income Related to Assets Still Held

   as of September 30, 2021

 

$

 

 

$

31,109

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2020

 

 

 

 

 

 

 

 

Balance as of July 1, 2020

 

$

1,068

 

 

$

88,995

 

Realized and Unrealized Net Gains (Losses):

 

 

 

 

 

 

 

 

Included in Net Income

 

 

(50

)

 

 

4,909

 

Transfers to Loans Held for Sale

 

 

 

 

 

(4,242

)

Variation Margin Payments

 

 

 

 

 

(1,840

)

Balance as of September 30, 2020

 

$

1,018

 

 

$

87,822

 

Total Unrealized Net Gains (Losses) Included in Net Income Related to Assets Still Held

   as of September 30, 2020

 

$

 

 

$

87,822

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

Balance as of January 1, 2021

 

$

958

 

 

 

77,880

 

Realized and Unrealized Net Gains (Losses):

 

 

 

 

 

 

 

 

Included in Net Income

 

 

(132

)

 

 

7,008

 

Transfers to Loans Held for Sale

 

 

 

 

 

(10,652

)

Variation Margin Payments

 

 

 

 

 

(43,127

)

Balance as of September 30, 2021

 

$

826

 

 

 

31,109

 

Total Unrealized Net Gains (Losses) Included in Net Income Related to Assets Still Held

   as of September 30, 2021

 

$

 

 

$

31,109

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

Balance as of January 1, 2020

 

$

1,126

 

 

$

22,573

 

Realized and Unrealized Net Gains (Losses):

 

 

 

 

 

 

 

 

Included in Net Income

 

 

(108

)

 

 

15,372

 

Transfers to Loans Held for Sale

 

 

 

 

 

(13,521

)

Variation Margin Payments

 

 

 

 

 

63,398

 

Balance as of September 30, 2020

 

$

1,018

 

 

$

87,822

 

Total Unrealized Net Gains (Losses) Included in Net Income Related to Assets Still Held

   as of September 30, 2020

 

$

 

 

$

87,822

 

 

1

Realized and unrealized gains and losses related to mortgage servicing rights are reported as a component of mortgage banking income in the Company’s consolidated statements of income.

2

Realized and unrealized gains and losses related to interest rate lock commitments are reported as a component of mortgage banking income in the Company’s consolidated statements of income.  Realized and unrealized gains and losses related to interest rate swap agreements are reported as a component of other noninterest income in the Company’s consolidated statements of income.

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Table of Contents

 

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2021, and December 31, 2020, the significant unobservable inputs used in the fair value measurements were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Valuation

Technique

 

Description

 

Range

 

 

Weighted

Average1

 

 

Fair

Value

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Servicing Rights

 

Discounted Cash Flow

 

Constant Prepayment Rate

 

 

8.13

%

-

 

14.43

%

 

 

11.50

%

 

$

22,099

 

 

 

 

 

Discount Rate

 

 

5.65

%

-

 

6.74

%

 

 

6.67

%

 

$

 

Net Derivative Assets and Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Lock Commitments

 

Pricing Model

 

Closing Ratio

 

 

84.10

%

-

 

100.00

%

 

 

92.84

%

 

$

1,222

 

Interest Rate Swap Agreements

 

Discounted Cash Flow

 

Credit Factor

 

 

0.00

%

-

 

0.49

%

 

 

0.14

%

 

$

29,887

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Servicing Rights

 

Discounted Cash Flow

 

Constant Prepayment Rate

 

 

8.71

%

-

 

15.89

%

 

 

14.42

%

 

$

19,652

 

 

 

 

 

Discount Rate

 

 

5.69

%

-

 

6.28

%

 

 

5.81

%

 

$

 

Net Derivative Assets and Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Rate Lock Commitments

 

Pricing Model

 

Closing Ratio

 

 

84.10

%

-

 

99.00

%

 

 

90.76

%

 

$

4,947

 

Interest Rate Swap Agreements

 

Discounted Cash Flow

 

Credit Factor

 

 

0.00

%

-

 

0.49

%

 

 

0.29

%

 

$

72,933

 

 

1

Unobservable inputs for mortgage servicing rights and interest rate lock commitments were weighted by loan amount.  Unobservable inputs for interest rate swap agreements were weighted by fair value.

Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement.  Although the constant prepayment rate and the discount rate are not directly interrelated, they generally move in opposite directions of each other.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company may be required periodically to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with GAAP.  These adjustments to fair value usually result from the application of lower-of-cost-or-fair value accounting or impairment write-downs of individual assets. The following table represents the assets measured at fair value on a nonrecurring basis as of September 30, 2021, and December 31, 2020.

 

(dollars in thousands)

 

Fair Value

Hierarchy

 

Net Carrying

Amount

 

 

Valuation

Allowance

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

Mortgage Servicing Rights - amortization method

 

Level 3

 

$

21,273

 

 

$

(2,107

)

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

Mortgage Servicing Rights - amortization method

 

Level 3

 

$

18,694

 

 

$

(3,892

)

The write-down of mortgage servicing rights accounted for under the amortization method was primarily due to changes in certain key assumptions used to estimate fair value.  As previously mentioned, all of the Company's mortgage servicing rights are classified as Level 3 measurements due to the use of significant unobservable inputs, as well as significant management judgment and estimation.  

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Table of Contents

 

Fair Value Option

The following table reflects the difference between the aggregate fair value and the aggregate unpaid principal balance of the Company’s residential mortgage loans held for sale as of September 30, 2021, and December 31, 2020.  

 

(dollars in thousands)

 

Aggregate

Fair Value

 

 

Aggregate

Unpaid

Principal

 

 

Aggregate

Fair Value

Less Aggregate

Unpaid Principal

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Loans Held for Sale

 

$

21,965

 

 

$

21,376

 

 

$

589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Loans Held for Sale

 

$

82,565

 

 

$

78,577

 

 

$

3,988

 

 

Changes in the estimated fair value of residential mortgage loans held for sale are reported as a component of mortgage banking income in the Company’s consolidated statements of income.  For the three and nine months ended September 30, 2021, and September 30, 2020, the net gains or losses from the change in fair value of the Company’s residential mortgage loans held for sale were not material.

Financial Instruments Not Recorded at Fair Value on a Recurring Basis

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments not recorded at fair value on a recurring basis as of September 30, 2021, and December 31, 2020.  This table excludes financial instruments for which the carrying amount approximates fair value.  For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.  For non-marketable equity securities such as Federal Home Loan Bank and Federal Reserve Bank stock, the carrying amount is a reasonable estimate of fair value as these securities can only be redeemed or sold at their par value and only to the respective issuing government supported institution or to another member institution.  For financial liabilities such as noninterest-bearing demand, interest-bearing demand, and savings deposits, the carrying amount is a reasonable estimate of fair value due to these products having no stated maturity.

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements

 

 

 

Carrying

 

 

 

 

 

 

Quoted Prices

in Active

Markets for

Identical Assets

or Liabilities

 

 

Significant

Other

Observable

Inputs

 

 

Significant

Unobservable

Inputs

 

(dollars in thousands)

 

Amount

 

 

Fair Value

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Instruments - Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Securities Held-to-Maturity

 

$

4,899,880

 

 

$

4,895,763

 

 

$

131,558

 

 

$

4,764,205

 

 

$

 

Loans 1

 

 

11,718,951

 

 

 

11,962,539

 

 

 

 

 

 

 

 

 

11,962,539

 

Financial Instruments - Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time Deposits

 

 

1,072,915

 

 

 

1,074,210

 

 

 

 

 

 

1,074,210

 

 

 

 

Securities Sold Under Agreements to Repurchase

 

 

450,490

 

 

 

477,228

 

 

 

 

 

 

477,228

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Instruments - Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investment Securities Held-to-Maturity

 

$

3,262,727

 

 

$

3,348,693

 

 

$

7,500

 

 

$

3,341,193

 

 

$

 

Loans 1

 

 

11,536,011

 

 

 

12,019,151

 

 

 

 

 

 

 

 

 

12,019,151

 

Financial Instruments - Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time Deposits

 

 

1,662,063

 

 

 

1,667,774

 

 

 

 

 

 

1,667,774

 

 

 

 

Securities Sold Under Agreements to Repurchase

 

 

600,590

 

 

 

649,039

 

 

 

 

 

 

649,039

 

 

 

 

Other Debt 2

 

 

50,000

 

 

 

51,546

 

 

 

 

 

 

51,546

 

 

 

 

 

1

Carrying amount is net of unearned income and the Allowance.

2

Excludes finance lease obligations.

 

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements can be identified by the fact that they do not relate strictly to historical or current facts and may include statements concerning, among other things, the anticipated economic and business environment in our service area and elsewhere, credit quality and other financial and business matters in future periods, our future results of operations and financial position, our business strategy and plans and our objectives and future operations.  We also may make forward-looking statements in our other documents filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”).  In addition, our senior management may make forward-looking statements orally to analysts, investors, representatives of the media and others.  Our forward-looking statements are based on numerous assumptions, any of which could prove to be inaccurate, and actual results may differ materially from those projected because of a variety of risks and uncertainties, including, but not limited to: 1) general economic conditions either nationally, internationally, or locally may be different than expected, and particularly, any event that negatively impacts the tourism industry in Hawaii; 2) the compounding effects of the COVID-19 pandemic, including reduced tourism in Hawaii, the duration and scope of government mandates or other limitations on travel and any lingering effects therefrom, volatility in the international and national economy and credit markets, worker absenteeism, quarantines or other travel or health-related restrictions, the length and severity of the COVID-19 pandemic, the pace of recovery following the COVID-19 pandemic, and the effect of government, business and individual actions intended to mitigate the effects of the COVID-19 pandemic; 3) changes in market interest rates that may affect credit markets and our ability to maintain our net interest margin; 4) changes in our credit quality or risk profile that may increase or decrease the required level of our reserve for credit losses; 5) the impact of legislative and regulatory initiatives, particularly the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018; 6) changes to the amount and timing of proposed common stock repurchases; 7) unanticipated changes in the securities markets, public debt markets, and other capital markets in the U.S. and internationally, including, without limitation, the anticipated elimination of the London Interbank Offered Rate (“LIBOR”) as a benchmark interest rate; 8) changes in fiscal and monetary policies of the markets in which we operate; 9) the increased cost of maintaining or the Company’s ability to maintain adequate liquidity and capital, based on the requirements adopted by the Basel Committee on Banking Supervision and U.S. regulators; 10) changes in accounting standards; 11) the effect of changes in or interpretations of tax laws or regulations, including Public Law 115-97, commonly known as the Tax Cuts and Jobs Act; 12) any failure or disruption in or breach of our operational or security systems, information systems or infrastructure, or those of our merchants, third party vendors and other service providers; 13) any interruption or breach of security of our information systems resulting in failures or disruptions in customer account management, general ledger processing, and loan or deposit systems; 14) natural disasters, public unrest or adverse weather, public health, disease outbreaks, and other conditions impacting us and our customers’ operations or negatively impacting the tourism industry in Hawaii; 15) competitive pressures in the markets for financial services and products; 16) actual or alleged conduct which could harm our reputation; and 17) the impact of litigation and regulatory investigations of the Company, including costs, expenses, settlements, and judgments. Given these risks and uncertainties, investors should not place undue reliance on any forward-looking statement as a prediction of our actual results.  A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included under the section entitled “Risk Factors” in Part II of this report and Part I of our Annual Report on Form 10-K for the year ended December 31, 2020, and subsequent periodic and current reports filed with the SEC.  Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.  We undertake no obligation to update forward-looking statements to reflect later events or circumstances, except as may be required by law.

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Critical Accounting Policies

Our Consolidated Financial Statements were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the industries in which we operate.  The most significant accounting policies we follow are presented in Note 1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.  Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes.  Most accounting policies are not considered by management to be critical accounting policies.  Several factors are considered in determining whether or not a policy is critical in the preparation of the Consolidated Financial Statements.  These factors include among other things, whether the policy requires management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.  The accounting policies which we believe to be most critical in preparing our Consolidated Financial Statements are presented in the section titled “Critical Accounting Policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.  There have been no significant changes in the Company’s application of critical accounting policies since December 31, 2020.

Overview

Bank of Hawaii Corporation (the “Parent”) is a Delaware corporation and a bank holding company headquartered in Honolulu, Hawaii.  The Parent’s principal operating subsidiary is Bank of Hawaii (the “Bank”).

The Bank, directly and through its subsidiaries, provides a broad range of financial services and products to businesses, consumers, and governments in Hawaii, Guam, and other Pacific Islands.  References to “we,” “our,” “us,” or the “Company” refer to the Parent and its subsidiaries that are consolidated for financial reporting purposes.

The Company’s business strategy is to use our unique market knowledge, prudent management discipline and brand strength to deliver exceptional value to our stakeholders.

Hawaii Economy

The COVID-19 pandemic has had and is continuing to have an impact on the Hawaii economy.  The actions taken by the State of Hawaii beginning in March 2020 were imposed to mitigate the spread and lessen the public health impact of the COVID-19 virus in Hawaii.  Prior to the COVID-19 pandemic, at risk industries of leisure and hospitality represented 19% of jobs and 10% of Hawaii’s GDP.  Hawaii benefits from a wide range of industries that help to provide stability in the case of economic shocks.  Federal government jobs, primarily military, have historically been a stabilizing part of Hawaii’s economy, supplying about 20% of GDP.  Construction activity, including the Honolulu Rail Project, and other non-visitor-related activities have continued despite COVID-19.  Hawaii’s large retiree population also contributes to a stable economic base.  The U.S. government has enacted several stimulus programs to counteract the economic disruptions caused by the COVID-19 pandemic, including the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, Paycheck Protection Program (“PPP”), Consolidated Appropriations Act (“CAA”), and American Rescue Plan (“ARP”).  Notwithstanding these stimulus programs, the Hawaii economy will likely continue to face significant challenges. 

We have taken and continue to take significant steps to help our customers who have been impacted by COVID-19.  For our consumer customers, we initially provided payment relief for residential mortgage, home equity, auto loan, auto lease and direct personal loans for up to six months.  We waived associated late fees, while not reporting these payment deferrals as late payments to the credit bureaus for all customers who were current prior to the event.  For our commercial customers that continued to make interest payments, we provided six months of principal deferral, or alternatively, three months of interest or interest and principal deferral. Although our formal assistance programs have ended, the Bank continues to work with our customers who are still being impacted by the COVID-19 pandemic.

The Bank continues to responsibly lend to qualified consumer and commercial customers.  We participated in the SBA’s Small Business Paycheck Protection Program.  As of September 30, 2021, the Bank had 1,939 PPP loans totaling $268.5 million net of deferred cost and fees. 

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Earnings Summary

Net income for the third quarter of 2021 was $62.1 million, an increase of $24.2 million or 64% compared to the same period in 2020.  Diluted earnings per common share was $1.52 for the third quarter of 2021, an increase of $0.57 or 60% compared to the same period in 2020.

Net income for the first nine months of 2021 was $189.5 million, an increase of $78.0 million or 70% compared to the same period in 2020.  Diluted earnings per common share was $4.70 for the first nine months of 2021, an increase of $1.90 or 68% compared to the same period in 2020.

 

The return on average assets for the third quarter of 2021 was 1.07% compared with 0.76% in the same period in 2020.  

 

The return on average common equity for the third quarter of 2021 was 17.08% compared with 11.01% in the same period in 2020.

 

Net interest income for the third quarter of 2021 was $126.8 million, an increase of 2.1% from the same period in 2020.  Net interest margin was 2.32% in the third quarter of 2021, a decrease of 35 basis points from the same period in 2020.  The decrease in the net interest margin from prior year is largely due to higher levels of liquidity from continued strong deposit growth and lower interest rates, partially offset by higher fees from Paycheck Protection Program (“PPP”) loans.

 

The provision for credit losses for the third quarter of 2021 was a net benefit of $10.4 million compared with a net expense of $28.6 million in the same period in 2020.

 

Noninterest income was $41.4 million in the third quarter of 2021, a decrease of 0.9% from the same period in 2020.

 

Noninterest expense was $96.5 million in the third quarter of 2021, an increase of 7.3% compared to the same period in 2020.  The third quarter of 2021 included one-time significant items related to gain on sale of property, partially offset by early termination of repurchase agreements and severance, reducing expense by $1.3 million.

 

The efficiency ratio during the third quarter of 2021 was 57.38% compared with 54.22% in the same period in 2020.  

 

The effective tax rate for the third quarter of 2021 was 24.40% compared with 20.09% in the same period in 2020.

 

Total non-performing assets were $20.6 million at September 30, 2021, an increase of $2.0 million compared to September 30, 2020.  Non-performing assets as percentage of total loans and leases and foreclosed real estate were 0.17% at September 30, 2021, an increase of 1 basis point compared to September 30, 2020.  

 

Net loan and lease charge-offs during the third quarter of 2021 were $1.2 million or 0.04% annualized of total average loans and leases outstanding, comprised of charge-offs of $3.4 million partially offset by recoveries of $2.2 million.  Compared to the third quarter of 2020, net loan and lease charge-offs increased by $2.7 million or 9 basis points on total average loans and leases outstanding.

 

The allowance for credit losses on loans and leases was $167.9 million at September 30, 2021, a decrease of $35.6 million from September 30, 2020.  The ratio of the allowance for credit losses to total loans and leases outstanding was 1.39% at the end of the quarter, a decrease of 34 basis points from the end of the same period in 2020.

We maintained a strong balance sheet during the third quarter of 2021, with what we believe are appropriate reserves for credit losses and high levels of liquidity and capital.

 

Total assets increased to a new record of $23.0 billion at September 30, 2021, an increase of 14.2% from September 30, 2020.  

 

The investment securities portfolio was $9.3 billion at September 30, 2021, an increase of 44.8% from September 30, 2020, due to growth in deposits that continued to outpace loan growth.  The portfolio remains largely comprised of securities issued by U.S. government agencies and U.S. government-sponsored enterprises.

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Table of Contents

 

 

Total loans and leases were $12.1 billion at September 30, 2021, an increase of 2.4% from September 30, 2020.  Total loans excluding PPP loans were $11.8 billion at September 30, 2021, an increase of 4.8% from September 30, 2020.

 

Total deposits were $20.5 billion at September 30, 2021, an increase of 15.5% from September 30, 2020.

 

The Company reduced $100 million of repurchase agreements in the third quarter of 2021.

 

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Table of Contents

 

 

Our financial highlights are presented in Table 1.

 

Financial Highlights

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 1

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(dollars in thousands, except per share amounts)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

For the Period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Results

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Interest Income

 

$

126,819

 

 

$

124,166

 

 

$

370,902

 

 

$

376,823

 

Provision for Credit Losses 1

 

 

(10,400

)

 

 

28,600

 

 

 

(40,800

)

 

 

102,600

 

Total Noninterest Income

 

 

41,378

 

 

 

41,734

 

 

 

128,779

 

 

 

139,151

 

Total Noninterest Expense

 

 

96,519

 

 

 

89,949

 

 

 

291,911

 

 

 

275,153

 

Net Income

 

 

62,053

 

 

 

37,840

 

 

 

189,535

 

 

 

111,490

 

Basic Earnings Per Common Share

 

 

1.53

 

 

 

0.95

 

 

 

4.73

 

 

 

2.81

 

Diluted Earnings Per Common Share

 

 

1.52

 

 

 

0.95

 

 

 

4.70

 

 

 

2.80

 

Dividends Declared Per Common Share

 

 

0.70

 

 

 

0.67

 

 

 

2.04

 

 

 

2.01

 

Performance Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on Average Assets

 

 

1.07

%

 

 

0.76

%

 

 

1.15

%

 

 

0.78

%

Return on Average Shareholders’ Equity

 

 

15.41

 

 

 

11.01

 

 

 

17.31

 

 

 

11.08

 

Return on Average Common Equity

 

 

17.08

 

 

 

11.01

 

 

 

18.10

 

 

 

11.08

 

Efficiency Ratio 2

 

 

57.38

 

 

 

54.22

 

 

 

58.42

 

 

 

53.33

 

Net Interest Margin 3

 

 

2.32

 

 

 

2.67

 

 

 

2.37

 

 

 

2.82

 

Dividend Payout Ratio 4

 

 

45.75

 

 

 

70.53

 

 

 

43.13

 

 

 

71.53

 

Average Shareholders’ Equity to Average Assets

 

 

6.95

 

 

 

6.93

 

 

 

6.63

 

 

 

7.06

 

Average Balances

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Loans and Leases

 

$

11,958,321

 

 

$

11,739,785

 

 

$

12,002,426

 

 

$

11,510,222

 

Average Assets

 

 

22,993,036

 

 

 

19,741,139

 

 

 

22,079,174

 

 

 

19,053,626

 

Average Deposits

 

 

20,473,777

 

 

 

17,270,206

 

 

 

19,619,053

 

 

 

16,591,640

 

Average Shareholders’ Equity

 

 

1,598,076

 

 

 

1,367,756

 

 

 

1,463,566

 

 

 

1,344,402

 

Market Price Per Share of Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Closing

 

$

82.17

 

 

$

50.52

 

 

$

82.17

 

 

$

50.52

 

High

 

 

87.12

 

 

 

61.94

 

 

 

99.10

 

 

 

95.53

 

Low

 

 

75.68

 

 

 

48.77

 

 

 

75.65

 

 

 

46.70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

2021

 

 

December 31,

2020

 

As of Period End:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and Leases

 

 

 

 

 

 

 

 

 

$

12,072,750

 

 

$

11,940,020

 

Total Assets

 

 

 

 

 

 

 

 

 

 

22,965,383

 

 

 

20,603,651

 

Total Deposits

 

 

 

 

 

 

 

 

 

 

20,493,678

 

 

 

18,211,621

 

Other Debt

 

 

 

 

 

 

 

 

 

 

10,414

 

 

 

60,481

 

Total Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

1,597,109

 

 

 

1,374,507

 

Asset Quality

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Performing Assets

 

 

 

 

 

 

 

 

 

$

20,620

 

 

$

18,481

 

Allowance for Credit Losses - Loans and Leases

 

 

 

 

 

 

 

 

 

 

167,920

 

 

 

216,252

 

Allowance to Loans and Leases Outstanding 5

 

 

 

 

 

 

 

 

 

 

1.39

%

 

 

1.81

%

Capital Ratios

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier 1 Capital Ratio

 

 

 

 

 

 

 

 

 

 

12.02

%

 

 

12.06

%

Tier 1 Capital Ratio

 

 

 

 

 

 

 

 

 

 

13.47

 

 

 

12.06

 

Total Capital Ratio

 

 

 

 

 

 

 

 

 

 

14.72

 

 

 

13.31

 

Tier 1 Leverage Ratio

 

 

 

 

 

 

 

 

 

 

7.10

 

 

 

6.71

 

Total Shareholders’ Equity to Total Assets

 

 

 

 

 

 

 

 

 

 

6.95

 

 

 

6.67

 

Tangible Common Equity to Tangible Assets 6

 

 

 

 

 

 

 

 

 

 

6.04

 

 

 

6.53

 

Tangible Common Equity to Risk-Weighted Assets 6

 

 

 

 

 

 

 

 

 

 

11.46

 

 

 

11.89

 

Non-Financial Data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Full-Time Equivalent Employees

 

 

 

 

 

 

 

 

 

 

2,049

 

 

 

2,022

 

Branches

 

 

 

 

 

 

 

 

 

 

54

 

 

 

65

 

ATMs

 

 

 

 

 

 

 

 

 

 

303

 

 

 

357

 

 

 

1

Provision for Credit Losses for 2021 includes Provision for Unfunded Commitments and Accrued Interest Receivable, 2020 represents only Provisions for Loans and Leases.

2

Efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and total noninterest income).

3

Net interest margin is defined as net interest income, on a taxable-equivalent basis, as a percentage of average earning assets.

4

Dividend payout ratio is defined as dividends declared per common share divided by basic earnings per common share.

5

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

6

Tangible common equity to tangible assets and tangible common equity to risk-weighted assets are Non-GAAP financial measures.  Tangible common equity is defined by the Company as common shareholders' equity minus goodwill and intangible assets.  Intangible assets are included as a component of other assets in the Consolidated Statements of Condition.

 


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Table of Contents

 

 

Use of Non-GAAP Financial Measures

 

The ratios “tangible common equity to tangible assets” and “tangible common equity to risk-weighted assets” are Non-GAAP financial measures.  The Company believes these measurements are useful for investors, regulators, management and others to evaluate capital adequacy relative to other financial institutions.  Although these Non-GAAP financial measures are frequently used by stakeholders in the evaluation of a financial institution, 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.  Table 2 provides a reconciliation of these Non-GAAP financial measures with their most closely related GAAP measures.

 

GAAP to Non-GAAP Reconciliation

 

 

 

 

 

Table 2

 

(dollars in thousands)

 

September 30,

2021

 

 

December 31,

2020

 

Total Shareholders’ Equity

 

$

1,597,109

 

 

$

1,374,507

 

Less: Preferred Stock

 

 

180,000

 

 

 

 

        Goodwill

 

 

31,517

 

 

 

31,517

 

Tangible Common Equity

 

$

1,385,592

 

 

$

1,342,990

 

Total Assets

 

$

22,965,383

 

 

$

20,603,651

 

Less: Goodwill

 

 

31,517

 

 

 

31,517

 

Tangible Assets

 

$

22,933,866

 

 

$

20,572,134

 

Risk-Weighted Assets, determined in accordance with prescribed regulatory requirements

 

$

12,093,010

 

 

$

11,295,077

 

Total Shareholders’ Equity to Total Assets

 

 

6.95

%

 

 

6.67

%

Tangible Common Equity to Tangible Assets (Non-GAAP)

 

 

6.04

%

 

 

6.53

%

Tier 1 Capital Ratio

 

 

13.47

%

 

 

12.06

%

Tangible Common Equity to Risk-Weighted Assets (Non-GAAP)

 

 

11.46

%

 

 

11.89

%

 

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Table of Contents

 

 

Analysis of Statements of Income

Average balances, related income and expenses, and resulting yields and rates are presented in Table 3.  An analysis of the change in net interest income, on a taxable-equivalent basis, is presented in Table 4.

 

Average Balances and Interest Rates - Taxable-Equivalent Basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 3

 

 

 

Three Months Ended

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2021

 

 

September 30, 2020

 

 

September 30, 2021

 

 

September 30, 2020

 

 

 

Average

 

 

Income/

 

 

Yield/

 

 

Average

 

 

Income/

 

 

Yield/

 

 

Average

 

 

Income/

 

 

Yield/

 

 

Average

 

 

Income/

 

 

Yield/

 

(dollars in millions)

 

Balance

 

 

Expense

 

 

Rate

 

 

Balance

 

 

Expense

 

 

Rate

 

 

Balance

 

 

Expense

 

 

Rate

 

 

Balance

 

 

Expense

 

 

Rate

 

Earning Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Deposits in Other Banks

 

$

3.2

 

 

$

 

 

 

0.23

%

 

$

2.6

 

 

$

 

 

 

0.45

%

 

$

2.9

 

 

$

 

 

 

0.44

%

 

$

2.2

 

 

$

 

 

 

0.76

%

Funds Sold

 

 

999.5

 

 

 

0.4

 

 

 

0.00

 

 

 

584.2

 

 

 

0.1

 

 

 

0.00

 

 

 

833.7

 

 

 

0.8

 

 

 

0.00

 

 

 

428.3

 

 

 

0.8

 

 

 

0.00

 

Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

4,454.9

 

 

 

16.3

 

 

 

0.01

 

 

 

2,918.6

 

 

 

14.3

 

 

 

0.02

 

 

 

4,252.9

 

 

 

48.4

 

 

 

0.02

 

 

 

2,745.7

 

 

 

45.1

 

 

 

0.02

 

Non-Taxable

 

 

10.1

 

 

 

0.1

 

 

 

0.04

 

 

 

25.8

 

 

 

0.3

 

 

 

0.04

 

 

 

11.5

 

 

 

0.4

 

 

 

0.04

 

 

 

30.1

 

 

 

1.0

 

 

 

0.04

 

Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

4,294.6

 

 

 

16.5

 

 

 

0.02

 

 

 

3,257.7

 

 

 

15.7

 

 

 

0.02

 

 

 

3,728.9

 

 

 

42.9

 

 

 

0.02

 

 

 

3,084.4

 

 

 

51.0

 

 

 

0.02

 

Non-Taxable

 

 

64.8

 

 

 

0.4

 

 

 

0.02

 

 

 

54.1

 

 

 

0.4

 

 

 

0.03

 

 

 

48.2

 

 

 

0.9

 

 

 

0.02

 

 

 

54.4

 

 

 

1.1

 

 

 

0.03

 

Total Investment Securities

 

 

8,824.4

 

 

 

33.3

 

 

 

1.51

 

 

 

6,256.2

 

 

 

30.7

 

 

 

1.96

 

 

 

8,041.5

 

 

 

92.6

 

 

 

1.54

 

 

 

5,914.6

 

 

 

98.2

 

 

 

2.21

 

Loans Held for Sale

 

 

24.6

 

 

 

0.2

 

 

 

2.80

 

 

 

15.9

 

 

 

0.1

 

 

 

3.24

 

 

 

25.5

 

 

 

0.5

 

 

 

2.81

 

 

 

20.8

 

 

 

0.5

 

 

 

3.35

 

Loans and Leases 1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

 

1,644.8

 

 

 

17.0

 

 

 

4.09

 

 

 

1,917.0

 

 

 

14.1

 

 

 

2.93

 

 

 

1,826.9

 

 

 

48.1

 

 

 

3.52

 

 

 

1,763.9

 

 

 

45.2

 

 

 

3.43

 

Commercial Mortgage

 

 

2,952.7

 

 

 

21.9

 

 

 

2.94

 

 

 

2,722.3

 

 

 

21.7

 

 

 

3.18

 

 

 

2,894.5

 

 

 

64.5

 

 

 

2.98

 

 

 

2,631.9

 

 

 

69.2

 

 

 

3.51

 

Construction

 

 

289.9

 

 

 

2.5

 

 

 

3.38

 

 

 

234.0

 

 

 

2.1

 

 

 

3.60

 

 

 

280.0

 

 

 

7.3

 

 

 

3.51

 

 

 

234.3

 

 

 

7.1

 

 

 

4.04

 

Commercial Lease Financing

 

 

109.3

 

 

 

0.4

 

 

 

1.57

 

 

 

110.7

 

 

 

0.5

 

 

 

1.83

 

 

 

107.1

 

 

 

1.2

 

 

 

1.51

 

 

 

111.0

 

 

 

1.6

 

 

 

1.88

 

Residential Mortgage

 

 

4,253.2

 

 

 

34.8

 

 

 

3.27

 

 

 

3,988.7

 

 

 

36.7

 

 

 

3.68

 

 

 

4,211.8

 

 

 

106.2

 

 

 

3.36

 

 

 

3,941.3

 

 

 

109.5

 

 

 

3.70

 

Home Equity

 

 

1,621.4

 

 

 

12.2

 

 

 

2.97

 

 

 

1,625.2

 

 

 

14.1

 

 

 

3.45

 

 

 

1,596.4

 

 

 

36.9

 

 

 

3.09

 

 

 

1,656.8

 

 

 

43.6

 

 

 

3.51

 

Automobile

 

 

718.7

 

 

 

6.2

 

 

 

3.41

 

 

 

708.3

 

 

 

6.4

 

 

 

3.59

 

 

 

712.5

 

 

 

18.4

 

 

 

3.46

 

 

 

710.2

 

 

 

19.0

 

 

 

3.57

 

Other 2

 

 

368.3

 

 

 

5.7

 

 

 

6.16

 

 

 

433.6

 

 

 

7.6

 

 

 

6.96

 

 

 

373.2

 

 

 

18.1

 

 

 

6.48

 

 

 

460.8

 

 

 

23.9

 

 

 

6.93

 

Total Loans and Leases

 

 

11,958.3

 

 

 

100.7

 

 

 

3.35

 

 

 

11,739.8

 

 

 

103.2

 

 

 

3.50

 

 

 

12,002.4

 

 

 

300.7

 

 

 

3.35

 

 

 

11,510.2

 

 

 

319.1

 

 

 

3.70

 

Other

 

 

31.5

 

 

 

0.2

 

 

 

2.02

 

 

 

33.3

 

 

 

0.2

 

 

 

1.81

 

 

 

32.4

 

 

 

0.5

 

 

 

2.17

 

 

 

33.9

 

 

 

0.5

 

 

 

1.95

 

Total Earning Assets 3

 

 

21,841.5

 

 

 

134.8

 

 

 

2.45

 

 

 

18,632.0

 

 

 

134.3

 

 

 

2.88

 

 

 

20,938.4

 

 

 

395.1

 

 

 

2.52

 

 

 

17,910.0

 

 

 

419.1

 

 

 

3.12

 

Cash and Due From Banks

 

 

252.2

 

 

 

 

 

 

 

 

 

 

 

234.3

 

 

 

 

 

 

 

 

 

 

 

259.6

 

 

 

 

 

 

 

 

 

 

 

271.7

 

 

 

 

 

 

 

 

 

Other Assets

 

 

899.3

 

 

 

 

 

 

 

 

 

 

 

874.8

 

 

 

 

 

 

 

 

 

 

 

881.2

 

 

 

 

 

 

 

 

 

 

 

871.9

 

 

 

 

 

 

 

 

 

Total Assets

 

$

22,993.0

 

 

 

 

 

 

 

 

 

 

$

19,741.1

 

 

 

 

 

 

 

 

 

 

$

22,079.2

 

 

 

 

 

 

 

 

 

 

$

19,053.6

 

 

 

 

 

 

 

 

 

Interest-Bearing Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

$

4,707.1

 

 

$

0.7

 

 

 

0.06

%

 

$

3,465.5

 

 

$

0.4

 

 

 

0.04

%

 

$

4,450.6

 

 

$

2.0

 

 

 

0.06

%

 

$

3,268.1

 

 

$

1.9

 

 

 

0.08

%

Savings

 

 

7,687.0

 

 

 

1.8

 

 

 

0.00

 

 

 

6,886.0

 

 

 

1.7

 

 

 

0.00

 

 

 

7,414.6

 

 

 

5.0

 

 

 

0.00

 

 

 

6,693.9

 

 

 

11.0

 

 

 

0.00

 

Time

 

 

1,267.0

 

 

 

1.4

 

 

 

0.00

 

 

 

1,568.3

 

 

 

3.8

 

 

 

0.01

 

 

 

1,437.1

 

 

 

5.3

 

 

 

0.00

 

 

 

1,712.2

 

 

 

15.2

 

 

 

0.01

 

Total Interest-Bearing Deposits

 

 

13,661.1

 

 

 

3.9

 

 

 

0.11

 

 

 

11,919.8

 

 

 

5.9

 

 

 

0.20

 

 

 

13,302.3

 

 

 

12.3

 

 

 

0.12

 

 

 

11,674.2

 

 

 

28.1

 

 

 

0.32

 

Short-Term Borrowings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0.8

 

 

 

 

 

 

0.09

 

 

 

38.3

 

 

 

0.2

 

 

 

0.52

 

Securities Sold Under Agreements to

   Repurchase

 

 

547.8

 

 

 

3.4

 

 

 

2.45

 

 

 

602.9

 

 

 

3.6

 

 

 

2.35

 

 

 

572.7

 

 

 

10.4

 

 

 

2.40

 

 

 

603.4

 

 

 

11.6

 

 

 

2.54

 

Other Debt

 

 

10.4

 

 

 

0.2

 

 

 

7.04

 

 

 

60.5

 

 

 

0.3

 

 

 

2.22

 

 

 

33.5

 

 

 

0.8

 

 

 

3.03

 

 

 

62.6

 

 

 

1.4

 

 

 

2.90

 

Total Interest-Bearing Liabilities

 

 

14,219.3

 

 

 

7.5

 

 

 

0.21

 

 

 

12,583.2

 

 

 

9.8

 

 

 

0.31

 

 

 

13,909.3

 

 

 

23.5

 

 

 

0.22

 

 

 

12,378.5

 

 

 

41.3

 

 

 

0.44

 

Net Interest Income

 

 

 

 

 

$

127.3

 

 

 

 

 

 

 

 

 

 

$

124.5

 

 

 

 

 

 

 

 

 

 

$

371.6

 

 

 

 

 

 

 

 

 

 

$

377.8

 

 

 

 

 

Interest Rate Spread

 

 

 

 

 

 

 

 

 

 

2.24

%

 

 

 

 

 

 

 

 

 

 

2.57

%

 

 

 

 

 

 

 

 

 

 

2.30

%

 

 

 

 

 

 

 

 

 

 

2.68

%

Net Interest Margin

 

 

 

 

 

 

 

 

 

 

2.32

%

 

 

 

 

 

 

 

 

 

 

2.67

%

 

 

 

 

 

 

 

 

 

 

2.37

%

 

 

 

 

 

 

 

 

 

 

2.82

%

Noninterest-Bearing Demand Deposits

 

 

6,812.7

 

 

 

 

 

 

 

 

 

 

 

5,350.4

 

 

 

 

 

 

 

 

 

 

 

6,316.8

 

 

 

 

 

 

 

 

 

 

 

4,917.4

 

 

 

 

 

 

 

 

 

Other Liabilities

 

 

362.9

 

 

 

 

 

 

 

 

 

 

 

439.7

 

 

 

 

 

 

 

 

 

 

 

389.5

 

 

 

 

 

 

 

 

 

 

 

413.3

 

 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

1,598.1

 

 

 

 

 

 

 

 

 

 

 

1,367.8

 

 

 

 

 

 

 

 

 

 

 

1,463.6

 

 

 

 

 

 

 

 

 

 

 

1,344.4

 

 

 

 

 

 

 

 

 

Total Liabilities and Shareholders’

   Equity

 

$

22,993.0

 

 

 

 

 

 

 

 

 

 

$

19,741.1

 

 

 

 

 

 

 

 

 

 

$

22,079.2

 

 

 

 

 

 

 

 

 

 

$

19,053.6

 

 

 

 

 

 

 

 

 

 

 

 

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

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

3

Interest income includes taxable-equivalent basis adjustments, based upon a federal statutory tax rate of 21%, of $0.3 million and $0.8 million for the three and nine months ended September 30, 2021, and $0.3 million and $1.0 million for the three and nine months ended September 30, 2020.

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Analysis of Change in Net Interest Income - Taxable-Equivalent Basis

 

 

 

 

 

 

 

 

 

Table 4

 

 

 

Nine Months Ended September 30, 2021

 

 

 

Compared to September 30, 2020

 

(dollars in millions)

 

Volume 1

 

 

Rate 1

 

 

Total

 

Change in Interest Income:

 

 

 

 

 

 

 

 

 

 

 

 

Funds Sold

 

$

0.5

 

 

$

(0.5

)

 

$

 

Investment Securities

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

19.9

 

 

 

(16.6

)

 

 

3.3

 

Non-Taxable

 

 

(0.6

)

 

 

 

 

 

(0.6

)

Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

Taxable

 

 

9.4

 

 

 

(17.5

)

 

 

(8.1

)

Non-Taxable

 

 

(0.1

)

 

 

(0.1

)

 

 

(0.2

)

Total Investment Securities

 

 

28.6

 

 

 

(34.2

)

 

 

(5.6

)

Loans Held for Sale

 

 

0.1

 

 

 

(0.1

)

 

 

 

Loans and Leases

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

 

6.4

 

 

 

(3.5

)

 

 

2.9

 

Commercial Mortgage

 

 

6.5

 

 

 

(11.2

)

 

 

(4.7

)

Construction

 

 

1.2

 

 

 

(1.0

)

 

 

0.2

 

Commercial Lease Financing

 

 

(0.1

)

 

 

(0.3

)

 

 

(0.4

)

Residential Mortgage

 

 

7.2

 

 

 

(10.5

)

 

 

(3.3

)

Home Equity

 

 

(1.5

)

 

 

(5.2

)

 

 

(6.7

)

Automobile

 

 

 

 

 

(0.6

)

 

 

(0.6

)

Other 2

 

 

(4.3

)

 

 

(1.5

)

 

 

(5.8

)

Total Loans and Leases

 

 

15.4

 

 

 

(33.8

)

 

 

(18.4

)

Other

 

 

 

 

 

 

 

 

 

Total Change in Interest Income

 

 

44.6

 

 

 

(68.6

)

 

 

(24.0

)

Change in Interest Expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-Bearing Deposits

 

 

 

 

 

 

 

 

 

 

 

 

Demand

 

 

0.6

 

 

 

(0.5

)

 

 

0.1

 

Savings

 

 

1.1

 

 

 

(7.1

)

 

 

(6.0

)

Time

 

 

(2.1

)

 

 

(7.8

)

 

 

(9.9

)

Total Interest-Bearing Deposits

 

 

(0.4

)

 

 

(15.4

)

 

 

(15.8

)

Short-Term Borrowings

 

 

(0.1

)

 

 

(0.1

)

 

 

(0.2

)

Securities Sold Under Agreements to Repurchase

 

 

(0.6

)

 

 

(0.6

)

 

 

(1.2

)

Other Debt

 

 

(0.7

)

 

 

0.1

 

 

 

(0.6

)

Total Change in Interest Expense

 

 

(1.8

)

 

 

(16.0

)

 

 

(17.8

)

Change in Net Interest Income

 

$

46.4

 

 

$

(52.6

)

 

$

(6.2

)

 

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.

2

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

Net Interest Income

Net interest income is affected by the size and mix of our balance sheet components as well as the spread between interest earned on assets and interest paid on liabilities.  Net interest margin is defined as net interest income, on a taxable-equivalent basis, as a percentage of average earning assets.  The lower margin in 2021 was primarily due to lower yields on investment securities and loans and leases.  These decreases were partially offset by a higher level of earning assets and lower funding costs.

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Yields on our earning assets decreased by 43 basis points in the third quarter of 2021 and by 60 basis points in the first nine months of 2021 compared to the same periods in 2020 primarily due to the lower rate environment.  Yields on our investment securities portfolio decreased by 45 basis points in the third quarter of 2021 and by 67 basis points in the first nine months of 2021 compared to the same periods in 2020 primarily due to higher premium amortization coupled with purchases of lower yielding securities. Yield decreases in our construction, commercial mortgage, and commercial and industrial loans were primarily due to lower yields on floating rate loans.  Yields on our construction loans decreased by 22 basis points in the third quarter of 2021 and by 53 basis points in the first nine months of 2021 compared to the same periods in 2020 primarily due to lower yields on floating-rate loans, and new loans with lower rates in comparison to loans that were paid off or transferred to commercial mortgage upon completion.  Yields on our commercial mortgage loans decreased by 24 basis points in the third quarter of 2021 and by 53 basis points in the first nine months of 2021 compared to the same periods in 2020.  Similar to our construction loans, commercial mortgage loan yields were negatively impacted by lower yields on floating-rate loans, and new loans with lower rates than loans that were paid off.  These decreases were partially offset by interest recoveries in the current year.  Yields on our commercial and industrial loans excluding PPP loans decreased by 14 basis points in the third quarter of 2021 and by 40 basis points in the first nine months of 2021 compared to the same periods in 2020 primarily due to lower yields on floating-rate loans coupled with new loans at lower rates than loans that were paid off.  Contractual yields on PPP loans are fixed at 1%, however, effective yield varies based on processing fee income being accelerated due to loans being forgiven by the SBA ahead of maturity.  The contribution to the earning asset yield for the current quarter was an increase of 14 basis points.  Yields on our funds sold was relatively unchanged in the third quarter of 2021 compared to the same period in 2020. Yields on our funds sold decreased by 12 basis points in the first nine months of 2021 compared to the same period in 2020 primarily due to federal fund rate decreases.  

Interest rates paid on our interest-bearing liabilities decreased by 10 basis points in the third quarter of 2021 and by 22 basis points in the first nine months of 2021 compared to the same periods in 2020.  Decreases to our funding costs are primarily due to lower rates paid on our interest-bearing deposits. Securities sold under agreements to repurchase increased by 10 basis points in the third quarter of 2021 compared to the same periods in 2020.  Securities sold under agreements to repurchase decreased by 14 basis points in the first nine months of 2021 compared to the same periods in 2020.  In September 2021, we terminated three of our repurchase agreements with an aggregated total of $100.0 million.  These repurchase agreements were scheduled to mature in 2022, 2024, and 2025.  The repurchase agreements had a weighted-average interest rate of 2.37%.  The decrease in our funding costs were partially offset by higher average balances in our interest-bearing deposits.  The average balance of our interest bearing demand deposits increased by $1.2 billion or 36% in the third quarter of 2021 and by $1.2 billion or 36% in the first nine months of 2021 compared to the same periods in 2020.  The average balance of savings deposits increased by $801.0 million or 12% in the third quarter of 2021 and by $720.7 million or 11% in the first nine months of 2021 compared to the same periods in 2020.  

Average balances of our earning assets increased by $3.3 billion or 16% in the third quarter of 2021 and by $3.0 billion or 16% in the first nine months of 2021 compared to the same periods in 2020 primarily due to an increase in the average balances of our investment securities.  Average balance of investment securities increased by $2.5 billion or 41% in the third quarter of 2021 and by $2.1 billion or 36% in the first nine months compared to the same periods in 2020.  Average balances of our loan and lease portfolio increased by $218.5 million in the third quarter of 2021 and by $492.2 million or 4% in the first nine months of 2021 compared to the same periods in 2020.  The average balance of funds sold increased by $415.3 million in the third quarter of 2021 and by $405.4 million in the first nine months of 2021 compared to the same periods in 2020.  The average balance of our commercial mortgage portfolio increased by $230.4 million in the third quarter of 2021 and by $262.6 million in the first nine months of 2021 compared to the same periods in 2020 as a result of continued demand from new and existing customers.  The average balance in our residential mortgage portfolio increased by $264.5 million in the third quarter of 2021 and by $270.5 million in the first nine months of 2021 compared to the same periods in 2020 primarily due to higher loan originations partially offset by an increase in payoff activity.  The average balance of our commercial and industrial portfolio including PPP loans decreased by $272.2 million in the third quarter of 2021 compared to the same period in 2020.  The average balance of our commercial and industrial portfolio including PPP loans, increased by $63.0 million in the first nine months of 2021 compared to the same periods in 2020 primarily due to origination of new loans under the PPP, partially offset by payoff activity.  The average balance of our home equity portfolio decreased by $3.8 million in the third quarter of 2021 and by $60.4 million in the first nine months of 2021 compared to the same periods in 2020 as a result of elevated runoff rates and lower utilization rates.

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Average balances of our interest-bearing liabilities increased by $1.6 billion or 13% in the third quarter of 2021 and by $1.5 billion or 12% in the first nine months of 2021 compared to the same periods in 2020 primarily due to growth in our demand and savings products.  Average balance in our core interest bearing deposit products increased by $2.1 billion in the third quarter of 2021 and by $1.8 billion in the first nine months of 2021 compared to the same periods in 2020. Average balances of our other debt, which was comprised primarily of Federal Home Loan Bank (“FHLB”) advances decreased by $50.1 million or 83% in the third quarter of 2021 and by $29.1 million or 46% in the first nine months of 2021 compared to the same periods in 2020 primarily due to the prepayment of FHLB advances totaling $50.0 million in the second quarter of 2021.

Noninterest Income

Table 5 presents the components of noninterest income.

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 5

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(dollars in thousands)

 

2021

 

 

2020

 

 

Change

 

 

2021

 

 

2020

 

 

Change

 

Trust and Asset Management

 

$

11,415

 

 

$

10,752

 

 

$

663

 

 

$

34,375

 

 

$

32,217

 

 

$

2,158

 

Mortgage Banking

 

 

3,136

 

 

 

4,047

 

 

 

(911

)

 

 

12,056

 

 

 

11,020

 

 

 

1,036

 

Service Charges on Deposit Accounts

 

 

6,510

 

 

 

6,027

 

 

 

483

 

 

 

18,703

 

 

 

18,575

 

 

 

128

 

Fees, Exchange, and Other Service Charges

 

 

13,604

 

 

 

12,296

 

 

 

1,308

 

 

 

41,018

 

 

 

34,913

 

 

 

6,105

 

Investment Securities Gains (Losses), Net

 

 

(1,259

)

 

 

(1,121

)

 

 

(138

)

 

 

(39

)

 

 

11,125

 

 

 

(11,164

)

Annuity and Insurance

 

 

735

 

 

 

881

 

 

 

(146

)

 

 

2,348

 

 

 

2,692

 

 

 

(344

)

Bank-Owned Life Insurance

 

 

1,897

 

 

 

1,806

 

 

 

91

 

 

 

5,877

 

 

 

5,035

 

 

 

842

 

Other Income

 

 

5,340

 

 

 

7,046

 

 

 

(1,706

)

 

 

14,441

 

 

 

23,574

 

 

 

(9,133

)

Total Noninterest Income

 

$

41,378

 

 

$

41,734

 

 

$

(356

)

 

$

128,779

 

 

$

139,151

 

 

$

(10,372

)

 

Trust and asset management income is comprised of fees earned from the management and administration of trusts and other customer assets. These fees are largely based upon the market value of the assets we manage and the fee rate charged to customers. Total trust assets under administration were $11.1 billion and $10.1 billion as of September 30, 2021, and, September 30, 2020, respectively.  Trust and asset management income increased by $0.7 million or 6% in the third quarter of 2021 and by $2.2 million or 7% for the first nine months of 2021 compared to the same periods in 2020 primarily due to increases in market value and trust fees.

 

Mortgage banking income is highly influenced by mortgage interest rates, the housing market, the amount of our loan sales, and our valuation of mortgage servicing rights.  Mortgage banking income decreased by $0.9 million or 23% in the third quarter of 2021 compared to the same period in 2020.  The decrease in the third quarter was primarily due to decreased sales of conforming saleable loans from current production offset with a net valuation allowance recovery to our servicing rights.  During the third quarter of 2021, we recognized a $0.7 million valuation allowance recovery to our mortgage servicing rights compared to a $0.6 million valuation impairment recorded in the third quarter of 2020.  Mortgage banking income increased by $1.0 million or 9% for the first nine months of 2021 compared to the same period in 2020.  For the first nine months of 2021, we recognized a $1.8 million valuation allowance recovery to our mortgage servicing rights compared to a $2.4 million valuation impairment to our mortgage servicing rights recorded in 2020.  This increase was offset by lower conforming salable loans from current production.                       

Service charges on deposit accounts increased by $0.5 million or 8% in the third quarter of 2021 and by $0.1 million or 1% for the first nine months of 2021 compared to the same periods in 2020. These increases were primarily due to an increase in overdraft fees coupled with an increase in account analysis fees.             

Fees, exchange, and other service charges, which are primarily comprised of debit and credit card income, fees from ATMs, merchant service activity, and other loan fees and service charges, increased by $1.3 million or 11% in the third quarter of 2021 and by $6.1 million or 17% for the first nine months of 2021 compared to the same periods in 2020.  These increases were primarily due to higher fees from ATMs, merchant income, and debit card transaction volume.

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Investment securities losses, net totaled $1.3 million in the third quarter of 2021 compared to $1.1 million during the same period in 2020.  The net loss in the third quarter of 2021 was primarily due to the fees paid to the counterparties of our prior Visa Class B share sales transactions.  The net losses of $0.04 million in the first nine months of 2021 was primarily due to $3.8 million of the fees paid to the counterparties of our prior Visa Class B share sales transactions and was partially offset by the net gains from the sales of mortgage-backed securities, corporate and government debt securities.  The net gains of $11.1 million in the first nine months of 2020 was primarily due to the sale of 80,214 Visa Class B shares.

Annuity and insurance income decreased by $0.1 million or 17% in the third quarter of 2021 and by $0.3 million or 13% for the first nine months of 2021 compared to the same periods in 2020 primarily due to a decrease in annuity and life insurance products sold.  

Bank-owned life insurance was relatively unchanged in the third quarter of 2021 compared to the same period in 2020.  Bank-owned life insurance increased by $0.8 million or 17% for the first nine months of 2021 compared to the same period in 2020 primarily due to an increase in death benefits received.  

Other noninterest income decreased by $0.4 million or 1% in the third quarter of 2021 and by $10.4 million or 7% for the first nine months of 2021 compared to the same periods in 2020.  These decreases were primarily due to a decrease in fees related to our customer interest rate swap derivatives.      

Noninterest Expense

Table 6 presents the components of noninterest expense.

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 6

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(dollars in thousands)

 

2021

 

 

2020

 

 

Change

 

 

2021

 

 

2020

 

 

Change

 

Salaries

 

$

34,676

 

 

$

34,046

 

 

$

630

 

 

$

99,658

 

 

$

100,271

 

 

$

(613

)

Incentive Compensation

 

 

4,677

 

 

 

2,683

 

 

 

1,994

 

 

 

15,763

 

 

 

6,069

 

 

 

9,694

 

Share-Based Compensation

 

 

3,335

 

 

 

1,442

 

 

 

1,893

 

 

 

9,093

 

 

 

4,754

 

 

 

4,339

 

Commission Expense

 

 

1,772

 

 

 

1,800

 

 

 

(28

)

 

 

6,807

 

 

 

4,821

 

 

 

1,986

 

Retirement and Other Benefits

 

 

4,746

 

 

 

4,164

 

 

 

582

 

 

 

15,552

 

 

 

13,316

 

 

 

2,236

 

Payroll Taxes

 

 

2,825

 

 

 

2,624

 

 

 

201

 

 

 

9,819

 

 

 

9,949

 

 

 

(130

)

Medical, Dental, and Life Insurance

 

 

3,222

 

 

 

3,422

 

 

 

(200

)

 

 

8,850

 

 

 

11,394

 

 

 

(2,544

)

Separation Expense

 

 

1,194

 

 

 

1,770

 

 

 

(576

)

 

 

3,317

 

 

 

6,555

 

 

 

(3,238

)

Total Salaries and Benefits

 

 

56,447

 

 

 

51,951

 

 

 

4,496

 

 

 

168,859

 

 

 

157,129

 

 

 

11,730

 

Net Occupancy

 

 

3,079

 

 

 

7,281

 

 

 

(4,202

)

 

 

17,216

 

 

 

24,997

 

 

 

(7,781

)

Net Equipment

 

 

8,924

 

 

 

9,223

 

 

 

(299

)

 

 

26,598

 

 

 

25,874

 

 

 

724

 

Data Processing

 

 

4,722

 

 

 

4,691

 

 

 

31

 

 

 

15,601

 

 

 

13,895

 

 

 

1,706

 

Professional Fees

 

 

2,948

 

 

 

2,743

 

 

 

205

 

 

 

9,468

 

 

 

9,012

 

 

 

456

 

FDIC Insurance

 

 

1,594

 

 

 

1,282

 

 

 

312

 

 

 

4,917

 

 

 

4,296

 

 

 

621

 

Other Expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Delivery and Postage Services

 

 

1,363

 

 

 

1,636

 

 

 

(273

)

 

 

4,704

 

 

 

5,387

 

 

 

(683

)

Mileage Program Travel

 

 

1,340

 

 

 

1,172

 

 

 

168

 

 

 

3,708

 

 

 

3,341

 

 

 

367

 

Merchant Transaction and Card Processing Fees

 

 

1,424

 

 

 

1,025

 

 

 

399

 

 

 

3,781

 

 

 

3,205

 

 

 

576

 

Advertising

 

 

2,736

 

 

 

1,985

 

 

 

751

 

 

 

7,066

 

 

 

5,394

 

 

 

1,672

 

Amortization of Solar Energy Partnership Investments

 

 

512

 

 

 

716

 

 

 

(204

)

 

 

1,536

 

 

 

2,148

 

 

 

(612

)

Other

 

 

11,430

 

 

 

6,244

 

 

 

5,186

 

 

 

28,457

 

 

 

20,475

 

 

 

7,982

 

Total Other Expense

 

 

18,805

 

 

 

12,778

 

 

 

6,027

 

 

 

49,252

 

 

 

39,950

 

 

 

9,302

 

Total Noninterest Expense

 

$

96,519

 

 

$

89,949

 

 

$

6,570

 

 

$

291,911

 

 

$

275,153

 

 

$

16,758

 

 

Total salaries and benefits expense increased by $4.5 million or 9% in the third quarter of 2021 compared to the same period in 2020.  This increase is mainly due to a $2.0 million increase in incentive compensation coupled with a $1.9 million increase in share-based compensation  primarily due to a higher number of restricted stock units being amortized.  Total salaries and benefits expense increased by $11.7 million or 7% for the first nine months of 2021 compared to the same period in 2020 primarily due to a $9.7 million increase in incentive compensation coupled with a $4.3 million increase in share-based compensation due to a higher number of restricted stock units being amortized.  These increases were partially offset by a $3.2 million decrease in separation expense.

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Net occupancy expense decreased by $4.2 million or 58% in the third quarter of 2021 compared to the same period in 2020 primarily due to a gain on sale of real estate property in Guam.  Net occupancy expense decreased by $7.8 million or 31% for the first nine months of 2021 compared to the same period in 2020. This decrease was primarily due to a $9.5 million gain on sales of real estate property on the island of Oahu and Guam coupled with a $0.8 million decrease in repairs and maintenance for the first nine months of 2021 compared to the same period in 2020.     

Net equipment expense decreased by $0.3 million or 3% in the third quarter of 2021 compared to the same period in 2020 primarily due to a $0.3 million gain on the disposal of fixed assets in the third quarter of 2021.   Net equipment expense increased by $0.7 million or 3% for the first nine months of 2021 compared to the same period in 2020.  This increase was due to higher depreciation expense and software license fee, partially offset by a gain on the disposal of fixed assets.

Data processing expense relatively unchanged in the third quarter of 2021 compared to the same period in 2020.  Data processing expense increased by $1.7 million or 12% for the first nine months of 2021 compared to the same period in 2020 primarily due to the rollout of contactless cards in 2021.

FDIC insurance expense increased by $0.3 million or 24% in the third quarter of 2021 and by $0.6 million or 14% for the first nine months of 2021 compared to the same periods in 2020 primarily due to an increase in assessment rates.  

Total other expense increased by $6.0 million or 47% in the third quarter of 2021 compared to the same period in 2020.  This increase was primarily due to $3.8 million early termination costs incurred in the third quarter of 2021 related to the prepayment of $100.0 million of repurchase agreements.  Total other expense increased by $9.3 million or 23% for the first nine months of 2021 compared to the same period in 2020 due to a total of $7.0 million early termination costs incurred in 2021 related to the prepayment of $150.0 million of repurchase agreements and $50.0 million of FHLB advances.  

Provision for Income Taxes

Table 7 presents our provision for income taxes and effective tax rates.

 

Provision for Income Taxes and Effective Tax Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 7

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Provision for Income Taxes

 

$

20,025

 

 

$

9,511

 

 

$

59,035

 

 

$

26,732

 

Effective Tax Rates

 

 

24.40

%

 

 

20.09

%

 

 

23.75

%

 

 

19.34

%

 

The provision for income taxes was $20.0 million in the third quarter of 2021, an increase of $10.5 million compared to the same period in 2020.  The effective tax rate for the third quarter of 2021 was 24.40%, up from 20.09% for the same period in 2020.  The higher effective rate in the third quarter of 2021 compared to the same period in 2020 was primarily due to higher pretax book income compared to relatively stable tax adjustments and the delayed impact of the TCJA on the deductibility of deferred executive compensation.

The provision for income taxes was $59.0 million for the first nine months of 2021, an increase of $32.3 million compared to the same period in 2020.  The effective tax rate for the first nine months of 2021 was 23.75%, up from 19.34% for the same period in 2020.  The higher effective tax rate for the first nine months of 2021 compared to the same period in 2020 was primarily due to the aforementioned higher pretax book income compared to a relatively consistent amount of tax adjustments.

 


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Analysis of Statements of Condition

Investment Securities

The carrying value of our investment securities portfolio was $9.3 billion and $7.1 billion as of September 30, 2021, and December 31, 2020, respectively.

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, change the composition of our investment securities portfolio, and change the proportion of investments made into the available-for-sale and held-to-maturity investment categories.

Mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac are the largest concentration in our portfolio.  As of September 30, 2021, our portfolio of Ginnie Mae, Fannie Mae, and Freddie Mac mortgage-backed securities were primarily comprised of securities issued in 2008 or later.  As of September 30, 2021, these mortgage-backed securities were all AAA-rated, with a low probability of a change in their credit ratings in the near future.

Gross unrealized gains in our investment securities portfolio were $76.6 million as of September 30, 2021, and $158.9 million as of December 31, 2020.  Gross unrealized losses in our investment securities were $89.8 million as of September 30, 2021, and $2.9 million as of December 31, 2020.  The overall decrease in net unrealized gains was primarily due to the increase in interest rates during 2021.  The gross unrealized losses were primarily related to mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac. See Note 3 to the Consolidated Financial Statements for more information.


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Loans and Leases

Table 8 presents the composition of our loan and lease portfolio by major categories.

 

Loan and Lease Portfolio Balances

 

 

 

 

 

 

 

 

 

Table 8

 

(dollars in thousands)

 

September 30,

2021

 

 

December 31,

2020

 

 

Change

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

$

1,325,446

 

 

$

1,357,610

 

 

$

(32,164

)

PPP 1

 

 

268,480

 

 

 

517,683

 

 

 

(249,203

)

Commercial Mortgage

 

 

2,994,520

 

 

 

2,854,829

 

 

 

139,691

 

Construction

 

 

296,052

 

 

 

259,798

 

 

 

36,254

 

Lease Financing

 

 

107,526

 

 

 

110,766

 

 

 

(3,240

)

Total Commercial

 

 

4,992,024

 

 

 

5,100,686

 

 

 

(108,662

)

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

4,272,540

 

 

 

4,130,513

 

 

 

142,027

 

Home Equity

 

 

1,680,229

 

 

 

1,604,538

 

 

 

75,691

 

Automobile

 

 

727,234

 

 

 

708,800

 

 

 

18,434

 

Other 2

 

 

400,723

 

 

 

395,483

 

 

 

5,240

 

Total Consumer

 

 

7,080,726

 

 

 

6,839,334

 

 

 

241,392

 

Total Loans and Leases

 

$

12,072,750

 

 

$

11,940,020

 

 

$

132,730

 

 

1

The PPP amounts presented, which are reported net of deferred costs and fees, were previously included as a component of the Commercial and Industrial loan class.

2

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

Total loans and leases as of September 30, 2021, increased by $132.7 million, or 1%, from December 31, 2020, primarily due to growth in our consumer lending portfolio.

Commercial loans and leases as of September 30, 2021, decreased by $108.7 million, or 2% from December 31, 2020.  Commercial and industrial loans decreased by $32.2 million or 2% from December 31, 2020, primarily due to customers paying down commercial credit lines.  PPP loans decreased by $249.2 million, or 48% from December 31, 2020, primarily due to forgiveness payments received from SBA.  Commercial mortgage loans increased by $139.7 million or 5% from December 31, 2020, primarily due to demand from new and existing customers.  Construction loans increased by $36.3 million or 14% from December 31, 2020, primarily due to an increase in construction activity in our market.  Lease financing decreased by $3.2 million, or 3% from December 31, 2020, primarily due to paydowns.

Consumer loans and leases as of September 30, 2021, increased by $241.4 million or 4% from December 31, 2020.  Residential mortgage loans increased by $142.0 million or 3% from December 31, 2020, primarily due to higher loan originations, partially offset by an increase in payoff activity.  Home equity decreased by $75.7 million or 5% from December 31, 2020, as a result of increased loan originations and stable payoff levels.  Automobile loans increased by $18.4 million or 3% from December 31, 2020, primarily driven by competitive loan programs and strong consumer demand.  Other consumer loans increased by $5.2 million or 1% from December 31, 2020, primarily due to growth in our installment loans.

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Table of Contents

 

 

Table 9 presents the composition of our loan and lease portfolio by geographic area and by major categories.

 

Geographic Distribution of Loan and Lease Portfolio

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 9

 

(dollars in thousands)

 

Hawaii

 

 

U.S.

Mainland 1

 

 

Guam

 

 

Other

Pacific

Islands

 

 

Total

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

$

1,138,531

 

 

$

114,002

 

 

$

68,585

 

 

$

4,328

 

 

$

1,325,446

 

PPP

 

 

240,872

 

 

 

16,572

 

 

 

8,823

 

 

 

2,213

 

 

 

268,480

 

Commercial Mortgage

 

 

2,596,294

 

 

 

165,139

 

 

 

233,087

 

 

 

 

 

 

2,994,520

 

Construction

 

 

296,052

 

 

 

 

 

 

 

 

 

 

 

 

296,052

 

Lease Financing

 

 

70,971

 

 

 

32,420

 

 

 

4,135

 

 

 

 

 

 

107,526

 

Total Commercial

 

 

4,342,720

 

 

 

328,133

 

 

 

314,630

 

 

 

6,541

 

 

 

4,992,024

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

4,192,851

 

 

 

 

 

 

78,904

 

 

 

785

 

 

 

4,272,540

 

Home Equity

 

 

1,640,072

 

 

 

65

 

 

 

40,092

 

 

 

 

 

 

1,680,229

 

Automobile

 

 

547,479

 

 

 

 

 

 

145,807

 

 

 

33,948

 

 

 

727,234

 

Other 2

 

 

337,911

 

 

 

 

 

 

46,344

 

 

 

16,468

 

 

 

400,723

 

Total Consumer

 

 

6,718,313

 

 

 

65

 

 

 

311,147

 

 

 

51,201

 

 

 

7,080,726

 

Total Loans and Leases

 

$

11,061,033

 

 

$

328,198

 

 

$

625,777

 

 

$

57,742

 

 

$

12,072,750

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial 3

 

$

1,143,863

 

 

$

133,766

 

 

$

72,326

 

 

$

7,655

 

 

$

1,357,610

 

PPP 3

 

 

479,445

 

 

 

11,355

 

 

 

21,153

 

 

 

5,730

 

 

 

517,683

 

Commercial Mortgage

 

 

2,470,031

 

 

 

138,690

 

 

 

246,108

 

 

 

 

 

 

2,854,829

 

Construction

 

 

259,798

 

 

 

 

 

 

 

 

 

 

 

 

259,798

 

Lease Financing

 

 

72,090

 

 

 

37,342

 

 

 

1,334

 

 

 

 

 

 

110,766

 

Total Commercial

 

 

4,425,227

 

 

 

321,153

 

 

 

340,921

 

 

 

13,385

 

 

 

5,100,686

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

4,048,831

 

 

 

 

 

 

80,774

 

 

 

908

 

 

 

4,130,513

 

Home Equity

 

 

1,565,546

 

 

 

89

 

 

 

38,823

 

 

 

80

 

 

 

1,604,538

 

Automobile

 

 

542,056

 

 

 

 

 

 

140,740

 

 

 

26,004

 

 

 

708,800

 

Other 2

 

 

325,526

 

 

 

 

 

 

48,316

 

 

 

21,641

 

 

 

395,483

 

Total Consumer

 

 

6,481,959

 

 

 

89

 

 

 

308,653

 

 

 

48,633

 

 

 

6,839,334

 

Total Loans and Leases

 

$

10,907,186

 

 

$

321,242

 

 

$

649,574

 

 

$

62,018

 

 

$

11,940,020

 

 

1

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

2

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

3

The PPP amounts presented, which are reported net of deferred costs and fees, were previously included as a component of the Commercial and Industrial loan class.

 

Our commercial and consumer lending activities are concentrated primarily in Hawaii and the Pacific Islands.  Our commercial loan and lease portfolio to borrowers based on the U.S. Mainland includes legacy lease financing and participation in shared national credits for customers whose operations and assets extend beyond Hawaii.


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Other Assets

Table 10 presents the major components of other assets.

 

Other Assets

 

 

 

 

 

 

Table 10

 

(dollars in thousands)

 

September 30,

2021

 

 

December 31,

2020

 

 

Change

 

Federal Home Loan Bank and Federal Reserve Bank Stock

 

$

31,574

 

 

$

33,340

 

 

$

(1,766

)

Derivative Financial Instruments

 

 

48,721

 

 

 

96,167

 

 

 

(47,446

)

Low-Income Housing and Other Equity Investments

 

 

129,367

 

 

 

142,961

 

 

 

(13,594

)

Deferred Compensation Plan Assets

 

 

55,167

 

 

 

53,410

 

 

 

1,757

 

Prepaid Expenses

 

 

17,106

 

 

 

14,517

 

 

 

2,589

 

Accounts Receivable

 

 

19,859

 

 

 

12,380

 

 

 

7,479

 

Deferred Tax Assets

 

 

35,182

 

 

 

16,724

 

 

 

18,458

 

Other

 

 

100,170

 

 

 

65,794

 

 

 

34,376

 

Total Other Assets

 

$

437,146

 

 

$

435,293

 

 

$

1,853

 

 

Total other assets increased by $1.9 million from December 31, 2020.  The increase was primarily due to a $19.7 million increase related to investment transactions and cash collateral and $4.8 million related to purchases of other assets.  Also, the increase was due to an $18.5 million increase in deferred tax assets, primarily due to temporary differences between financial reporting and income tax basis of unrealized losses on investment securities.  This increase was partially offset by a decrease in derivative financial instruments of $47.4 million, which was primarily due to fair value decreases of our interest rate swap agreement assets.

Deposits

Table 11 presents the composition of our deposits by major customer categories.

 

Deposits

 

 

 

 

 

 

 

 

 

Table 11

 

(dollars in thousands)

 

September 30,

2021

 

 

December 31,

2020

 

 

Change

 

Consumer

 

$

10,150,199

 

 

$

9,347,725

 

 

$

802,474

 

Commercial

 

 

8,767,733

 

 

 

7,302,832

 

 

 

1,464,901

 

Public and Other

 

 

1,575,746

 

 

 

1,561,064

 

 

 

14,682

 

Total Deposits

 

$

20,493,678

 

 

$

18,211,621

 

 

$

2,282,057

 

 

Total deposits were $20.5 billion as of September 30, 2021, an increase of $2.3 billion or 13% from December 31, 2020.  This increase was primarily due to an increase in commercial and consumer deposits.  Commercial deposits increased by $1.5 billion or 20% primarily due to a $1.3 billion increase in core deposits and a $51.8 million increase in time deposits.  Consumer deposits increased by $802.5 million or 9% due to an increase in core deposits of $929.5 million, partially offset by a $127.1 million decrease in time deposits.  In addition, public and other deposits increased by $14.7 million or 1% due to an increase in public demand deposits of $528.6 million, partially offset by a decrease in time deposits of $513.9 million.

Table 12 presents the composition of our savings deposits.

 

Savings Deposits

 

 

 

 

 

Table 12

 

 

Table 12

 

(dollars in thousands)

 

September 30,

2021

 

 

December 31,

2020

 

 

Change

 

Money Market

 

$

2,803,547

 

 

$

2,453,619

 

 

$

349,928

 

Regular Savings

 

 

4,736,798

 

 

 

4,305,594

 

 

 

431,204

 

Total Savings Deposits

 

$

7,540,345

 

 

$

6,759,213

 

 

$

781,132

 

 

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Table of Contents

 

 

Securities Sold Under Agreements to Repurchase

Table 13 presents the composition of our securities sold under agreements to repurchase.

 

Securities Sold Under Agreements to Repurchase

 

 

 

 

 

 

 

 

 

Table 13

 

(dollars in thousands)

 

September 30,

2021

 

 

December 31,

2020

 

 

Change

 

Private Institutions

 

$

450,000

 

 

$

600,000

 

 

$

(150,000

)

Government Entities

 

 

490

 

 

 

590

 

 

 

(100

)

Total Securities Sold Under Agreements to Repurchase

 

$

450,490

 

 

$

600,590

 

 

$

(150,100

)

 

Securities sold under agreements to repurchase was $450.5 million as of September 30, 2021, a decrease of $150.1 million or 25% from December 31, 2020.  As of September 30, 2021, the weighted-average maturity was 3.1 years for our repurchase agreements with government entities and 3.3 years for our repurchase agreements with private institutions.  Some of our repurchase agreements with private institutions may be terminated at earlier specified dates by the private institution or in some cases by either the private institution or the Company.  If all such agreements were to terminate at the earliest possible date, the weighted-average maturity for our repurchase agreements with private institutions would decrease to 3.3 years.  As of September 30, 2021, the weighted-average interest rate for outstanding agreements with government entities and private institutions was 1.55% and 2.46%, respectively, with all rates being fixed.  Each of our repurchase agreements is accounted for as a collateralized financing arrangement (i.e., a secured borrowing) and not as a sale and subsequent repurchase of securities.

 

In third quarter of 2021, we terminated three of our repurchase agreements, with an aggregate total of $100.0 million, with three private institutions.  These repurchase agreements were scheduled to mature in 2022, 2024, and 2025.  The repurchase agreements had a weighted-average interest rate of 2.37%.

Other Debt

Table 14 presents the composition of our other debt.

 

Other Debt

 

 

 

 

 

 

 

 

 

Table 14

 

(dollars in thousands)

 

September 30,

2021

 

 

December 31,

2020

 

 

Change

 

Federal Home Loan Bank Advances

 

$

 

 

$

50,000

 

 

$

(50,000

)

Finance Lease Obligations

 

 

10,414

 

 

 

10,481

 

 

 

(67

)

Total

 

$

10,414

 

 

$

60,481

 

 

$

(50,067

)

 

Other debt was $10.4 million as of September 30, 2021, a decrease of $50.0 million or 83% from December 31, 2020.  During the first nine months of 2021, we prepaid the FHLB advances totaling $50.0 million with a weighted-average interest rate of 1.19% and maturity dates during 2024.  As of September 30, 2021, our remaining unused line of credit with the FHLB was $2.9 billion.

 

 


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Table of Contents

 

 

Analysis of Business Segments

Our business segments are defined as Consumer Banking, Commercial Banking, and Treasury and Other.  

Table 15 summarizes net income from our business segments.  Additional information about segment performance is presented in Note 10 to the Consolidated Financial Statements.

 

Business Segment Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 15

 

 

 

Three Months Ended

September 30,

 

 

Nine Months Ended

September 30,

 

(dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Consumer Banking

 

$

23,495

 

 

$

27,981

 

 

$

62,981

 

 

$

71,118

 

Commercial Banking

 

 

31,739

 

 

 

30,340

 

 

 

91,426

 

 

 

93,725

 

Total

 

 

55,234

 

 

 

58,321

 

 

 

154,407

 

 

 

164,843

 

Treasury and Other

 

 

6,819

 

 

 

(20,481

)

 

 

35,128

 

 

 

(53,353

)

Consolidated Total

 

$

62,053

 

 

$

37,840

 

 

$

189,535

 

 

$

111,490

 

 

Consumer Banking

Net income decreased by $4.5 million or 16% in the third quarter of 2021 compared to the same period in 2020 primarily due to an increase in the provision for credit losses (the “Provision”), an increase in noninterest expense, and a decrease in net interest income. The increase in the Provision was primarily due to higher net charge-offs in our home equity, installment loan, auto loan and mortgage loan portfolios. The increase in noninterest expense is primarily due to a gain on the sale of real estate property on the island of Oahu in the third quarter of 2020. The decrease in net interest income is primarily due to lower average rates in the segment’s deposit portfolio, partly offset by higher average balances in the deposit portfolio, as well as higher average rates and higher average balances in the segment’s loan portfolio.

Net income decreased by $8.1 million or 11% in the first nine months of 2021 compared to the same period in 2020 primarily due to an increase in noninterest expense and a decrease in net interest income. This was partly offset by an increase in noninterest income and a decrease in the Provision. The increase in noninterest expense was primarily due to increases in allocated incentive compensation expense and allocated share-based compensation expense. The decrease in net interest income was primarily due to lower average rates in the segment’s deposit portfolio, partly offset by higher average balances in the deposit portfolio, as well as higher average rates and higher average balances in the segment’s loan portfolio. The increase in noninterest income was primarily due to increases in trust and asset management fees, debit card income, mortgage banking income, and ATM fees. The decrease in the Provision was primarily due to lower net charge-offs in our auto loan, residential mortgage, personal creditline and installment loan portfolios.

Commercial Banking

Net income increased by $1.4 million in the third quarter of 2021, compared to the same period in 2020, primarily due to an increase in interest income and partially offset by an increase in noninterest expense. The increase in interest income is primarily due to growth in the Commercial Mortgage and Construction portfolios, partially offset by a decline in the Commercial & Industrial portfolio. The increase in noninterest income is primarily due to an increase in merchant services and partially offset by a decline in customer derivative program revenue. The increase in noninterest expense was primarily due increased salaries and benefits and merchant services processing fees, partially offset by reduced allocated expenses.

Net income decreased by $2.2 million in the first nine months of 2021, compared to the same period in 2020, primarily due to a decrease in noninterest income, partially offset by an increase in interest income and reduced noninterest expenses. The decrease in noninterest income is primarily due to a decline in customer derivative program revenue and partially offset by increases in account analysis, loan fees, and merchant services. The increase in interest income is due to growth in the commercial mortgage and construction portfolios. The decline in noninterest expense was primarily due to reduced allocated expense and was partially offset by increased salaries and benefits, and merchant services processing fees.

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Table of Contents

 

 

Treasury and Other

Net income increased by $27.3 million in the third quarter of 2021 compared to the same period in 2020 primarily due to a decrease in the Provision” partially offset by an increase in noninterest expense and higher provision for income taxes. The increase in noninterest expense was due to early termination costs incurred in the third quarter of 2021 related to the prepayment of repurchase agreements.  The decrease in the Provision was due to the changes in economic outlook and forecasts for COVID-19 pandemic driven market changes, and impacts of fiscal, monetary and regulatory programs.  The provision for income taxes in this business segment represents the residual amount to arrive at the total tax expense for the Company.

Net income increased by $88.5 million in the first nine months of 2021 compared to the same period in 2020 primarily due to a decrease in the Provision partially offset by an increase in noninterest expense and higher provision for income taxes. The increase in noninterest expense was due to early termination costs incurred in the second and third quarter of 2021 related to the prepayment of repurchase agreements and FHLB advances.  The decrease in the Provision was due to the changes in economic outlook and forecasts for COVID-19 pandemic driven market changes, and impacts of fiscal, monetary and regulatory programs.  The provision for income taxes in this business segment represents the residual amount to arrive at the total tax expense for the Company.

Corporate Risk Profile

Credit Risk

As of September 30, 2021, our overall credit risk profile reflects the improving trend of economic impacts from the COVID-19 pandemic in the markets we serve.  Despite the challenge of these economic impacts, the underlying risk profile of our credit portfolio remains strong.  

We actively manage exposures with deteriorating asset quality to reduce levels of potential loss exposure and closely monitor our reserves and capital to address both anticipated and unforeseen issues.  Risk management activities include detailed analysis of portfolio segments and stress tests of certain segments to ensure that reserve and capital levels are appropriate.  We perform frequent loan and lease-level risk monitoring and risk rating reviews, which provide opportunities for early interventions to allow for credit exits or restructuring, loan and lease sales, and voluntary workouts and liquidations.

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Table of Contents

 

Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More

Table 16 presents information on non-performing assets (“NPAs”) and accruing loans and leases past due 90 days or more.

 

Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More

 

 

 

 

 

 

 

 

 

Table 16

 

(dollars in thousands)

 

September 30,

2021

 

 

December 31,

2020

 

 

Change

 

Non-Performing Assets

 

 

 

 

 

 

 

 

 

 

 

 

Non-Accrual Loans and Leases

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

$

209

 

 

$

441

 

 

$

(232

)

Commercial Mortgage

 

 

8,309

 

 

 

8,527

 

 

 

(218

)

Total Commercial

 

 

8,518

 

 

 

8,968

 

 

 

(450

)

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

4,348

 

 

 

3,223

 

 

 

1,125

 

Home Equity

 

 

5,422

 

 

 

3,958

 

 

 

1,464

 

Total Consumer

 

 

9,770

 

 

 

7,181

 

 

 

2,589

 

Total Non-Accrual Loans and Leases

 

 

18,288

 

 

 

16,149

 

 

 

2,139

 

Foreclosed Real Estate

 

 

2,332

 

 

 

2,332

 

 

 

 

Total Non-Performing Assets

 

$

20,620

 

 

$

18,481

 

 

$

2,139

 

Accruing Loans and Leases Past Due 90 Days or More

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

$

4,776

 

 

$

5,274

 

 

$

(498

)

Home Equity

 

 

2,946

 

 

 

3,187

 

 

 

(241

)

Automobile

 

 

395

 

 

 

925

 

 

 

(530

)

Other 1

 

 

593

 

 

 

1,160

 

 

 

(567

)

Total Consumer

 

 

8,710

 

 

 

10,546

 

 

 

(1,836

)

Total Accruing Loans and Leases Past Due 90 Days or More

 

$

8,710

 

 

$

10,546

 

 

$

(1,836

)

Restructured Loans on Accrual Status and Not Past Due 90 Days or More

 

$

62,787

 

 

$

68,065

 

 

$

(5,278

)

Total Loans and Leases

 

$

12,072,750

 

 

$

11,940,020

 

 

$

132,730

 

Ratio of Non-Accrual Loans and Leases to Total Loans and Leases

 

 

0.15

%

 

 

0.14

%

 

 

0.01

%

Ratio of Non-Performing Assets to Total Loans and Leases and Foreclosed Real Estate

 

 

0.17

%

 

 

0.15

%

 

 

0.02

%

Ratio of Commercial Non-Performing Assets to Total Commercial Loans and Leases

   and Commercial Foreclosed Real Estate

 

 

0.17

%

 

 

0.18

%

 

 

(0.01

)%

Ratio of Consumer Non-Performing Assets to Total Consumer Loans and Leases

   and Consumer Foreclosed Real Estate

 

 

0.17

%

 

 

0.14

%

 

 

0.03

%

Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days

   or More to Total Loans and Leases and Foreclosed Real Estate

 

 

0.24

%

 

 

0.24

%

 

 

 

Changes in Non-Performing Assets

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of December 31, 2020

 

$

18,481

 

 

 

 

 

 

 

 

 

Additions

 

 

8,392

 

 

 

 

 

 

 

 

 

Reductions

 

 

 

 

 

 

 

 

 

 

 

 

Payments

 

 

(4,092

)

 

 

 

 

 

 

 

 

Return to Accrual Status

 

 

(2,036

)

 

 

 

 

 

 

 

 

Charge-offs/Write-downs

 

 

(125

)

 

 

 

 

 

 

 

 

Total Reductions

 

 

(6,253

)

 

 

 

 

 

 

 

 

Balance as of September 30, 2021

 

$

20,620

 

 

 

 

 

 

 

 

 

 

1

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

NPAs consist of non-accrual loans and leases, and foreclosed real estate.  Changes in the level of non-accrual loans and leases typically represent additions for loans and leases that reach a specified past due status, offset by reductions for loans and leases that are charged-off, paid down, sold, transferred to Other Real Estate Owned (“OREO”), or are no longer classified as non-accrual because they have returned to accrual status.

Residential mortgage non-accrual loans were $4.3 million as of September 30, 2021, an increase of $1.1 million or 35% from December 31, 2020, primarily due to returns to accrual status and payoffs.  As of September 30, 2021, our residential mortgage non-accrual loans were comprised of 13 loans with a weighted average current loan-to-value ratio of 61%.

Foreclosed real estate represents property acquired as the result of borrower defaults on loans.  Foreclosed real estate is recorded at fair value, less estimated selling costs, at the time of foreclosure.  On an ongoing basis, properties are appraised as required by market conditions and applicable regulations.  Foreclosed real estate as of September 30, 2021, was unchanged from December 31, 2020.

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Table of Contents

 

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 $8.7 million as of September 30, 2021, a $1.8 million or 17% decrease from December 31, 2020.  The decrease was primarily in residential mortgage, other, and auto loans, which was partially offset by an increase in home equity.

 

Table 17 presents information on loans with terms that have been modified in a TDR.

 

Loans Modified in a Troubled Debt Restructuring

 

 

 

 

 

 

 

 

 

Table 17

 

(dollars in thousands)

 

September 30,

2021

 

 

December 31,

2020

 

 

Change

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

$

19,728

 

 

$

20,337

 

 

$

(609

)

Commercial Mortgage

 

 

12,002

 

 

 

7,605

 

 

 

4,397

 

Total Commercial

 

 

31,730

 

 

 

27,942

 

 

 

3,788

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

16,362

 

 

 

18,503

 

 

 

(2,141

)

Home Equity

 

 

4,882

 

 

 

4,070

 

 

 

812

 

Automobile

 

 

17,090

 

 

 

19,155

 

 

 

(2,065

)

Other 1

 

 

2,646

 

 

 

2,809

 

 

 

(163

)

Total Consumer

 

 

40,980

 

 

 

44,537

 

 

 

(3,557

)

Total

 

$

72,710

 

 

$

72,479

 

 

$

231

 

 

1

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

The Company initially offered loan and lease modifications to assist borrowers during the COVID-19 national emergency. These modifications generally involve principal and/or interest payment deferrals for up to six months.  Similar to the initial modifications granted, the additional round of loan modifications generally involve principal and/or interest payment deferrals for up to an additional six months for commercial and consumer loans, and principal-only deferrals for up to an additional 12 months for selected commercial loans.  The Company generally continues to accrue and recognize interest income during the deferral period.  The Company offers several repayment options such as immediate repayment, repayment over a designated time period or as a balloon payment at maturity, or by extending the loan term.  These modifications generally do not involve forgiveness or interest rate reductions.  In accordance with Section 4013 of the CARES Act and the joint agency statement issued by banking agencies, these initial COVID-19 related loan and lease modifications are not accounted for as TDRs.  As of September 30, 2021, these COVID-19 related loan and lease modifications totaled $130.4 million (23 loans and leases) for the commercial segment and $7.5 million (31 loans and leases) for the consumer segment.  See Note 4 to the Consolidated Financial Statements for more information. Loans in a deferral program will continue to accrue interest during the deferral period unless otherwise classified as nonperforming. The provisions of the CARES Act and the interagency guidance issued by Federal banking regulators provided clarification related to modifications and deferral programs to assist borrowers who are negatively impacted by the COVID-19 pandemic. The guidance and clarifications detail certain provisions whereby banks are permitted to make deferrals and modifications to the terms of a loan which would not require the loans be reported as TDRs.  In accordance with the CARES Act and the interagency guidance, we elected to not report qualified loan modifications as TDRs. The relief related to TDRs under the CARES Act was extended by the Consolidated Appropriations Act, 2021. Under the Consolidated Appropriations Act, relief under the CARES Act will continue until the earlier of (i) 60 days after the date the COVID-19 national emergency comes to an end or (ii) January 1, 2022.  We do not know if the date will be extended beyond January 1, 2022 and it is possible that a failure to extend the date will result in an increase in the volume of loans considered TDRs.  It is also unknown whether customers currently on a deferral period will be able to perform under the original terms of the loan once the deferral period ends.  Any such inability to perform may result in increases in past due and nonperforming loans.

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Reserve for Credit Losses

Table 18 presents the activity in our reserve for credit losses.

 

Reserve for Credit Losses

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 18

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Balance at Beginning of Period

 

$

186,371

 

 

$

175,958

 

 

$

221,303

 

 

$

116,849

 

CECL Adoption (Day 1) Impact

 

 

 

 

 

 

 

 

 

 

 

(5,072

)

Loans and Leases Charged-Off

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

 

(196

)

 

 

(171

)

 

 

(900

)

 

 

(1,520

)

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

(197

)

 

 

0

 

 

 

(316

)

 

 

(84

)

Home Equity

 

 

(289

)

 

 

(43

)

 

 

(412

)

 

 

(316

)

Automobile

 

 

(576

)

 

 

(489

)

 

 

(3,894

)

 

 

(6,103

)

Other 1

 

 

(2,187

)

 

 

(1,644

)

 

 

(8,523

)

 

 

(9,784

)

Total Loans and Leases Charged-Off

 

 

(3,445

)

 

 

(2,347

)

 

 

(14,045

)

 

 

(17,807

)

Recoveries on Loans and Leases Previously Charged-Off

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and Industrial

 

 

118

 

 

 

231

 

 

 

374

 

 

 

2,044

 

Commercial Mortgage

 

 

 

 

 

 

 

 

 

 

 

40

 

Consumer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential Mortgage

 

 

173

 

 

 

414

 

 

 

1,609

 

 

 

795

 

Home Equity

 

 

216

 

 

 

727

 

 

 

1,276

 

 

 

2,024

 

Automobile

 

 

943

 

 

 

1,313

 

 

 

3,034

 

 

 

2,865

 

Other 1

 

 

802

 

 

 

1,119

 

 

 

2,459

 

 

 

2,645

 

Total Recoveries on Loans and Leases Previously

   Charged-Off

 

 

2,252

 

 

 

3,804

 

 

 

8,752

 

 

 

10,413

 

Net Charged-Off - Loans and Leases

 

 

(1,193

)

 

 

1,457

 

 

 

(5,293

)

 

 

(7,394

)

Net Charged-Off  - Accrued Interest Receivable

 

 

(70

)

 

 

 

 

 

(502

)

 

 

 

Provision for Credit Losses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans and Leases

 

 

(11,272

)

 

 

28,600

 

 

 

(43,039

)

 

 

102,600

 

Accrued Interest Receivable 2

 

 

(703

)

 

 

 

 

 

(1,531

)

 

 

 

Unfunded Commitments 3

 

 

1,575

 

 

 

(202

)

 

 

3,770

 

 

 

(1,170

)

Total Provision for Credit Losses

 

 

(10,400

)

 

 

28,398

 

 

 

(40,800

)

 

 

101,430

 

Balance at End of Period

 

$

174,708

 

 

$

205,813

 

 

$

174,708

 

 

$

205,813

 

Components

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Credit Losses - Loans and Leases

 

$

167,920

 

 

$

203,496

 

 

$

167,920

 

 

$

203,496

 

Allowance for Credit Losses - Accrued Interest Receivable 2

 

 

667

 

 

 

 

 

 

667

 

 

 

 

Reserve for Unfunded Commitments 3

 

 

6,121

 

 

 

2,317

 

 

 

6,121

 

 

 

2,317

 

Total Reserve for Credit Losses

 

$

174,708

 

 

$

205,813

 

 

$

174,708

 

 

$

205,813

 

Average Loans and Leases Outstanding

 

$

11,958,321

 

 

$

11,739,785

 

 

$

12,002,426

 

 

$

11,510,222

 

Ratio of Net Loans and Leases Charged-Off (Recovered) to

   Average Loans and Leases Outstanding (annualized)

 

 

0.04

%

 

 

(0.05

)%

 

 

0.06

%

 

 

0.09

%

Ratio of Allowance for Credit Losses to

   Loans and Leases Outstanding

 

 

1.39

%

 

 

1.73

%

 

 

1.39

%

 

 

1.73

%

 

1

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

2

Beginning December 31, 2020, the Company established a reserve on accrued interest receivable related to loans in which interest payment forbearances were granted to borrowers impacted by the COVID-19 pandemic.  The reserve was recorded as a contra-asset against accrued interest receivable with the offset to provision for credit losses.

3

The reserve for unfunded commitments is separately recorded in other liabilities in the consolidated statements of condition.  For the nine months ended September 30, 2021, the offsetting provision was recorded in provision for credit losses in the consolidated statements of income.  In previous reporting periods, the offsetting provision was recorded in other noninterest expense.  


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Allowance for Credit Losses - Loans and Leases

As of September 30, 2021, the Allowance was $167.9 million or 1.39% of total loans and leases outstanding (1.44% excluding PPP loans), compared with an Allowance of $216.3 million or 1.81% of total loans and leases outstanding (1.89% excluding PPP loans) as of December 31, 2020.  The decrease in the Allowance and the ratio of Allowance to loans and leases outstanding was primarily due to management’s best estimate of losses over the life of loans and leases in our portfolio in accordance with the CECL approach, given the economic outlook and forecasts for COVID-19 pandemic driven market changes, as well as the impact of unprecedented intervention of fiscal, monetary and regulatory programs.

Net charge-off on loans and leases were $1.2 million or 0.04% of total average loans and leases, on an annualized basis, in the third quarter of 2021 compared to net recoveries of $1.5 million or 0.05% of total average loans and leases, on an annualized basis, in the third quarter of 2020.  The decrease in net charge-offs on loans and leases was primarily due to the continued and cumulative impact of government stimulus measures and the assistance we offered to borrowers to modify payment terms, which support the trend of low delinquencies, which in turn reduce the number of charge-offs during the quarter.  Net charge-off on loans and leases were $5.3 million or 0.06% of total average loans and leases, on an annualized basis, for the first nine months of 2021.

Allowance for Credit Losses – Accrued Interest Receivable

This allowance was first established on December 31, 2020, for accrued interest receivable related to loans in which interest payment forbearances were granted to borrowers impacted by the COVID-19 pandemic.  The allowance for accrued interest receivable was $0.7 million as of September 30, 2021, a decrease of $2.0 million or 75% from December 31, 2020, as a result of both loan and deferred interest payments.

Reserve for Unfunded Commitments

The Unfunded Reserve was $6.1 million as of September 30, 2021, an increase of $3.8 million or 160% from December 31, 2020, primarily driven by risk rating downgrades to commercial loans with low utilization.

Provision for Credit Losses

We recorded a negative Provision of $10.4 million in the third quarter of 2021 compared to a $28.6 million Provision during the same period in 2020.  For the first nine months of 2021 we recorded a negative Provision of $40.8 million compared to a $102.6 million Provision during the same period in 2020.  These decreases were primarily due to management’s best estimate of losses over the life of loans and leases in our portfolio in accordance with the CECL approach, given the economic outlook, consumer delinquency rates, post deferral consumer payment trends, very low commercial delinquency rates post-deferral, very strong commercial performance and liquidity levels during the second and third quarters, and forecasts for COVID-19 pandemic driven market changes, as well as the cumulative impact of unprecedented intervention of fiscal, monetary and regulatory programs.  The smaller negative provision for the quarter ended September 2021 was primarily due to considering uncertainties driven by the COVID Delta variant surge in cases and UHERO updated forecast for unemployment reported in mid-September.

Market Risk

Market risk is the potential of loss arising from adverse changes in interest rates and prices.  We are exposed to market risk as a consequence of the normal course of conducting our business activities.  Our market risk management process involves measuring, monitoring, controlling, and mitigating risks that can significantly impact our statements of income and condition.  In this management process, market risks are balanced with expected returns in an effort to enhance earnings performance, while limiting volatility.

Our primary market risk exposure is interest rate risk.

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Interest Rate Risk

The objective of our interest rate risk management process is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.  The potential cash flows, sales, or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates.  This interest rate risk arises primarily from our core business activities of extending loans and accepting deposits.  Our investment securities portfolio is also subject to significant interest rate risk.

Many factors affect our exposure to changes in interest rates such as general economic and financial conditions, customer preferences, historical pricing relationships, and repricing characteristics of financial instruments.  Our earnings are affected not only by general economic conditions but also by the monetary and fiscal policies of the U.S. and its agencies, particularly the Federal Reserve Bank (the “FRB”).  The monetary policies of the FRB can influence the overall growth of loans, investment securities, and deposits and the level of interest rates earned on assets and paid for liabilities.

In managing interest rate risk, we, through the Asset/Liability Management Committee (“ALCO”), measure short and long-term sensitivities to changes in interest rates.  The ALCO, which is comprised of members of executive management, utilizes several techniques to manage interest rate risk, which include:

 

adjusting the balance sheet mix or altering the interest rate characteristics of assets and liabilities;

 

changing product pricing strategies;

 

modifying characteristics of the investment securities portfolio; and

 

using derivative financial instruments.

Our use of derivative financial instruments, as detailed in Note 11 to the Consolidated Financial Statements, has generally been limited.  This is due to natural on-balance sheet hedges arising out of offsetting interest rate exposures from loans and investment securities with deposits and other interest-bearing liabilities.  In particular, the investment securities portfolio is utilized to manage the interest rate exposure and sensitivity to within the guidelines and limits established by the ALCO.  We utilize natural and offsetting economic hedges in an effort to reduce the need to employ off-balance sheet derivative financial instruments to hedge interest rate risk exposures.  Expected movements in interest rates are also considered in managing interest rate risk.  Thus, as interest rates change, we may use different techniques to manage interest rate risk.

A key element in our ongoing process to measure and monitor interest rate risk is the utilization of an asset/liability simulation model that attempts to capture the dynamic nature of the statement of condition.  The model is used to estimate and measure the statement of condition sensitivity to changes in interest rates.  These estimates are based on assumptions about the behavior of loan and deposit pricing, prepayment rates on mortgage-based assets, and principal amortization and maturities on other financial instruments.  The model’s analytics include the effects of standard prepayment options on mortgages and customer withdrawal options for deposits.  While such assumptions are inherently uncertain, we believe that our assumptions are reasonable.

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We utilize net interest income simulations to analyze income sensitivities to changes in interest rates.  Table 19 presents, as of September 30, 2021, and December 31, 2020, an estimate of the change in net interest income that would result from a gradual and immediate change in interest rates, moving in a parallel shock over the entire yield curve, relative to the measured base case scenario.  The base case scenario assumes the statement of condition and interest rates are generally unchanged.  Based on our net interest income simulation as of September 30, 2021, net interest income is expected to increase as interest rates rise.  Rising interest rates would drive higher rates on loans and investment securities, as well as induce a slower pace of premium amortization on certain securities within our investment portfolio.  However, lower interest rates would likely cause a decline in net interest income as lower rates would lead to lower yields on loans and investment securities, as well as drive higher premium amortization on existing investment securities.  Based on our net interest income simulation as of September 30, 2021, net interest income sensitivity to changes in interest rates as of September 30, 2021, was slightly more sensitive in comparison to the sensitivity profile as of December 31, 2020.

 

Net Interest Income Sensitivity Profile

 

 

 

 

 

 

 

 

 

 

 

 

 

Table 19

 

 

 

Impact on Future Annual Net Interest Income

 

(dollars in thousands)

 

September 30, 2021

 

 

December 31, 2020

 

Gradual Change in Interest Rates (basis points)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

+200

 

$

30,602

 

 

 

6.3

%

 

$

21,584

 

 

 

4.6

%

+100

 

 

15,900

 

 

 

3.3

 

 

 

10,776

 

 

 

2.3

 

-100

 

 

(8,177

)

 

 

(1.7

)

 

 

(3,547

)

 

 

(0.8

)

Immediate Change in Interest Rates (basis points)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

+200

 

$

67,793

 

 

 

13.9

%

 

$

56,113

 

 

 

11.9

%

+100

 

 

38,828

 

 

 

7.9

 

 

 

30,439

 

 

 

6.5

 

-100

 

 

(26,174

)

 

 

(5.4

)

 

 

(13,517

)

 

 

(2.9

)

 

To analyze the impact of changes in interest rates in a more realistic manner, non-parallel interest rate scenarios are also simulated.  These non-parallel interest rate scenarios indicate that net interest income may decrease from the base case scenario should the yield curve flatten or become inverted for a period of time.  Conversely, if the yield curve were to steepen, net interest income may increase.

Other Market Risks

In addition to interest rate risk, we are exposed to other forms of market risk in our normal business transactions.  Foreign currency and foreign exchange contracts expose us to a small degree of foreign currency risk.  These transactions are primarily executed on behalf of customers.  Our trust and asset management income are at risk to fluctuations in the market values of underlying assets, particularly debt and equity securities.  Also, our share-based compensation expense is dependent on the fair value of our stock options, restricted stock units, and restricted stock at the date of grant.  The fair value of stock options, restricted stock units, and restricted stock is impacted by the market price of the Parent’s common stock on the date of grant and is at risk to changes in equity markets, general economic conditions, and other factors.

Liquidity Risk Management

The objective of our liquidity risk management process is to manage cash flow and liquidity in an effort to provide continuous access to sufficient, reasonably priced funds.  Funding requirements are impacted by loan originations and refinancings, deposit balance changes, liability issuances and settlements, and off-balance sheet funding commitments.  We consider and comply with various regulatory guidelines regarding required liquidity levels and periodically monitor our liquidity position in light of the changing economic environment and customer activity.  Based on periodic liquidity assessments, we may alter our asset, liability, and off-balance sheet positions.  The ALCO monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change.  This process, combined with our ability to raise funds in money and capital markets and through private placements, provides flexibility in managing the exposure to liquidity risk.

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In an effort to satisfy our liquidity needs, we actively manage our assets and liabilities.  We have access to immediate liquid resources in the form of cash which is primarily on deposit with the FRB.  Potential sources of liquidity also include investment securities in our available-for-sale securities portfolio and our ability to sell loans in the secondary market.  Our held-to-maturity securities, while not intended for sale, may also be utilized in repurchase agreements to obtain funding.  Our core deposits have historically provided us with a long-term source of stable and relatively lower cost source of funding.  Additional funding is available through the issuance of long-term debt or equity.

Maturities and payments on outstanding loans and investment securities also provide a steady flow of funds.  Liquidity is further enhanced by our ability to pledge loans to access secured borrowings from the FHLB and FRB.  As of September 30, 2021, we had additional borrowing capacity of $2.9 billion from the FHLB and $0.8 billion from the FRB based on the amount of collateral pledged.

We continued our focus on maintaining a strong liquidity position throughout the first nine months of 2021.  As of September 30, 2021, cash and cash equivalents were $0.7 billion, the carrying value of our available-for-sale investment securities was $4.4 billion, and total deposits were $20.5 billion as of September 30, 2021.

Capital Management

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

The Company and the Bank are each subject to regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements could cause certain mandatory and discretionary actions by regulators that, if undertaken, would likely have a material effect on our financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative and qualitative measures.  These measures were established by regulation intended to ensure capital adequacy.  As of September 30, 2021, the Company and the Bank were considered “well-capitalized” under this regulatory framework.  The Company’s regulatory capital ratios are presented in Table 20 below.  There have been no conditions or events since September 30, 2021, that management believes have changed either the Company’s or the Bank’s capital classifications.

As of September 30, 2021, shareholders’ equity was $1.6 billion, an increase of $222.6 million or 16% from December 31, 2020.  For the first nine months of 2021, net income of $189.5 million, net preferred stock issuance of $175.5 million, common stock issuances of $11.2 million, and share-based compensation of $9.7 million were partially offset by other comprehensive loss of $56.4 million, cash dividends paid of $82.4 million on common shares, and common stock repurchased of $23.4 million.  In the first nine months of 2021, we repurchased 241,332 shares under our share repurchase program.  These shares were repurchased at an average cost per share of $82.89 and a total cost of $20.0 million.  From the beginning of our share repurchase program in July 2001 through September 30, 2021, we repurchased a total of 57.3 million shares of common stock and returned a total of $2.3 billion to our shareholders at an average cost of $40.69 per share.  

Remaining buyback authority under our share repurchase program was $93.1 million as of September 30, 2021.  The actual amount and timing of future share repurchases, if any, will depend on market and economic conditions, regulatory rules, applicable SEC rules, and various other factors.  In March 2020, we suspended share repurchases in light of the COVID-19 pandemic.  We resumed our share repurchase program in July 2021.

In October 2021, the Parent’s Board of Directors declared a quarterly dividend payment of its Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, of $10.94 per share, equivalent to $0.2735 per depositary share.  The dividend will be payable on November 1, 2021, to shareholders of record of the preferred stock at the close of business on October 18, 2021.

In October 2021, the Parent’s Board of Directors declared a quarterly cash dividend of $0.70 per share on the Parent’s outstanding common shares.  The dividend will be payable on December 14, 2021, to shareholders of record of the common stock at the close of business on November 30, 2021.

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Table 20 presents our regulatory capital and ratios as of September 30, 2021, and December 31, 2020

 

Regulatory Capital and Ratios

 

 

 

 

 

Table 20

 

(dollars in thousands)

 

September 30,

2021

 

 

December 31,

2020

 

Regulatory Capital

 

 

 

 

 

 

 

 

Total Common Shareholders’ Equity

 

$

1,421,623

 

 

$

1,374,507

 

Add: CECL Transitional Amount

 

 

12,101

 

 

 

23,750

 

Less: Goodwill, Net of Deferred Tax Liabilities

 

 

28,718

 

 

 

28,718

 

Postretirement Benefit Liability Adjustments

 

 

(41,925

)

 

 

(43,250

)

Net Unrealized Gains (Losses) on Investment Securities 1

 

 

(6,642

)

 

 

51,072

 

Other

 

 

(198

)

 

 

(198

)

Common Equity Tier 1 Capital

 

 

1,453,771

 

 

 

1,361,915

 

Preferred Stock, Net of Issuance Cost

 

 

175,486

 

 

 

 

Tier 1 Capital

 

 

1,629,257

 

 

 

1,361,915

 

Allowable Reserve for Credit Losses

 

 

151,322

 

 

 

141,869

 

Total Regulatory Capital

 

$

1,780,579

 

 

$

1,503,784

 

Risk-Weighted Assets

 

$

12,093,010

 

 

$

11,295,077

 

Key Regulatory Capital Ratios

 

 

 

 

 

 

 

 

Common Equity Tier 1 Capital Ratio

 

 

12.02

%

 

 

12.06

%

Tier 1 Capital Ratio

 

 

13.47

 

 

 

12.06

 

Total Capital Ratio

 

 

14.72

 

 

 

13.31

 

Tier 1 Leverage Ratio

 

 

7.10

 

 

 

6.71

 

 

1

Includes unrealized gains and losses related to the Company’s reclassification of available-for-sale investment securities to the held-to-maturity category.

We have elected to apply the modified transition provision related to the impact of the CECL accounting standard on regulatory capital, as provided by the US banking agencies’ March 2020 interim final rule that was finalized on September 30, 2020.  Under the modified CECL transition provision, the regulatory capital impact of the Day 1 adjustment to the allowance for credit losses (after-tax), upon the January 1, 2020, CECL adoption date, has been deferred, and will phase in to regulatory capital at 25% per year commencing January 1, 2022. For the ongoing impact of CECL, we are allowed to defer the regulatory capital impact of the allowance for credit losses in an amount equal to 25% of the change in the allowance for credit losses (pre-tax) recognized through earnings for each period between January 1, 2020, and December 31, 2021.  The cumulative adjustment to the allowance for credit losses between January 1, 2020, and December 31, 2021, will also phase in to regulatory capital at 25% per year commencing January 1, 2022.

Regulatory Initiatives Affecting the Banking Industry

U.S. Government Relief Programs in Response to COVID-19

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law.  The CARES Act established several new temporary U.S. Small Business Administration (“SBA”) loan programs to assist U.S. small businesses through the COVID-19 pandemic.  One of the new loan programs was the Paycheck Protection Program, an expansion of the SBA’s 7(a) loan program and the Economic Injury Disaster Loan Program.  The PPP provided loans to small businesses who were affected by economic conditions as a result of COVID-19 to provide cash-flow assistance to employers who maintain their payroll (including healthcare and certain related expenses), mortgage interest, rent, leases, utilities and interest on existing debt during this emergency.  Eligible borrowers needed to make a good faith certification that the uncertainty of current economic conditions make requesting assistance necessary to support ongoing operations.  Pursuant to the provisions of Section 1106 of the CARES Act, borrowers may apply to the Bank for loan forgiveness of all or a portion of the loan, subject to certain eligibility requirements and conditions.  On December 27, 2020, the Consolidated Appropriations Act, 2021 (“CAA”) was signed into law.  The CAA provides several amendments to the PPP, including additional funding for first and second draws of PPP loans through March 31, 2021.  On March 30, 2021, the PPP Extension Act of 2021 was signed into law, which extended the program to May 31, 2021.  The Bank is an SBA lender and accepted applications under the CARES Act via its online application process from April 3, 2020, until May 31, 2021, when the PPP program ended.  As of September 30, 2021, the Bank had 1,939 PPP loans totaling $268.5 million net of deferred costs and fees.

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On March 11, 2021, the American Rescue Plan Act of 2021 (“ARP”) was signed into law.  Chief among the $1.9 trillion stimulus act is additional support for individuals, including $1,400 checks to many Americans, extended unemployment benefits, and expanded tax credits. In addition, ARP provides funding for state and local governments and support for businesses continuing to struggle as a result of the pandemic, including a modest increase to PPP, expanded eligibility to more non-profits, a grant program for restaurants that have suffered pandemic-related losses, and extended payroll support for the airline industry.

Operational Risk

Operational risk represents the risk of loss resulting from our operations, including, but not limited to, the risk of fraud by employees or persons outside the Company, errors relating to transaction processing and technology, failure to adhere to compliance requirements, and the risk of cyber attacks.  We are also exposed to operational risk through our outsourcing arrangements, and the effect that changes in circumstances or capabilities of our outsourcing vendors can have on our ability to continue to perform operational functions necessary to our business.  The risk of loss also includes the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory standards, adverse business decisions or their implementation, and customer attrition due to potential negative publicity.  Operational risk is inherent in all business activities, and management of this risk is important to the achievement of Company goals and objectives.

Our Operating Risk Committee (the “ORC”) provides oversight and assesses the most significant operational risks facing the Company.  We have developed a framework that provides for a centralized operating risk management function through the ORC, supplemented by business unit responsibility for managing operational risks specific to their business units.  Our internal audit department also validates the system of internal controls through ongoing risk-based audit procedures and reports on the effectiveness of internal controls to executive management and the Audit and Risk Committee of the Board of Directors.

We continuously strive to strengthen our system of internal controls to improve the oversight of operational risk.  While our internal controls have been designed to minimize operational risks, there is no assurance that business disruption or operational losses will not occur.  On an ongoing basis, management reassesses operational risks, implements appropriate process changes, and invests in enhancements to our systems of internal controls.

Off-Balance Sheet Arrangements, Credit Commitments, and Contractual Obligations

Off-Balance Sheet Arrangements

We hold interests in several unconsolidated VIEs.  These unconsolidated VIEs are primarily low-income housing partnerships and solar energy partnerships.  Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in an entity’s net asset value.  The primary beneficiary consolidates the VIE.  We have determined that the Company is not the primary beneficiary of these entities.  As a result, we do not consolidate these VIEs.  

Credit Commitments and Contractual Obligations

Our credit commitments and contractual obligations have not changed materially since previously reported in our Annual Report on Form 10-K for the year ended December 31, 2020.

 

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

See “Market Risk” of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Item 4.  Controls and Procedures

Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2021.  The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.  Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2021.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II - Other Information

Item 1.  Legal Proceedings

Information regarding legal proceedings is incorporated by reference from “Contingencies” in Note 12 to our Consolidated Financial Statements (unaudited) set forth in Part I of this report.

Item 1A.  Risk Factors

There are no material changes from the risk factors set forth under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, except as described below.

 

Adverse changes in business and economic conditions, in particular those of Hawaii, Guam and other Pacific Islands, could lead to lower revenue, lower asset quality, and lower earnings.

Our business and earnings are closely tied to the economies of Hawaii and the Pacific Islands.  These local economies rely heavily on tourism, the U.S. military, real estate, construction, government, and other service-based industries.  Lower visitor arrivals or spending, real or threatened acts of war or terrorism, public unrest, increases in energy costs, the availability of affordable air transportation, climate change, natural disasters and adverse weather, public health issues including Asian air pollution and the spread of the COVID-19 pandemic, and Federal, State of Hawaii and local government budget issues may impact consumer and corporate spending.

The impacts of various travel restrictions, stay-at-home orders and quarantine requirements for visitors to Hawaii has had a dramatic negative impact on tourism.  These events have contributed to a significant deterioration in general economic conditions in our markets which has impacted and will continue to adversely impact us and our customers’ operations.  Though there has been an increase in tourism recently, many of the impacts in Hawaii and the Pacific Islands still linger.

Recent deterioration of economic conditions, locally, nationally, and internationally could adversely affect the quality of our assets, credit losses, and the demand for our products and services, which could lead to lower revenues, higher expenses, and lower earnings.  In response to this deterioration, several government stimulus programs were initiated, including the CARES Act and the PPP.  The level of visitor arrivals and spending, housing prices, and unemployment rates are some of the metrics that we continually monitor.  We also monitor the value of collateral, such as real estate, that secures the loans we have made.  The borrowing power of our customers could also be negatively impacted by a decline in the value of collateral.

The COVID-19 pandemic has disrupted the Hawaii economy and our business, and the extent and severity of the impact on our business and our financial results are highly uncertain and cannot be predicted.

The COVID-19 pandemic has had and is expected to continue to have a material adverse effect on our operations and financial performance.  The duration of the COVID-19 pandemic and its effects still cannot be determined with a reasonable level of certainty.  We have experienced unprecedented levels of government stimulus in response to COVID-19 in the current economic cycle, the lasting impacts of which are unknown.

Novel viruses such as COVID-19 increase concerns related to illness when traveling and gathering in large numbers.  In response, the majority of the nation’s state and local jurisdictions imposed stay-at-home and/or shelter-in-place orders, quarantines, executive orders or similar government orders and restrictions in order to control the spread of COVID-19.  

The stay-at-home and safer-at-home orders, along with the mandatory 10-day self-quarantine travel restrictions, resulted in a dramatic decline in tourism in Hawaii.  Though many of these restrictions are now being lifted or relaxed, tourism and tourism spending remained below pre-pandemic levels as various public events, attractions and venues were closed or cancelled. Recent limits on internal gatherings and vaccination requirements for restaurants has had an impact on the economy locally and many of our customers.  We cannot predict when these closures and cancellations will diminish or when tourism and tourism spending levels in Hawaii will fully recover. This decline in tourism has, and is expected to continue to have, a negative impact to the Hawaii economy and our financial results.

Although some of the original restrictions have been relaxed, the mandatory self-quarantine travel restriction remains in place.  Beginning October 15, 2020, arriving passengers and interisland travelers may avoid the self-quarantine requirements by providing proof of a recent negative test result for COVID-19 prior to boarding.  Beginning July 8, 2021, passengers from the United States mainland may bypass testing or quarantine by proving proof of full vaccination (15 days following the final vaccination dose).  While the relaxation in travel restrictions has resulted in an increase in visitor arrivals, the tourism industry in Hawaii is still below pre-pandemic levels. Additionally, current requirements are subject to change should the infection rates in Hawaii change, causing uncertainty and continuing to impact travel to Hawaii.

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Even as more and more individuals become vaccinated, prior travel restrictions and mandatory quarantines related to the COVID-19 pandemic may have a lasting impact on tourism in Hawaii.  Because many of our customers, both commercial and consumer, derive at least some of their income from tourism, this dramatic drop in tourism affects them directly, as well as the Hawaii economy as a whole.  A downturn in the Hawaii economy and widespread impact to our customers’ income have a negative impact on our operations.  We are unable to predict the extent to which the pandemic and related impacts will continue to adversely affect our business, results of operations, financial condition, regulatory capital and liquidity ratios.

The COVID-19 pandemic, the institution of physical distancing, and shelter-in-place requirements resulted in both temporary and permanent closures of many businesses.  As a result, the demand for our products and services has been and may continue to be significantly impacted.  The COVID-19 pandemic could prompt credit losses in our loan portfolios and increase our allowance for credit losses, particularly as businesses remain closed and as more customers draw on lines of credit or seek additional loans to help finance their businesses.  Our operations may also be disrupted if significant portions of our workforce are unable to work effectively, due to illness, quarantines, government actions, or other restrictions in connection with the COVID-19 pandemic.  We temporarily or permanently closed certain of our branches and offices and many employees are still working remotely.  Though we have re-opened some of our branches, others remain closed.  It is anticipated that staffing levels at our headquarters will remain lower than pre-pandemic levels for some time.

In response to the COVID-19 pandemic, we temporarily suspended residential property foreclosure sales, evictions, and involuntary automobile repossessions.  We offered other expanded assistance to customers such as fee waivers, payment deferrals or forbearances on automobile loans and leases, mortgages, home equity loans and lines, as well as commercial, small business and personal loans. Although our formal assistance programs have ended, we continue to work with our customers who are still being impacted by the COVID-19 pandemic.  The extent to which the COVID-19 pandemic impacts our business, results of operations, financial condition, regulatory capital, and liquidity ratios, will depend on the scope and duration of the COVID-19 pandemic, actions taken by governmental authorities, the availability of federal, state, or local funding programs, actions taken by other third parties in response to the COVID-19 pandemic, and the pace of recovery when the COVID-19 pandemic subsides, all of which are highly uncertain.

Climate change and the governmental responses to it could have a material adverse impact on the Bank and its customers

The impacts of climate change, such as extreme weather conditions, natural disasters and rising sea levels, could impact the Bank’s operations as well as those of its customers and third party vendors upon which it relies.  Such events could also result in market volatility or negatively impact our customers’ ability to pay outstanding loans, or result in the deterioration of the value of our collateral causing a material adverse effect on the Bank’s financial condition and results of operation.  Furthermore, increasing regulation related to climate change could have an adverse effect on the business and financial condition of the Bank and its customers, including our credit portfolio.   Further legislation and regulatory requirements could increase the operating expenses of, or otherwise adversely impact, the Bank or its customers.  To the extent that the Bank or its customers experience increases in costs, reductions in the value of assets, constraints on operations or similar concerns driven by changes in regulation relating to climate change, the Bank’s business and results of operations may be adversely affected.


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Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

The Parent’s repurchases of its common stock during the third quarter of 2021 were as follows:

 

Issuer Purchases of Equity Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

Total Number

of Shares

Purchased 1

 

 

Average Price

Paid Per

Share

 

 

Total Number of

Shares Purchased

as Part of

Publicly Announced

Plans or Programs

 

 

Approximate Dollar

Value of Shares

that May Yet Be

Purchased Under

the Plans or

Programs 2

 

July 1 - 31, 2021

 

 

1,288

 

 

$

84.61

 

 

 

22,500

 

 

$

111,171,297

 

August 1 - 31, 2021

 

 

 

 

 

84.68

 

 

 

130,500

 

 

 

100,120,594

 

September 1 - 30, 2021

 

 

 

 

 

79.82

 

 

 

88,332

 

 

 

93,069,913

 

Total

 

 

1,288

 

 

$

82.90

 

 

 

241,332

 

 

 

 

 

 

1

During the third quarter of 2021, 1,288 shares were acquired by the trustee of a trust established pursuant to the Bank of Hawaii Corporation Director Deferred Compensation Plan (the “DDCP”) directly from the Parent in satisfaction of the Company’s obligations to participants under the DDCP.  The issuance of these shares was made in reliance upon the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”) by Section 4(a)(2) thereof.  The trustee under the trust and the participants under the DDCP are “Accredited Investors”, as defined in Rule 501(a) under the Securities Act.  These transactions did not involve a public offering and occurred without general solicitation or advertising.  The shares were purchased at the closing price of the Parent’s common stock on the dates of purchase.

2

The share repurchase program was first announced in July 2001.  The program has no set expiration or termination date.  The actual amount and timing of future share repurchases, if any, will depend on market and economic conditions, regulatory rules, applicable SEC rules, and various other factors.  On March 17, 2020, we suspended share repurchases in light of the COVID-19 pandemic.  We resumed our share repurchase program in July 2021.

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Item 6.  Exhibits

A list of exhibits to this Form 10-Q is set forth on the Exhibit Index and is incorporated herein by reference.

Exhibit Index

 

Exhibit

Number

 

 

 

 

 

3.1

 

Certificate of Incorporation of Bank of Hawaii Corporation (f/k/a Pacific Century Financial Corporation and Bancorp Hawaii, Inc.), as amended (incorporated by reference to Exhibit 3.1 to Bank of Hawaii Corporation’s Annual Report on Form 10-K for its fiscal year ended December 31, 2005 filed on February 28, 2006).

 

 

 

3.2

 

Certificate of Amendment of Certificate of Incorporation of Bank of Hawaii Corporation (incorporated by reference to Exhibit 3.1 to Bank of Hawaii Corporation’s Current Report on Form 8-K filed on April 30, 2008).

 

 

 

3.3

 

Certificate of Designations of 4.375% Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A (incorporated by reference to Exhibit 3.1 to Bank of Hawaii Corporation’s Current Report on Form 8-K filed on June 15, 2021).

 

 

 

3.4

 

Amended and Restated By-laws of Bank of Hawaii Corporation (as amended October 19, 2018) (incorporated by reference to Exhibit 3.2 to Bank of Hawaii Corporation’s Current Report on Form 8-K filed on October 24, 2018).

 

 

 

4.1

 

Deposit Agreement, dated June 15, 2021, by and among Bank of Hawaii Corporation, Computershare Inc. and Computershare Trust Company, N.A., jointly as depositary, and the holders from time to time of the depositary receipts described therein (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on June 15, 2021)

 

 

 

4.2

 

Form Depository Receipt (included in Exhibit 4.1)

 

 

 

31.1

 

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Amended, Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002

 

 

 

31.2

 

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as Amended, Adopted Pursuant to Section 302 of the Sarbanes Oxley Act of 2002

 

 

 

32

 

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS

 

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

The cover page for the Company’s Quarterly Report on the Form 10-Q has been formatted in Inline XBRL and contained in Exhibit 101

 

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date:

October 26, 2021

 

Bank of Hawaii Corporation

 

 

 

 

 

 

By:

/s/ Peter S. Ho

 

 

 

Peter S. Ho

 

 

 

Chairman of the Board,

 

 

 

Chief Executive Officer, and

 

 

 

President

 

 

 

 

 

 

By:

/s/ Dean Y. Shigemura

 

 

 

Dean Y. Shigemura

 

 

 

Chief Financial Officer

 

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