(1) | In March 2019, the Company announced a share repurchase program for up to $100 million of its outstanding common stock during 2019. In August 2019, the Company announced a $50 million increase in its share repurchase program to up to $150 million of its outstanding common stock during 2019. On December 31, 2019, the share repurchase program for 2019 expired with $13.8 million remaining of the $150 million total repurchase amount authorized. In January 2020, the Company announced a share repurchase program for $80 million of its common stock during 2020. The timing and amount of share repurchases are influenced by various internal and external factors.
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Performance Graph The following graph displays the cumulative total stockholder return on our common stock based on the market price of the common stock compared to the cumulative total returns for the Standard & Poor’s (“S&P”) 500 Index and the KBW Regional Banking Index (“KRX”). The graph assumes that $100 was invested on our IPO date, August 4, 2016, in our common stock(1), the S&P 500 Index(2) and the KRX(2). The cumulative total return on each investment is as of the dates indicated and assumes reinvestment of dividends.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1Q 2017 | | 2Q 2017 | | 3Q 2017 | | 4Q 2017 | | 1Q 2018 | | 2Q 2018 | | 3Q 2018 | | 4Q 2018 | | 1Q 2019 | | 2Q 2019 | | 3Q 2019 | | 4Q 2019 | | 1Q 2018 | | 2Q 2018 | | 3Q 2018 | | 4Q 2018 | | 1Q 2019 | | 2Q 2019 | | 3Q 2019 | | 4Q 2019 | | 1Q 2020 | | 2Q 2020 | | 3Q 2020 | | 4Q 2020 | First Hawaiian, Inc. Common Stock | | $ | 121.31 | | $ | 119.40 | | $ | 121.37 | | $ | 122.43 | | $ | 120.17 | | $ | 127.60 | | $ | 119.49 | | $ | 96.18 | | $ | 111.93 | | $ | 112.31 | | $ | 121.29 | | $ | 130.46 | | $ | 120.17 | | $ | 127.60 | | $ | 119.49 | | $ | 96.18 | | $ | 111.93 | | $ | 112.31 | | $ | 121.29 | | $ | 130.46 | | $ | 77.28 | | $ | 78.81 | | $ | 69.24 | | $ | 107.84 | S&P 500 Index | | | 107.88 | | | 111.51 | | | 114.76 | | | 122.86 | | | 122.05 | | | 125.44 | | | 133.45 | | | 113.54 | | | 129.27 | | | 134.14 | | | 136.84 | | | 147.46 | | | 122.05 | | | 125.44 | | | 133.45 | | | 113.54 | | | 129.27 | | | 134.14 | | | 136.84 | | | 147.46 | | | 112.95 | | | 141.43 | | | 151.66 | | | 169.97 | KBW Regional Banking Index | | | 123.53 | | | 123.69 | | | 124.23 | | | 132.55 | | | 134.18 | | | 138.69 | | | 134.01 | | | 104.12 | | | 115.19 | | | 115.12 | | | 117.66 | | | 127.60 | | | 134.18 | | | 138.69 | | | 134.01 | | | 104.12 | | | 115.19 | | | 115.12 | | | 117.66 | | | 127.60 | | | 73.44 | | | 84.63 | | | 75.42 | | | 110.31 |
(1) | The investments in FHI were calculated using a volume weighted average price with a 10-day averaging period with dividends reinvested at the ex-dividend date. |
(2) | The S&P 500 Index and KRX were calculated using a 10-day averaging period. |
The stock performance depicted in the graph above should not be relied upon as indicative of future performance. ITEM 6. SELECTED FINANCIAL DATA | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial Highlights | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Year Ended | | For the Year Ended | | | December 31, | | December 31, | | (dollars in thousands, except per share data) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Income Statement Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest income | $ | 678,692 | | $ | 646,051 | | $ | 570,768 | | $ | 518,520 | | $ | 483,846 | | $ | 582,759 | | $ | 678,692 | | $ | 646,051 | | $ | 570,768 | | $ | 518,520 | | Interest expense | | 105,290 | | | 79,733 | | | 41,964 | | | 26,848 | | | 22,521 | | | 47,025 | | | 105,290 | | | 79,733 | | | 41,964 | | | 26,848 | | Net interest income | | 573,402 | | | 566,318 | | | 528,804 | | | 491,672 | | | 461,325 | | | 535,734 | | | 573,402 | | | 566,318 | | | 528,804 | | | 491,672 | | Provision for loan and lease losses | | 13,800 | | | 22,180 | | | 18,500 | | | 8,600 | | | 9,900 | | | Net interest income after provision for loan and lease losses | | 559,602 | | | 544,138 | | | 510,304 | | | 483,072 | | | 451,425 | | | Provision for credit losses | | | 121,718 | | | 13,800 | | | 22,180 | | | 18,500 | | | 8,600 | | Net interest income after provision for credit losses | | | 414,016 | | | 559,602 | | | 544,138 | | | 510,304 | | | 483,072 | | Noninterest income | | 192,533 | | | 178,993 | | | 205,605 | | | 226,037 | | | 219,111 | | | 197,380 | | | 192,533 | | | 178,993 | | | 205,605 | | | 226,037 | | Noninterest expense | | 370,437 | | | 364,953 | | | 347,554 | | | 337,280 | | | 327,309 | | | 367,672 | | | 370,437 | | | 364,953 | | | 347,554 | | | 337,280 | | Income before provision for income taxes | | 381,698 | | | 358,178 | | | 368,355 | | | 371,829 | | | 343,227 | | | 243,724 | | | 381,698 | | | 358,178 | | | 368,355 | | | 371,829 | | Provision for income taxes | | 97,306 | | | 93,784 | | | 184,673 | | | 141,651 | | | 129,447 | | | 57,970 | | | 97,306 | | | 93,784 | | | 184,673 | | | 141,651 | | Net income | $ | 284,392 | | $ | 264,394 | | $ | 183,682 | | $ | 230,178 | | $ | 213,780 | | $ | 185,754 | | $ | 284,392 | | $ | 264,394 | | $ | 183,682 | | $ | 230,178 | | Basic earnings per share | $ | 2.14 | | $ | 1.93 | | $ | 1.32 | | $ | 1.65 | | $ | 1.53 | | $ | 1.43 | | $ | 2.14 | | $ | 1.93 | | $ | 1.32 | | $ | 1.65 | | Diluted earnings per share | $ | 2.13 | | $ | 1.93 | | $ | 1.32 | | $ | 1.65 | | $ | 1.53 | | $ | 1.43 | | $ | 2.13 | | $ | 1.93 | | $ | 1.32 | | $ | 1.65 | | Basic weighted-average outstanding shares | | 133,076,489 | | | 136,945,134 | | | 139,560,305 | | | 139,487,762 | | | 139,459,620 | | | 129,890,225 | | | 133,076,489 | | | 136,945,134 | | | 139,560,305 | | | 139,487,762 | | Diluted weighted-average outstanding shares | | 133,387,157 | | | 137,111,420 | | | 139,656,993 | | | 139,492,608 | | | 139,459,620 | | | 130,220,077 | | | 133,387,157 | | | 137,111,420 | | | 139,656,993 | | | 139,492,608 | | Dividends declared per share | $ | 1.04 | | $ | 0.96 | | $ | 0.88 | | $ | 0.62 | | $ | — | | $ | 1.04 | | $ | 1.04 | | $ | 0.96 | | $ | 0.88 | | $ | 0.62 | | Dividend payout ratio | | 48.83 | % | | 49.74 | % | | 66.67 | % | | 37.27 | % | | — | % | | 72.73 | % | | 48.83 | % | | 49.74 | % | | 66.67 | % | | 37.27 | % | Supplemental Income Statement Data (non-GAAP)(1): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Core net interest income | $ | 573,402 | | $ | 566,318 | | $ | 528,804 | | $ | 491,672 | | $ | 456,489 | | $ | 535,734 | | $ | 573,402 | | $ | 566,318 | | $ | 528,804 | | $ | 491,672 | | Core noninterest income | | 199,748 | | | 203,078 | | | 198,683 | | | 198,793 | | | 195,905 | | | 202,322 | | | 199,748 | | | 203,078 | | | 198,683 | | | 198,793 | | Core noninterest expense | | 367,623 | | | 358,561 | | | 342,097 | | | 331,060 | | | 327,309 | | | 367,672 | | | 367,623 | | | 358,561 | | | 342,097 | | | 331,060 | | Core net income | | 291,785 | | | 286,711 | | | 230,366 | | | 217,111 | | | 196,315 | | | 189,378 | | | 291,785 | | | 286,711 | | | 230,366 | | | 217,111 | | Core basic earnings per share | $ | 2.19 | | $ | 2.09 | | $ | 1.65 | | $ | 1.56 | | $ | 1.41 | | $ | 1.46 | | $ | 2.19 | | $ | 2.09 | | $ | 1.65 | | $ | 1.56 | | Core diluted earnings per share | $ | 2.19 | | $ | 2.09 | | $ | 1.65 | | $ | 1.56 | | $ | 1.41 | | $ | 1.45 | | $ | 2.19 | | $ | 2.09 | | $ | 1.65 | | $ | 1.56 | | Other Financial Information / Performance Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net interest margin | | 3.20 | % | | 3.16 | % | | 2.99 | % | | 2.88 | % | | 2.78 | % | | 2.77 | % | | 3.20 | % | | 3.16 | % | | 2.99 | % | | 2.88 | % | Core net interest margin (non-GAAP)(1),(2) | | 3.20 | % | | 3.16 | % | | 2.99 | % | | 2.88 | % | | 2.75 | % | | 2.77 | % | | 3.20 | % | | 3.16 | % | | 2.99 | % | | 2.88 | % | Efficiency ratio | | 48.36 | % | | 48.96 | % | | 47.32 | % | | 46.99 | % | | 48.10 | % | | 50.10 | % | | 48.36 | % | | 48.96 | % | | 47.32 | % | | 46.99 | % | Core efficiency ratio (non-GAAP)(1),(3) | | 47.55 | % | | 46.59 | % | | 47.02 | % | | 47.94 | % | | 50.17 | % | | 49.77 | % | | 47.55 | % | | 46.59 | % | | 47.02 | % | | 47.94 | % | Return on average total assets | | 1.40 | % | | 1.31 | % | | 0.92 | % | | 1.19 | % | | 1.14 | % | | 0.85 | % | | 1.40 | % | | 1.31 | % | | 0.92 | % | | 1.19 | % | Core return on average total assets (non-GAAP)(1),(4) | | 1.44 | % | | 1.42 | % | | 1.16 | % | | 1.12 | % | | 1.05 | % | | 0.87 | % | | 1.44 | % | | 1.42 | % | | 1.16 | % | | 1.12 | % | Return on average tangible assets (non-GAAP)(10) | | 1.47 | % | | 1.37 | % | | 0.97 | % | | 1.26 | % | | 1.20 | % | | Return on average tangible assets (non-GAAP)(9) | | | 0.89 | % | | 1.47 | % | | 1.37 | % | | 0.97 | % | | 1.26 | % | Core return on average tangible assets (non-GAAP)(1),(5) | | 1.51 | % | | 1.49 | % | | 1.22 | % | | 1.18 | % | | 1.10 | % | | 0.91 | % | | 1.51 | % | | 1.49 | % | | 1.22 | % | | 1.18 | % | Return on average total stockholders' equity | | 10.90 | % | | 10.76 | % | | 7.24 | % | | 8.96 | % | | 7.81 | % | | 6.88 | % | | 10.90 | % | | 10.76 | % | | 7.24 | % | | 8.96 | % | Core return on average total stockholders' equity (non-GAAP)(1),(6) | | 11.18 | % | | 11.67 | % | | 9.08 | % | | 8.45 | % | | 7.18 | % | | 7.02 | % | | 11.18 | % | | 11.67 | % | | 9.08 | % | | 8.45 | % | Return on average tangible stockholders' equity (non-GAAP)(10) | | 17.62 | % | | 18.08 | % | | 11.91 | % | | 14.64 | % | | 12.28 | % | | Return on average tangible stockholders' equity (non-GAAP)(9) | | | 10.91 | % | | 17.62 | % | | 18.08 | % | | 11.91 | % | | 14.64 | % | Core return on average tangible stockholders' equity (non-GAAP)(1),(7) | | 18.08 | % | | 19.61 | % | | 14.93 | % | | 13.80 | % | | 11.28 | % | | 11.12 | % | | 18.08 | % | | 19.61 | % | | 14.93 | % | | 13.80 | % | Noninterest expense to average assets | | 1.82 | % | | 1.80 | % | | 1.74 | % | | 1.74 | % | | 1.74 | % | | 1.68 | % | | 1.82 | % | | 1.80 | % | | 1.74 | % | | 1.74 | % | Core noninterest expense to average assets (non-GAAP)(1),(8) | | 1.81 | % | | 1.77 | % | | 1.72 | % | | 1.71 | % | | 1.74 | % | | 1.68 | % | | 1.81 | % | | 1.77 | % | | 1.72 | % | | 1.71 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | | December 31, | | | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 694,017 | | $ | 1,003,637 | | $ | 1,034,644 | | $ | 1,052,058 | | $ | 2,650,195 | | | $ | 1,040,944 | | $ | 694,017 | | $ | 1,003,637 | | $ | 1,034,644 | | $ | 1,052,058 | | Investment securities | | | 4,075,644 | | | 4,498,342 | | | 5,234,658 | | | 5,077,514 | | | 4,027,265 | | | | 6,071,415 | | | 4,075,644 | | | 4,498,342 | | | 5,234,658 | | | 5,077,514 | | Loans and leases | | | 13,211,650 | | | 13,076,191 | | | 12,277,369 | | | 11,520,378 | | | 10,722,030 | | | | 13,279,097 | | | 13,211,650 | | | 13,076,191 | | | 12,277,369 | | | 11,520,378 | | Allowance for loan and lease losses | | | 130,530 | | | 141,718 | | | 137,253 | | | 135,494 | | | 135,484 | | | Allowance for credit losses for loans and leases | | | | 208,454 | | | 130,530 | | | 141,718 | | | 137,253 | | | 135,494 | | Goodwill | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | Total assets | | | 20,166,734 | | | 20,695,678 | | | 20,549,461 | | | 19,661,829 | | | 19,352,681 | | | | 22,662,831 | | | 20,166,734 | | | 20,695,678 | | | 20,549,461 | | | 19,661,829 | | Total deposits | | | 16,444,994 | | | 17,150,068 | | | 17,612,122 | | | 16,794,532 | | | 16,061,924 | | | | 19,227,723 | | | 16,444,994 | | | 17,150,068 | | | 17,612,122 | | | 16,794,532 | | Short-term borrowings | | | 400,000 | | | — | | | — | | | 9,151 | | | 216,151 | | | | — | | | 400,000 | | | — | | | — | | | 9,151 | | Long-term borrowings | | | 200,019 | | | 600,026 | | | 34 | | | 41 | | | 48 | | | | 200,010 | | | 200,019 | | | 600,026 | | | 34 | | | 41 | | Total liabilities | | | 17,526,476 | | | 18,170,839 | | | 18,016,910 | | | 17,185,344 | | | 16,615,740 | | | | 19,918,727 | | | 17,526,476 | | | 18,170,839 | | | 18,016,910 | | | 17,185,344 | | Total stockholders' equity | | | 2,640,258 | | | 2,524,839 | | | 2,532,551 | | | 2,476,485 | | | 2,736,941 | | | | 2,744,104 | | | 2,640,258 | | | 2,524,839 | | | 2,532,551 | | | 2,476,485 | | Book value per share | | $ | 20.32 | | $ | 18.72 | | $ | 18.14 | | $ | 17.75 | | $ | 19.63 | | | $ | 21.12 | | $ | 20.32 | | $ | 18.72 | | $ | 18.14 | | $ | 17.75 | | Tangible book value per share (non-GAAP)(10) | | $ | 12.66 | | $ | 11.34 | | $ | 11.01 | | $ | 10.61 | | $ | 12.49 | | | Tangible book value per share (non-GAAP)(9) | | | $ | 13.46 | | $ | 12.66 | | $ | 11.34 | | $ | 11.01 | | $ | 10.61 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Asset Quality Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-accrual loans and leases / total loans and leases | | | 0.04 | % | | 0.05 | % | | 0.08 | % | | 0.08 | % | | 0.16 | % | | | 0.07 | % | | 0.04 | % | | 0.05 | % | | 0.08 | % | | 0.08 | % | Allowance for loan and lease losses / total loans and leases | | | 0.99 | % | | 1.08 | % | | 1.12 | % | | 1.18 | % | | 1.26 | % | | Allowance for credit losses for loans and leases / total loans and leases | | | | 1.57 | % | | 0.99 | % | | 1.08 | % | | 1.12 | % | | 1.18 | % | Net charge-offs / average total loans and leases | | | 0.19 | % | | 0.14 | % | | 0.14 | % | | 0.08 | % | | 0.09 | % | | | 0.23 | % | | 0.19 | % | | 0.14 | % | | 0.14 | % | | 0.08 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | | December 31, | | Capital Ratios(9): | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | | Capital Ratios: | | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Common Equity Tier 1 Capital Ratio | | | 11.88 | % | | 11.97 | % | | 12.45 | % | | 12.75 | % | | 15.31 | % | | | 12.47 | % | | 11.88 | % | | 11.97 | % | | 12.45 | % | | 12.75 | % | Tier 1 Capital Ratio | | | 11.88 | % | | 11.97 | % | | 12.45 | % | | 12.75 | % | | 15.31 | % | | | 12.47 | % | | 11.88 | % | | 11.97 | % | | 12.45 | % | | 12.75 | % | Total Capital Ratio | | | 12.81 | % | | 12.99 | % | | 13.50 | % | | 13.85 | % | | 16.48 | % | | | 13.73 | % | | 12.81 | % | | 12.99 | % | | 13.50 | % | | 13.85 | % | Tier 1 Leverage Ratio | | | 8.79 | % | | 8.72 | % | | 8.52 | % | | 8.36 | % | | 9.84 | % | | | 8.00 | % | | 8.79 | % | | 8.72 | % | | 8.52 | % | | 8.36 | % | Total stockholders' equity to total assets | | | 13.09 | % | | 12.20 | % | | 12.32 | % | | 12.60 | % | | 14.14 | % | | | 12.11 | % | | 13.09 | % | | 12.20 | % | | 12.32 | % | | 12.60 | % | Tangible stockholders' equity to tangible assets (non-GAAP)(10) | | | 8.58 | % | | 7.76 | % | | 7.86 | % | | 7.93 | % | | 9.49 | % | | Tangible stockholders' equity to tangible assets (non-GAAP)(9) | | | | 8.07 | % | | 8.58 | % | | 7.76 | % | | 7.86 | % | | 7.93 | % |
(1) | We present net interest income, noninterest income, noninterest expense, net income, basic earnings per share, diluted earnings per share and the related ratios described below, on an adjusted, or “core,” basis, each a non-GAAP financial measure. These core measures exclude from the corresponding GAAP measure the impact of certain items that we do not believe are representative of our financial results. We believe that the presentation of these non-GAAP financial measures helps identify underlying trends in our business from period to period that could otherwise be distorted by the effect of certain expenses, gains and other items included in our operating results. We believe that these core measures provide useful information about our operating results and enhance the overall understanding of our past performance and future performance. Investors should consider our performance and financial condition as reported under GAAP and all other relevant information when assessing our performance or financial condition. Non-GAAP measures have limitations as analytical tools and investors should not consider them in isolation or as a substitute for analysis of our financial results or financial condition as reported under GAAP. |
The following table provides a reconciliation of net interest income, noninterest income, noninterest expense and net income to their “core” non-GAAP financial measures: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | GAAP to Non-GAAP Reconciliation | | | | | | | | | | | | | | | | | | | | | | For the Years Ended | | For the Years Ended | | | December 31, | | December 31, | | (dollars in thousands, except per share data) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Net interest income | $ | 573,402 | | $ | 566,318 | | $ | 528,804 | | $ | 491,672 | | $ | 461,325 | | $ | 535,734 | | $ | 573,402 | | $ | 566,318 | | $ | 528,804 | | $ | 491,672 | | Early loan termination(a) | | — | | | — | | | — | | | — | | | (4,836) | | | Core net interest income (non-GAAP) | $ | 573,402 | | $ | 566,318 | | $ | 528,804 | | $ | 491,672 | | $ | 456,489 | | $ | 535,734 | | $ | 573,402 | | $ | 566,318 | | $ | 528,804 | | $ | 491,672 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Noninterest income | $ | 192,533 | | $ | 178,993 | | $ | 205,605 | | $ | 226,037 | | $ | 219,111 | | $ | 197,380 | | $ | 192,533 | | $ | 178,993 | | $ | 205,605 | | $ | 226,037 | | Loss (gain) on sale of securities | | 2,715 | | | — | | | — | | | (4,566) | | | (7,737) | | | (Gains) and costs associated with the sale of stock (Visa/MasterCard) | | 4,500 | | | — | | | — | | | (22,678) | | | (4,584) | | | Losses (gains) on sale of securities | | | 114 | | | 2,715 | | | — | | | — | | | (4,566) | | Costs (gains) associated with the sale of stock(a) | | | 4,828 | | | 4,500 | | | — | | | — | | | (22,678) | | Gain on the sale of real estate and other assets | | — | | | — | | | (6,922) | | | — | | | (3,414) | | | — | | | — | | | — | | | (6,922) | | | — | | OTTI losses on available-for-sale debt securities | | — | | | 24,085 | | | — | | | — | | | — | | | — | | | — | | | 24,085 | | | — | | | — | | Other adjustments(a),(b) | | — | | | — | | | — | | | — | | | (7,471) | | | Core noninterest income (non-GAAP) | $ | 199,748 | | $ | 203,078 | | $ | 198,683 | | $ | 198,793 | | $ | 195,905 | | $ | 202,322 | | $ | 199,748 | | $ | 203,078 | | $ | 198,683 | | $ | 198,793 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Noninterest expense | $ | 370,437 | | $ | 364,953 | | $ | 347,554 | | $ | 337,280 | | $ | 327,309 | | $ | 367,672 | | $ | 370,437 | | $ | 364,953 | | $ | 347,554 | | $ | 337,280 | | Loss on litigation settlement(c) | | — | | | (4,125) | | | — | | | — | | | — | | | One-time items(d) | | (2,814) | | | (2,267) | | | (5,457) | | | (6,220) | | | — | | | Loss on litigation settlement(b) | | | — | | | — | | | (4,125) | | | — | | | — | | One-time items(c) | | | — | | | (2,814) | | | (2,267) | | | (5,457) | | | (6,220) | | Core noninterest expense (non-GAAP) | $ | 367,623 | | $ | 358,561 | | $ | 342,097 | | $ | 331,060 | | $ | 327,309 | | $ | 367,672 | | $ | 367,623 | | $ | 358,561 | | $ | 342,097 | | $ | 331,060 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | $ | 284,392 | | $ | 264,394 | | $ | 183,682 | | $ | 230,178 | | $ | 213,780 | | $ | 185,754 | | $ | 284,392 | | $ | 264,394 | | $ | 183,682 | | $ | 230,178 | | Early loan termination(a) | | — | | | — | | | — | | | — | | | (4,836) | | | Loss (gain) on sale of securities | | 2,715 | | | — | | | — | | | (4,566) | | | (7,737) | | | (Gains) and costs associated with the sale of stock (Visa/MasterCard) | | 4,500 | | | — | | | — | | | (22,678) | | | (4,584) | | | Losses (gains) on sale of securities | | | 114 | | | 2,715 | | | — | | | — | | | (4,566) | | Costs (gains) associated with the sale of stock(a) | | | 4,828 | | | 4,500 | | | — | | | — | ��� | | (22,678) | | Gain on the sale of real estate and other assets | | — | | | — | | | (6,922) | | | — | | | (3,414) | | | — | | | — | | | — | | | (6,922) | | | — | | OTTI losses on available-for-sale debt securities | | — | | | 24,085 | | | — | | | — | | | — | | | — | | | — | | | 24,085 | | | — | | | — | | Other noninterest income adjustments(b) | | — | | | — | | | — | | | — | | | (7,471) | | | Loss on litigation settlement(c) | | — | | | 4,125 | | | — | | | — | | | — | | | One-time noninterest expense items(d) | | 2,814 | | | 2,267 | | | 5,457 | | | 6,220 | | | — | | | Loss on litigation settlement(b) | | | — | | | — | | | 4,125 | | | — | | | — | | One-time noninterest expense items(c) | | | — | | | 2,814 | | | 2,267 | | | 5,457 | | | 6,220 | | Tax Cuts and Jobs Act | | — | | | — | | | 47,598 | | | — | | | — | | | — | | | — | | | — | | | 47,598 | | | — | | Tax adjustments(e) | | (2,636) | | | (8,160) | | | 551 | | | 7,957 | | | 10,577 | | | Tax adjustments(d) | | | (1,318) | | | (2,636) | | | (8,160) | | | 551 | | | 7,957 | | Total core adjustments | | 7,393 | | | 22,317 | | | 46,684 | | | (13,067) | | | (17,465) | | | 3,624 | | | 7,393 | | | 22,317 | | | 46,684 | | | (13,067) | | Core net income (non-GAAP) | $ | 291,785 | | $ | 286,711 | | $ | 230,366 | | $ | 217,111 | | $ | 196,315 | | $ | 189,378 | | $ | 291,785 | | $ | 286,711 | | $ | 230,366 | | $ | 217,111 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Basic earnings per share | $ | 2.14 | | $ | 1.93 | | $ | 1.32 | | $ | 1.65 | | $ | 1.53 | | $ | 1.43 | | $ | 2.14 | | $ | 1.93 | | $ | 1.32 | | $ | 1.65 | | Diluted earnings per share | $ | 2.13 | | $ | 1.93 | | $ | 1.32 | | $ | 1.65 | | $ | 1.53 | | $ | 1.43 | | $ | 2.13 | | $ | 1.93 | | $ | 1.32 | | $ | 1.65 | | Efficiency ratio | | 48.36 | % | | 48.96 | % | | 47.32 | % | | 46.99 | % | | 48.10 | % | | 50.10 | % | | 48.36 | % | | 48.96 | % | | 47.32 | % | | 46.99 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Core basic earnings per share (non-GAAP) | $ | 2.19 | | $ | 2.09 | | $ | 1.65 | | $ | 1.56 | | $ | 1.41 | | $ | 1.46 | | $ | 2.19 | | $ | 2.09 | | $ | 1.65 | | $ | 1.56 | | Core diluted earnings per share (non-GAAP) | $ | 2.19 | | $ | 2.09 | | $ | 1.65 | | $ | 1.56 | | $ | 1.41 | | $ | 1.45 | | $ | 2.19 | | $ | 2.09 | | $ | 1.65 | | $ | 1.56 | | Core efficiency ratio (non-GAAP) | | 47.55 | % | | 46.59 | % | | 47.02 | % | | 47.94 | % | | 50.17 | % | | 49.77 | % | | 47.55 | % | | 46.59 | % | | 47.02 | % | | 47.94 | % |
(a) | Adjustments that are not materialCosts associated with the sale of stock for the year ended December 31, 2020 and 2019 related to changes in the valuation of the funding swap entered into with the buyer of our financial results have not been presentedVisa Class B restricted sales in 2016. Gains associated with the sale of stock for certain periods.the year ended December 31, 2016 related to the sale of MasterCard stock. |
(b) | Other adjustments included a one-time MasterCard signing bonus and a recovery of an investment that was previously written down for the year. |
(c) | The Company reached an agreement in principle to resolve a putative class action lawsuit alleging that the Bank improperly charged certain overdraft fees. In connection with the anticipated settlement agreement, the Company recorded an expense of approximately $4.1 million during the year ended December 31, 2018. |
(d)(c) | One-time items for the year ended December 31, 2019 included a nonrecurring payment to a former executive of the Company pursuant to the Bank’s Executive Change-in-Control Retention Plan, nonrecurring offering costs and the loss on our funding swap as a result of a 2019 decrease in the conversion rate of our Visa Class B restricted shares sold in 2016. One-time items for the year ended December 31, 2018 included public company transition-related costs, the loss on our funding swap as a result of a 2018 decrease in the conversion rate of the aforementioned Visa Class B restricted shares and nonrecurring offering costs. One-time items for the year-ended December 31, 2017 included salaries and benefits stemming from the Tax Act, nonrecurring offering costs and public company transition-related costs. One-time items for the year-ended December 31, 2016 included public company transition-related costs and nonrecurring offering costs. |
(e)(d) | Represents the adjustments to net income, tax effected at the Company’s effective tax rate for the respective period, exclusive of one-time Tax Act expense. |
(2) | Core net interest margin is a non-GAAP financial measure. We compute our core net interest margin as the ratio of core net interest income to average earning assets. For a reconciliation to the most directly comparable GAAP financial measure for core net interest income, see the GAAP to Non-GAAP Reconciliation Table. |
(3) | Core efficiency ratio is a non-GAAP financial measure. We compute our core efficiency ratio as the ratio of core noninterest expense to the sum of core net interest income and core noninterest income. For a reconciliation to the most directly comparable GAAP financial measure for core noninterest expense, core net interest income and core noninterest income, see the GAAP to Non-GAAP Reconciliation Table. |
(4) | Core return on average total assets is a non-GAAP financial measure. We compute our core return on average total assets as the ratio of core net income to average total assets. For a reconciliation to the most directly comparable GAAP financial measure for core net income, see the GAAP to Non-GAAP Reconciliation Table. |
(5) | Core return on average tangible assets is a non-GAAP financial measure. We compute our core return on average tangible assets as the ratio of core net income to average tangible assets, which is calculated by subtracting (and thereby effectively excluding) amounts related to the effect of goodwill from our average total assets. For a reconciliation to the most directly comparable GAAP financial measure for core net income, see the GAAP to Non-GAAP Reconciliation Table. |
(6) | Core return on average total stockholders’ equity is a non-GAAP financial measure. We compute our core return on average total stockholders’ equity as the ratio of core net income to average total stockholders’ equity. For a reconciliation to the most directly comparable GAAP financial measure for core net income, see the GAAP to Non-GAAP Reconciliation Table. |
(7) | Core return on average tangible stockholders’ equity is a non-GAAP financial measure. We compute our core return on average tangible stockholders’ equity as the ratio of core net income to average tangible stockholders’ equity, which is calculated by subtracting (and thereby effectively excluding) amounts related to the effect of goodwill from our average total stockholders’ equity. For a reconciliation to the most directly comparable GAAP financial measure for core net income, see the GAAP to Non-GAAP Reconciliation Table. |
(8) | Core noninterest expense to average assets is a non-GAAP financial measure. We compute our core noninterest expense to average assets as the ratio of core noninterest expense to average assets. For a reconciliation to the most directly comparable GAAP financial measure for core noninterest expense, see the GAAP to Non-GAAP Reconciliation Table. |
(9) | The change in our capital ratios from December 31, 2015 to December 31, 2016 was primarily due to distributions of $363.6 million made in connection with the Reorganization Transactions. |
(10) | Return on average tangible assets, return on average tangible stockholders’ equity, tangible book value per share and tangible stockholders’ equity to tangible assets are non-GAAP financial measures. We compute our return on average tangible assets as the ratio of net income to average tangible assets. We compute our return on average tangible stockholders’ equity as the ratio of net income to average tangible stockholders’ equity. We compute our tangible book value per share as the ratio of tangible stockholders’ equity to outstanding shares. We compute our tangible stockholders’ equity to tangible assets as the ratio of tangible stockholders’ equity to tangible assets. We compute our tangible book value per share as the ratio of tangible stockholders’ equity to outstanding shares. We believe that these financial measures are useful for investors, regulators, management and others to evaluate financial performance and capital adequacy relative to other financial institutions. Although these non-GAAP financial measures are frequently used by shareholders in the evaluation of a company, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP. |
The following table provides a reconciliation of these non-GAAP financial measures with their most closely related GAAP measures for the years indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | GAAP to Non-GAAP Reconciliation | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | For the Years Ended | | | | For the Years Ended | | | | | December 31, | | | | December 31, | | (dollars in thousands, except per share data) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Income Statement Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Noninterest expense | | $ | 370,437 | | $ | 364,953 | | $ | 347,554 | | $ | 337,280 | | $ | 327,309 | | | $ | 367,672 | | $ | 370,437 | | $ | 364,953 | | $ | 347,554 | | $ | 337,280 | | Core noninterest expense | | $ | 367,623 | | $ | 358,561 | | $ | 342,097 | | $ | 331,060 | | $ | 327,309 | | | $ | 367,672 | | $ | 367,623 | | $ | 358,561 | | $ | 342,097 | | $ | 331,060 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net income | | $ | 284,392 | | $ | 264,394 | | $ | 183,682 | | $ | 230,178 | | $ | 213,780 | | | $ | 185,754 | | $ | 284,392 | | $ | 264,394 | | $ | 183,682 | | $ | 230,178 | | Core net income | | $ | 291,785 | | $ | 286,711 | | $ | 230,366 | | $ | 217,111 | | $ | 196,315 | | | $ | 189,378 | | $ | 291,785 | | $ | 286,711 | | $ | 230,366 | | $ | 217,111 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average total stockholders' equity | | $ | 2,609,432 | | $ | 2,457,771 | | $ | 2,538,341 | | $ | 2,568,219 | | $ | 2,735,786 | | | $ | 2,698,853 | | $ | 2,609,432 | | $ | 2,457,771 | | $ | 2,538,341 | | $ | 2,568,219 | | Less: average goodwill | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | Average tangible stockholders' equity | | $ | 1,613,940 | | $ | 1,462,279 | | $ | 1,542,849 | | $ | 1,572,727 | | $ | 1,740,294 | | | $ | 1,703,361 | | $ | 1,613,940 | | $ | 1,462,279 | | $ | 1,542,849 | | $ | 1,572,727 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average total assets | | $ | 20,325,697 | | $ | 20,247,135 | | $ | 19,942,807 | | $ | 19,334,653 | | $ | 18,785,701 | | | $ | 21,869,064 | | $ | 20,325,697 | | $ | 20,247,135 | | $ | 19,942,807 | | $ | 19,334,653 | | Less: average goodwill | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | Average tangible assets | | $ | 19,330,205 | | $ | 19,251,643 | | $ | 18,947,315 | | $ | 18,339,161 | | $ | 17,790,209 | | | $ | 20,873,572 | | $ | 19,330,205 | | $ | 19,251,643 | | $ | 18,947,315 | | $ | 18,339,161 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Return on average total stockholders' equity | | | 10.90 | % | | 10.76 | % | | 7.24 | % | | 8.96 | % | | 7.81 | % | | | 6.88 | % | | 10.90 | % | | 10.76 | % | | 7.24 | % | | 8.96 | % | Core return on average total stockholders' equity (non-GAAP) | | | 11.18 | % | | 11.67 | % | | 9.08 | % | | 8.45 | % | | 7.18 | % | | | 7.02 | % | | 11.18 | % | | 11.67 | % | | 9.08 | % | | 8.45 | % | Return on average tangible stockholders' equity (non-GAAP) | | | 17.62 | % | | 18.08 | % | | 11.91 | % | | 14.64 | % | | 12.28 | % | | | 10.91 | % | | 17.62 | % | | 18.08 | % | | 11.91 | % | | 14.64 | % | Core return on average tangible stockholders' equity (non-GAAP) | | | 18.08 | % | | 19.61 | % | | 14.93 | % | | 13.80 | % | | 11.28 | % | | | 11.12 | % | | 18.08 | % | | 19.61 | % | | 14.93 | % | | 13.80 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Return on average total assets | | | 1.40 | % | | 1.31 | % | | 0.92 | % | | 1.19 | % | | 1.14 | % | | | 0.85 | % | | 1.40 | % | | 1.31 | % | | 0.92 | % | | 1.19 | % | Core return on average total assets (non-GAAP) | | | 1.44 | % | | 1.42 | % | | 1.16 | % | | 1.12 | % | | 1.05 | % | | | 0.87 | % | | 1.44 | % | | 1.42 | % | | 1.16 | % | | 1.12 | % | Return on average tangible assets (non-GAAP) | | | 1.47 | % | | 1.37 | % | | 0.97 | % | | 1.26 | % | | 1.20 | % | | | 0.89 | % | | 1.47 | % | | 1.37 | % | | 0.97 | % | | 1.26 | % | Core return on average tangible assets (non-GAAP) | | | 1.51 | % | | 1.49 | % | | 1.22 | % | | 1.18 | % | | 1.10 | % | | | 0.91 | % | | 1.51 | % | | 1.49 | % | | 1.22 | % | | 1.18 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Noninterest expense to average assets | | | 1.82 | % | | 1.80 | % | | 1.74 | % | | 1.74 | % | | 1.74 | % | | | 1.68 | % | | 1.82 | % | | 1.80 | % | | 1.74 | % | | 1.74 | % | Core noninterest expense to average assets (non-GAAP) | | | 1.81 | % | | 1.77 | % | | 1.72 | % | | 1.71 | % | | 1.74 | % | | | 1.68 | % | | 1.81 | % | | 1.77 | % | | 1.72 | % | | 1.71 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, | | | December 31, | | | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Balance Sheet Data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total stockholders' equity | | $ | 2,640,258 | | $ | 2,524,839 | | $ | 2,532,551 | | $ | 2,476,485 | | $ | 2,736,941 | | $ | 2,744,104 | | $ | 2,640,258 | | $ | 2,524,839 | | $ | 2,532,551 | | $ | 2,476,485 | | Less: goodwill | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | Tangible stockholders' equity | | $ | 1,644,766 | | $ | 1,529,347 | | $ | 1,537,059 | | $ | 1,480,993 | | $ | 1,741,449 | | $ | 1,748,612 | | $ | 1,644,766 | | $ | 1,529,347 | | $ | 1,537,059 | | $ | 1,480,993 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total assets | | $ | 20,166,734 | | $ | 20,695,678 | | $ | 20,549,461 | | $ | 19,661,829 | | $ | 19,352,681 | | $ | 22,662,831 | | $ | 20,166,734 | | $ | 20,695,678 | | $ | 20,549,461 | | $ | 19,661,829 | | Less: goodwill | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | | 995,492 | | Tangible assets | | $ | 19,171,242 | | $ | 19,700,186 | | $ | 19,553,969 | | $ | 18,666,337 | | $ | 18,357,189 | | $ | 21,667,339 | | $ | 19,171,242 | | $ | 19,700,186 | | $ | 19,553,969 | | $ | 18,666,337 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Shares outstanding | | | 129,928,479 | | | 134,874,302 | | | 139,588,782 | | | 139,530,654 | | | 139,459,620 | | | 129,912,272 | | | 129,928,479 | | | 134,874,302 | | | 139,588,782 | | | 139,530,654 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total stockholders' equity to total assets | | | 13.09 | % | | 12.20 | % | | 12.32 | % | | 12.60 | % | | 14.14 | % | | 12.11 | % | | 13.09 | % | | 12.20 | % | | 12.32 | % | | 12.60 | % | Tangible stockholders' equity to tangible assets (non-GAAP) | | | 8.58 | % | | 7.76 | % | | 7.86 | % | | 7.93 | % | | 9.49 | % | | 8.07 | % | | 8.58 | % | | 7.76 | % | | 7.86 | % | | 7.93 | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Book value per share | | $ | 20.32 | | $ | 18.72 | | $ | 18.14 | | $ | 17.75 | | $ | 19.63 | | $ | 21.12 | | $ | 20.32 | | $ | 18.72 | | $ | 18.14 | | $ | 17.75 | | Tangible book value per share (non-GAAP) | | $ | 12.66 | | $ | 11.34 | | $ | 11.01 | | $ | 10.61 | | $ | 12.49 | | $ | 13.46 | | $ | 12.66 | | $ | 11.34 | | $ | 11.01 | | $ | 10.61 | |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Cautionary Note Regarding Forward-Looking Statements This Annual Report on Form 10-K, including the documents incorporated by reference herein, contains, and from time to time our management may make, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements. A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including the following: the impact of the ongoing COVID-19 pandemic and any other pandemic, epidemic or health-related crisis; the geographic concentration of our business; current and future economic and market conditions in the United States generally or in Hawaii, Guam and Saipan in particular; our dependence on the real estate markets in which we operate; concentrated exposures to certain asset classes and individual obligors; the effect of the current low interest rate environment or changes in interest rates on our business including our net interest income, net interest margin, the fair value of our investment securities, and our mortgage loan originations, mortgage servicing rights and mortgage loans held for sale; changes in the method pursuant to which LIBOR and other benchmark rates are determined or the discontinuance of LIBOR; the possibility of a deterioration in credit quality in our portfolio; the possibility we might underestimate the credit losses inherent in our loan and lease portfolio; our ability to maintain our Bank's reputation; the future value of the investment securities that we own; our ability to attract and retain customer deposits; our inability to receive dividends from our bank, pay dividends to our common stockholders and satisfy obligations as they become due; the effects of severe weather, geopolitical instability, including war, terrorist attacks, pandemics or other severe health emergencies and man-made and natural disasters; our ability to maintain consistent growth, earnings and profitability; our ability to attract and retain skilled employees or changes in our management personnel; our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business; the effectiveness of our risk management and internal disclosure controls and procedures; our ability to keep pace with technological changes; any failure or interruption of our information and communications systems; our ability to identify and address cybersecurity risks; the occurrence of fraudulent activity or effect of a material breach of, or disruption to, the security of any of our or our vendors’ systems; the failure to properly use and protect our customer and employee information and data; the possibility of employee misconduct or mistakes; our ability to successfully develop and commercialize new or enhanced products and services; changes in the demand for our products and services; the effects of problems encountered by other financial institutions; our access to sources of liquidity and capital to address our liquidity needs; our use of the secondary mortgage market as a source of liquidity; risks associated with the sale of loans and with our use of appraisals in valuing and monitoring loans; the possibility that actual results may differ from estimates and forecasts; fluctuations in the fair value of our assets and liabilities and off-balance sheet exposures; the effects of the failure of any component of our business infrastructure provided by a third party; the potential for environmental liability; the risk of being subject to litigation and the outcome thereof; the impact of, and changes in, applicable laws, regulations and accounting standards and policies, including the enactment of the Tax Act (Public Law 115-97) on December 22, 2017; possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations; our likelihood of success in, and the impact of, litigation or regulatory actions; our ability to continue to pay dividends on our common stock; contingent liabilities and unexpected tax liabilities that may be applicable to us as a result of the Reorganization Transactions; and damage to our reputation from any of the factors described above. Further, statements about the potential effects of the ongoing COVID-19 pandemic on our business, financial condition, liquidity and results of operations may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, clients, third parties and us. The foregoing factors should not be considered an exhaustive list and should be read together with the other cautionary statements set forth under “Item 1A. Risk Factors” in this Annual Report on Form 10-K. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law. Company Overview FHI, a bank holding company, owns 100% of the outstanding common stock of FHB. FHB was founded in 1858 under the name Bishop & Company and was the first successful banking partnership in the Kingdom of Hawaii and the second oldest bank formed west of the Mississippi River. As of December 31, 2019,2020, we were the largest full-service bank headquartered in Hawaii as measured by assets, loans and leases, deposits and net income. As of December 31, 2019,2020, we had $20.2$22.7 billion of assets, $13.2$13.3 billion of gross loans and leases and $16.4$19.2 billion of deposits. We also generated $284.4$185.8 million of net income or diluted earnings per share of $2.13$1.43 per share for the year ended December 31, 2019.2020. We operate our business through three operating segments: Retail Banking, Commercial Banking and Treasury and Other. See “Note 23. Reportable Operating Segments” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information. Recent Developments regarding COVID-19 and the Hawaii and Global Economy Overview The COVID-19 pandemic has brought unprecedented challenges to businesses and economies around the world, particularly those in the United States. Our business has been, and continues to be, impacted by the recent and ongoing outbreak of COVID-19. There remains a high degree of uncertainty relating to the ongoing spread and severity of the virus and new variants, as well as the availability, distribution and use of effective treatments and vaccines. To the extent that the economy continues to be negatively impacted by the pandemic, our results will be affected. In light of the uncertainties and continuing developments discussed herein, the ultimate adverse impact of COVID-19 cannot be reliably estimated at this time, but it has been and is expected to continue to be material. We have, however, continued to support our community in the midst of the pandemic. We waived ATM fees for non-Bank customers for a portion of the year and waived fees for individuals to cash their stimulus checks, whether or not they were a Bank customer. We launched an initiative through our foundation to support local restaurants by donating up to $1 million to support non-profit organizations with food supply and health and human service programs for those impacted by COVID-19. We partnered with the Hawaii Community Foundation by contributing $1 million, through our foundation, to establish the $2 million Stronger Together Hawai’i Scholarship Fund, which provides scholarship opportunities to public high school seniors who graduated amidst the pandemic. Unlike traditional scholarships that are limited to tuition and college materials, students awarded with the scholarship can use the funds in a variety of ways, with the intent to help students overcome barriers to their education caused by COVID-19. We donated, through our foundation, $200,000 to The Queen’s Medical Center to support its infectious diseases program. Our employees also donated $877,000 through our Kokua Mai campaign to support a number of local charities. Hawaii Economy Hawaii’s economy continuedcontinues to reflect stable growth duringbe significantly impacted by COVID-19 and the responses to it. On March 5, 2020, the Governor of the State of Hawaii issued an emergency proclamation declaring a state of emergency in Hawaii and the Governor has issued a number of supplemental emergency proclamations since. The resulting closures and/or limited operations of non-essential businesses and related economic disruption have impacted our operations as well as the operations of our customers. For an economy that is heavily dependent on tourism, the combination of various response measures to the COVID-19 pandemic—including the stay-at-home orders for local residents and the mandatory self-quarantine period for visitors–resulted in an unprecedented increase in Hawaii unemployment. The statewide seasonally adjusted unemployment rate was 9.3% in December 2020 compared to 2.6% in December 2019, ledaccording to the State of Hawaii Department of Labor and Industrial Relations, while the national seasonally adjusted unemployment rate was 6.7% in large part by a strong tourism industry and steady labor and real estate market conditions. Hawaii’s tourism industry remained robustDecember 2020 compared to 3.5% in December 2019. Visitor arrivals for the year ended December 31, 2019 increased2020 decreased by 5.4%75.2% compared to 2018, and total visitor spending for the year ended December 31,same period in 2019, increased by 1.4% compared to 2018 according to the Hawaii Tourism Authority. Visitor arrivals and spending increased, in particular, from U.S. mainland and Japanese visitors. The statewide seasonally-adjustedvisitors decreased from a daily average of $195 per person in 2019 to $170 per person in 2020. Statistics from non-U.S. visitors were not available for 2020 due to insufficient data. While we may see a gradual improvement in unemployment rate was 2.6% in both December 2019as local businesses and 2018 according to the Hawaii State Departmenttourism industry continue to reopen in 2021 and the COVID-19 vaccine becomes more widely administered, the timing and extent of Labor & Industrial Relations. The national seasonally-adjusted unemployment rate was 3.5%the return of air travel and the recovery of the Hawaii tourism industry is highly uncertain and beyond our control. Although the volume of home sales on Oahu has decreased year-over-year due to stay-at-home orders that were in place earlier in the year, prices have increased. For the year ended December 2019 compared to 3.9% in December 2018. The31, 2020, the volume of single-family home sales on Oahu increased by 3.9% for the year ended December 31, 20192.3%, while condominium sales decreased by 13% compared to 2018, while the volume of condominium sales on Oahu decreased by 4.8% for the year ended December 31,same period in 2019, compared to 2018 according to the Honolulu Board of Realtors. The median price of single-family home sales and condominium sales on Oahu was $789,000$830,000 and $435,000, respectively, or an increase of 5.2% and 2.4%, respectively, for the year ended December 31, 2019 or a decrease of 0.1%2020 as compared to the same period in 2018. The median price of condominium sales on Oahu was $425,000 for the year ended December 31, 2019 or an increase of 1.2% compared to the same period in 2018.2019. As of December 31, 2019,2020, months of inventory of single-family homes and condominiums on Oahu remained low at approximately 2.51.4 and 3.3 months, respectively. Lastly, state general excise and 3.4 months, respectively.use tax revenues decreased by 15.6% for year ended December 31, 2020 as compared to the same period in 2019, according to the Hawaii Department of Business, Economic Development & Tourism. Legislative and Regulatory Developments Although Hawaii’s economy continuedRecent actions taken by the federal government and the Federal Reserve and other bank regulatory agencies to reflect stable growthpartially mitigate the economic effects of COVID-19 and related containment measures will also have an impact on our financial position and results of operations. These actions are further discussed below.
In response to market conditions resulting from the COVID-19 pandemic, the Federal Reserve has taken a number of proactive measures, including cutting its target for the federal funds rate by a total of 1.50%, bringing it down to a range of 0.00% to 0.25%. In September 2020, the Federal Reserve indicated that it expects to maintain the targeted federal funds rate at current levels until such time that labor market conditions have reached levels consistent with the Federal Open Market Committee's assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. The Federal Reserve has instituted a number of other measures, to mitigate the lasting impact from the COVID-19 pandemic, including the following: | ● | establishing a temporary repurchase agreement facility for foreign and international monetary authorities; |
| ● | committing to quantitative easing through large-scale asset-purchase programs; |
| ● | lowering the rate charged on its discount window and extending the length of the loans offered; |
| ● | increasing the frequency of engagement with currency swap lines with foreign central banks; |
| ● | expanding the collateral accepted by its Term Asset-Backed Securities Loan Facility; and |
| ● | introducing a number of additional facilities, which is designed to enhance support for small and mid-sized businesses that were in good financial standing before the crisis. |
The U.S. government has also enacted certain fiscal stimulus measures in 2019, Hawaii’s economy depends significantlyseveral phases to counteract the economic disruption caused by COVID-19. The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), enacted on conditionsMarch 27, 2020, is an approximately $2 trillion emergency economic stimulus package in response to the COVID-19 outbreak. Among other provisions, the CARES Act (i) authorized the Secretary of the U.S. economyTreasury to make loans, loan guarantees and key international economies, particularly Japan. In 2019,other investments, up to $500 billion, for assistance to eligible businesses, States and municipalities with limited, targeted relief for passenger air carriers, cargo air carriers, and businesses critical to maintaining national security, (ii) created a $670 billion loan program (the “Paycheck Protection Program” or the “PPP”) for fully guaranteed loans (which may then be forgiven) to small businesses for, among other things, payroll, group health care benefit costs and qualifying mortgage, rent and utility payments (program dollar amount includes amount approved under the original program in March 2020 and a second tranche which was approved in April 2020), (iii) provides certain credits against the 2020 personal income tax for eligible individuals and their dependents, (iv) expanded eligibility for unemployment insurance and provides eligible recipients with an additional $600 per week on top of the unemployment amount determined by each State and (v) set a 60-day foreclosure moratorium beginning on March 18, 2020 for federally backed mortgage loans (the Federal Housing Administration has subsequently announced a second extension of the foreclosure and eviction moratorium through August 31, 2020). The Paycheck Protection Program Flexibility Act of 2020 (the “PPPF Act”) was enacted on June 5, 2020 and modified the PPP as follows: (i) established a minimum maturity of five years for all loans made after the enactment of the PPPF Act and permits an extension of the maturity of existing loans to five years if the borrower and lender agree; (ii) extended the “covered period” of the CARES Act from June 30, 2020, to December 31, 2020; (iii) extended the eight-week “covered period” for expenditures that qualify for forgiveness to the earlier of 24 weeks following loan origination and December 31, 2020; (iv) extended the deferral period for payment of principal, interest and fees to the date on which the forgiveness amount is remitted to the lender by the U.S. economy grewSmall Business Administration (“SBA”); (v) required the borrower to use at least 60% (down from 75%) of the proceeds of the loan for payroll costs, and up to 40% (up from 25%), for other permitted purposes, as a solid pace, althoughcondition to obtaining forgiveness of the growth rate slowed comparedloan; (vi) delayed from June 30, 2020 to 2018. Japanese economic growth slowed downDecember 31, 2020, the date by which employees must be rehired to avoid a reduction in the second halfamount of 2019,forgiveness of a loan, and creates a “rehiring safe harbor” that allows businesses to remain eligible for loan forgiveness if they make a good faith attempt to rehire employees or hire similarly qualified employees, but are unable to do so, or are able to document an inability to return to pre-COVID-19 levels of business activity due to compliance with fourth quarter GDP contractingsocial distancing measures; and (vii) allowed borrowers to receive both loan forgiveness under the PPP and the payroll tax deferral permitted under the CARES Act, rather than having to choose the more advantageous option. An amendment to the CARES Act extended the SBA’s authority to make commitments under the PPP to August 8, 2020. In August 2020, President Trump signed four executive actions to provide additional COVID-19 relief. These executive orders seek to (i) allocate $44 billion from the Disaster Relief Fund to provide additional unemployment benefits through the authorization of the Lost Wages Assistance Program, which provides for a $400-per-week payment to those currently receiving more than $100 a week in unemployment benefits due to disruptions caused by COVID-19, (ii) extend the moratorium on payments and interest accrual on student loans held by the government until the end of 2020, (iii) defer collections of certain employee social security payroll taxes, and (iv) identify options to help renters and homeowners avoid evictions and foreclosures. In December 2020, President Trump signed The Consolidated Appropriations Act - 2021 (the “CAA”) which, amongst other COVID-19 relief measures, extended the term of a number of initiatives under the CARES Act. Under the CAA, the SBA’s authority to make commitments under the PPP was extended to March 31, 2021, or until the additional PPP funds are exhausted. The CAA also provides an additional $877 billion for coronavirus relief and government funding, which includes enhanced unemployment benefits of $300 weekly through March 14, direct stimulus payments of $600 to individuals, another round of PPP loans, resources for vaccines, testing and tracing, and funding for K-12 education. We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S. government. The State of Hawaii received at least $1.25 billion in federal aid from the CARES Act, with a ratemajority of approximately 6%this federal aid used to help fund state and county government response efforts to COVID-19. Additional federal funding is expected to provide unemployment assistance, direct cash payments to Hawaii residents and funding to support local schools and colleges. The CAA provides an additional $1.7 billion in new federal funding, while extending the ability of the State of Hawaii and its local governments to use its previously received federal aid until December 31, 2021. Impact to our Operations On March 23, 2020, the Governor of the State of Hawaii issued a third supplemental emergency proclamation that ordered all residents to stay at home, with the exception of certain essential activities associated with identified essential businesses and services. A stay-at-home order was in place until May 31, 2020, and then reinstated from August 27, 2020 through September 23, 2020. While the Bank is an essential business in Hawaii, we saw a significant decrease in customer traffic in our branches in recent periods. As a result, we strategically closed 26 of our branch locations on an annualized basis. Locally,a temporary basis and closed four of them permanently in November 2020. Since June 2020, we reopened 18 of the temporarily closed branch locations in connection with the reopening of local businesses. The temporary (or in certain cases, permanent) closures of bank branches and the safety precautions implemented at re-opened branches could result in consumers becoming more comfortable with technology and devaluing face-to-face interaction. Our business is relationship driven and such changes could necessitate changes to our business practices to accommodate changing consumer behaviors. We continue to provide service to all customers and operate our businesses on all islands of Hawaii, Guam and Saipan. Additionally, as part of our contingency plans, we have established a redundant operations center for our administrative operations. Many of our employees are working remotely and for those employees who are deemed essential and unable to work from home, we continue to emphasize the importance of practicing social distancing and good hygiene practices in the workplace. Impact on our Financial Position and Results of Operations Due to the widespread impact that COVID-19 is having on Hawaii’s economy, we expect that adverse economic conditions will continue. While its effects continue to materialize, the COVID-19 pandemic has resulted in a significant decrease in commercial activity throughout the State of Hawaii and nationally. This decrease in commercial activity has caused and may continue to cause our customers (including affected businesses and individuals), vendors and counterparties to be unable to meet existing payment or other obligations to us. As Hawaii’s economy continues to reopen, we expect that local consumption of goods and services will begin to resume over an extended period of time. Additionally, the timing and extent of the return of air travel and the recovery of the Hawaii tourism industry is highly uncertain and is dependent upon, among other things, the number of cases declining around the globe, in the United States and, in particular, in Hawaii, visitor receptiveness to Hawaii’s new pre-travel COVID-19 testing requirements, an extended period in which there is no subsequent “wave” of infections and the widespread availability of a vaccine, treatment or testing, tracking and tracing capabilities. During this time of uncertainty, we remain committed to servicing our customers. The economic pressures and uncertainties arising from the COVID-19 pandemic has resulted in and may continue to result in specific changes in consumer and business spending and borrowing and saving habits, affecting the demand for loans and other products and services we offer. For example, certain industries may take longer to recover (particularly those that rely on travel or large gatherings) as consumers may be hesitant to travel or return to full social interaction. We lend to customers operating in such industries including tourism, hotels/lodging, restaurants, entertainment and commercial real estate, among others. We will continue to closely monitor the impact that COVID-19 and the recession in Hawaii has on our customers and will adjust the means by which we assist our customers during this period of financial hardship. We are working with our customers impacted by COVID-19 by offering payment deferrals and forbearance on certain loan products. The shut-down of Hawaii’s tourism and construction activityindustry, stay-at-home measures, the recession in Hawaii and record low interest rates, should they persist, will continue to have a negative impact on our financial position and results of operations. A continued decrease in interest rates, or sustained period of interest rates, would be expected to reduce our net interest margin, as, currently, our interest rate profile is such that we project net interest income will benefit from higher interest rates as our assets would reprice faster and to a greater degree than our liabilities, while in the local economy’s abilitycase of lower interest rates, our assets would reprice downward and to absorb further planned expansion given deteriorating home affordabilitya greater degree than our liabilities. Our net interest margin also may be reduced as a result of our participation in Hawaii. Nationallythe PPP, with loans made thereunder that are not forgiven carrying an interest rate of 1%. Our credit risk profile has also been, and globally,we expect that it will continue to be, adversely impacted during this period of financial hardship for our customers. We also expect that we will see temporary decreases in non-interest income, partially driven by certain measures we have taken to assist customers during the COVID-19 pandemic. Moreover, we have seen increased draws by some of our customers on lines of credit as they have sought to improve their liquidity positions. While we expect a significant portion of loans made by the Bank through our participation in the PPP to be forgiven, we expect that a sizeable portion of such loans will remain on our balance sheet for up to two years. As a result, we expect to see higher loan volumes and reduced capital levels as a result of the COVID-19 pandemic. In light of volatility in the capital markets and economic disruptions, we continue to carefully monitor our capital and liquidity positions. As of December 31, 2020, the movementCompany was “well-capitalized” and met all applicable regulatory capital requirements, including a Common Equity Tier 1 capital ratio of interest rates12.47%, compared to the minimum requirement of 4.50%. We continue to anticipate that we will have sufficient capital levels to meet all of these requirements. Additionally, we continue to access our routine short-term funding sources, such as borrowings and repurchase agreements, and to assess longer-term funding sources. For additional discussions regarding our capital and liquidity positions and related risks, refer to the sections titled “Liquidity” and “Capital” in the U.S., global economic weakening, ongoing trade disputes and political uncertainty.this MD&A. These and other key factors could impact our profitability in future reporting periods. See “RiskItem 1A. Risk Factors, – Risks Related to Our Business”.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented in this Annual Report on Form 10-K have been prepared according to generally accepted accounting principlesbeginning in the United States, which require the measurementsection captioned “Summary of financial positions and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.Risk Factors.”
Financial Highlights Net income was $185.8 million for the year ended December 31, 2020, a decrease of $98.6 million or 35% as compared to the same period in 2019. Basic earnings per share was $1.43 per share for the year ended December 31, 2020, a decrease of $0.71 per share or 33% as compared to the same period in 2019. Diluted earnings per share was $1.43 for the year ended December 31, 2020, a decrease of $0.70 or 33% as compared to the same period in 2019. The decrease was primarily due to a $107.9 million increase in the provision for credit losses (the “Provision”) and a $37.7 million decrease in net interest income, partially offset by a $39.3 million decrease in the provision for income taxes, a $4.8 million increase in noninterest income and a $2.8 million decrease in noninterest expense. Net income for the year ended December 31, 2020 was negatively impacted by a $4.8 million charge on the funding swap for the Visa Class B restricted shares sold in 2016. Core net income was $189.4 million for the year ended December 31, 2020, a decrease of $102.4 million or 35% as compared to the same period in 2019. Core basic earnings per share was $1.46 for the year ended December 31, 2020, a decrease of $0.73 or 33% as compared to the same period in 2019. Core diluted earnings per share was $1.45 for the year ended December 31, 2020, a decrease of $0.74 or 34% as compared to the same period in 2019. Core net income and core basic and diluted earnings per share are non-GAAP financial measures. For a reconciliation to the most directly comparable GAAP financial measures for core net income and core basic and diluted earnings per share, see “Item 6. Selected Financial Data - GAAP to Non-GAAP Reconciliation”. Net income was $284.4 million for the year ended December 31, 2019, an increase of $20.0 million or 8% as compared to the same period in 2018. Basic earnings per share was $2.14 per share for the year ended December 31, 2019, an increase of $0.21 per share or 11% as compared to the same period in 2018. Diluted earnings per share was $2.13 for the year ended December 31, 2019, an increase of $0.20 or 10% as compared to the same period in 2018. The increase was primarily due to a $13.5 million increase in noninterest income, an $8.4 million decrease in the provision for loan and lease losses (the “Provision”)Provision and a $7.1 million increase in net interest income, partially offset by a $5.5 million increase in noninterest expense and a $3.5 million increase in the provision for income taxes. Net income for the year ended December 31, 2019 was negatively impacted by a $4.5 million charge on the funding swap for the Visa Class B restricted shares sold in 2016 as well as $2.7 million losses on available-for-sale debt securities. Core net income was $291.8 million for the year ended December 31, 2019, an increase of $5.1 million or 2% as compared to the same period in 2018. Core basic and diluted earnings per share were both $2.19 for the year ended December 31, 2019, an increase of $0.10 or 5% as compared to the same period in 2018. Core net income and core basic and diluted earnings per share are non-GAAP financial measures. For a reconciliation to the most directly comparable GAAP financial measures for core net income and core basic and diluted earnings per share, see “Item 6. Selected Financial Data - GAAP to Non-GAAP Reconciliation”. Our return on average total assets was $264.4 million0.85% for the year ended December 31, 2018, an increase2020, a decrease of $80.7 million or 44%55 basis points as compared to the same period in 2017. Basic2019, and diluted earnings per share were $1.93our return on average total stockholders’ equity was 6.88% for the year ended December 31, 2018, an increase2020, a decrease of $0.61 or 46%402 basis points as compared to the same period in 2017. The increase2019. Our return on average tangible assets was primarily due to a $90.9 million decrease in the provision for income taxes and a $37.5 million increase in net interest income, partially offset by a $26.6 million decrease in noninterest income, a $17.4 million increase in noninterest expense and a $3.7 million increase in the Provision.
Net income0.89% for the year ended December 31, 2018 was negatively impacted by $24.1 million OTTI losses on available-for-sale debt securities. Core net income was $286.7 million for the year ended December 31, 2018, an increase2020, a decrease of $56.3 million or 24%58 basis points as compared to the same period in 2017. Core basic2019, and diluted earnings per share were $2.09our return on average tangible stockholders’ equity was 10.91% for the year ended December 31, 2018, an increase2020, a decrease of $0.44 or 27%671 basis points as compared to the same period in 2017. Core net income2019. We continued to manage our expenses as our efficiency ratio was 50.10% for the year ended December 31, 2020 as compared to 48.36% for the same period in 2019. Return on average tangible assets and core basic and diluted earnings per sharereturn on average tangible stockholders’ equity are non-GAAP financial measures. For a reconciliation to the most directly comparable GAAP financial measures for core net incomereturn on average tangible assets and core basic and diluted earnings per share,return on average tangible stockholders’ equity, see “Item 6. Selected Financial Data - GAAP to Non-GAAP Reconciliation”.
Our return on average total assets was 1.40% for the year ended December 31, 2019, an increase of nine basis points as compared to the same period in 2018, and our return on average total stockholders’ equity was 10.90% for the year ended December 31, 2019, an increase of 14 basis points as compared to the same period in 2018. Our return on average tangible assets was 1.47% for the year ended December 31, 2019, an increase of 10 basis points as compared to the same period in 2018, and our return on average tangible stockholders’ equity was 17.62% for the year ended December 31, 2019, a decrease of 46 basis points as compared to the same period in 2018. We continued to prudently manage our expenses as our efficiency ratio was 48.36% for the year ended December 31, 2019 as compared to 48.96% for the same period in 2018. Return on average tangible assets and return on average tangible stockholders’ equity are non-GAAP financial measures. For a reconciliation to the most directly comparable GAAP financial measures for return on average tangible assets and return on average tangible stockholders’ equity, see “Item 6. Selected Financial Data - GAAP to Non-GAAP Reconciliation”. Our return on average total assets was 1.31%results for the year ended December 31, 2018, an increase of 39 basis points as compared to2020 were highlighted by the same period in 2017, and our return on average total stockholders’ equity was 10.76% for the year ended December 31, 2018, an increase of 352 basis points as compared to the same period in 2017. Our return on average tangible assets was 1.37% for the year ended December 31, 2018, an increase of 40 basis points as compared to the same period in 2017, and our return on average tangible stockholders’ equity was 18.08% for the year ended December 31, 2018, an increase of 617 basis points as compared to the same period in 2017. We continued to prudently manage our expenses as our efficiency ratio was 48.96% for the year ended December 31, 2018 as compared to 47.32%following: | ● | Net interest income was $535.7 million for the year ended December 31, 2020, a decrease of $37.7 million or 7% as compared to the same period in 2019. Our net interest margin was 2.77% for the year ended December 31, 2020, a decrease of 43 basis points as compared to the same period in 2019. The decrease in net interest income was primarily due to lower yields in all loan categories and lower yields in our investment securities portfolio. This was partially offset by lower deposit funding costs and higher average balances in our investment securities portfolio. |
| ● | The Provision was $121.7 million for the year ended December 31, 2020, an increase of $107.9 million as compared to the same period in 2019. This increase was primarily due to higher expected credit losses as a result of COVID-19 and its impact on Hawaii’s economy, key industries, businesses and our customers. The Provision is recorded to maintain the ACL at levels deemed adequate to absorb probable credit losses that are expected in our loan and lease portfolio as of the balance sheet date. |
| ● | Noninterest income was $197.4 million for the year ended December 31, 2020, an increase of $4.8 million or 3% as compared to the same period in 2019. The increase was primarily due to a $20.7 million increase in other noninterest income, a $2.6 million decrease in the net loss on investment securities and a $0.6 million increase in trust and investment services income. This was partially offset by a $11.3 million decrease in credit and debit card fees, a $5.6 million decrease in service charges on deposit accounts and a $2.4 million decrease in other service charges and fees. |
| ● | Noninterest expense was $367.7 million for the year ended December 31, 2020, a decrease of $2.8 million or 1% as compared to the same period in 2019. The decrease in noninterest expense was primarily due to a $7.8 million decrease in card rewards program expenses, a $3.3 million decrease in other noninterest expense and a $1.2 million decrease in advertising and marketing expenses, partially offset by a $4.2 million increase in contracted services and professional fees, a $2.9 million increase in equipment costs, a $1.3 million increase in regulatory assessment and fees and a $1.1 million increase in salaries and employee benefits. |
for the same period in 2017. Return on average tangible assets and return on average tangible stockholders’ equity are non-GAAP financial measures. For a reconciliation to the most directly comparable GAAP financial measures for return on average tangible assets and return on average tangible stockholders’ equity, see “Item 6. Selected Financial Data - GAAP to Non-GAAP Reconciliation”.
Our results for the year ended December 31, 2019 were highlighted by the following: | ● | Net interest income was $573.4 million for the year ended December 31, 2019, an increase of $7.1 million or 1% as compared to the same period in 2018. Our net interest margin was 3.20% for the year ended December 31, 2019, an increase of four basis points as compared to the same period in 2018. The increase in net interest income was primarily due to higher average balances and yields in most loan categories. This was partially offset by lower average balances in our investment securities portfolio, higher deposit funding costs and higher average balances in total borrowings. |
| ● | The Provision was $13.8 million for the year ended December 31, 2019, a decrease of $8.4 million or 38% as compared to the same period in 2018. This decrease was partially due to the sale of $408.9 million commercial and industrial loans during the year ended December 31, 2019. The Provision is recorded to maintain the AllowanceACL at levels deemed adequate to absorb probable credit losses that have been incurred in our loan and lease portfolio as of the balance sheet date. |
| ● | Noninterest income was $192.5 million for the year ended December 31, 2019, an increase of $13.5 million or 8% as compared to the same period in 2018. The increase was primarily due to the absence of $24.1 million OTTI losses on available-for-sale debt securities, a $6.3 million increase in bank-owned life insurance (“BOLI”) income, a $3.8 million increase in trust and investment services income, a $1.7 million increase in service charges on deposit accounts and a $1.0 million increase in credit and debit card fees. This was partially offset by an $18.6 million decrease in other noninterest income, a $2.7 million net loss on investment securities and a $2.1 million decrease on other service charges and fees. |
| ● | Noninterest expense was $370.4 million for the year ended December 31, 2019, an increase of $5.5 million or 2% as compared to the same period in 2018. The increase in noninterest expense was primarily due to a $6.5 million increase in contracted services and professional fees, a $5.9 million increase in salaries and employee benefits, a $5.1 million increase in card rewards program expenses, a $2.1 million increase in advertising and marketing expenses and a $1.4 million increase in occupancy expenses, partially offset by an $8.4 million decrease in other noninterest expense and a $6.8 million decrease in regulatory assessment and fees. |
Our results for the year ended December 31, 2018 wereWe maintained a strong balance sheet throughout 2020, highlighted by the following:
| ● | Net interest income was $566.3 million for the year ended December 31, 2018, an increase of $37.5 million or 7% as compared to the same period in 2017. Our net interest margin was 3.16% for the year ended December 31, 2018, an increase of 17 basis points as compared to the same period in 2017. The increase in net interest income was primarily due to higher average balances and yields in most loan categories and higher yields in our investment securities portfolio, partially offset by lower average balances in our investment securities portfolio and higher deposit funding costs. |
| ● | The Provision was $22.2 million for the year ended December 31, 2018, an increase of $3.7 million or 20% as compared to the same period in 2017. The Provision is recorded to maintain the Allowance at levels deemed adequate to absorb probable credit losses that have been incurred in our loan and lease portfolio as of the balance sheet date. |
| ● | Noninterest income was $179.0 million for the year ended December 31, 2018, a decrease of $26.6 million or 13% as compared to the same period in 2017. The decrease was primarily due to $24.1 million in OTTI losses on available-for-sale debt securities, a $4.1 million decrease in BOLI income, a $3.8 million decrease in service charges on deposit accounts and a $1.4 million decrease in other noninterest income, partially offset by a $4.3 million increase in other service charges and fees and a $1.7 million increase in credit and debit card fees. |
| ● | Noninterest expense was $365.0 million for the year ended December 31, 2018, an increase of $17.4 million or 5% as compared to the same period in 2017. The increase in noninterest expense was primarily due to a $4.8 million increase in other noninterest expense, a $4.8 million increase in contracted services and professional fees, a $4.1 million increase in salaries and employee benefits, a $3.8 million increase in occupancy and $1.5 million increase in card rewards program expenses, partially offset by a $1.4 million decrease in advertising and marketing expenses. |
During 2019, we continued to benefit from a stable Hawaii economy as reflected in the continued growth in our commercial real estate and residential real estate loan portfolios. Our investment securities portfolio remained strong as we continued to invest in high-grade investment securities. We also continued to maintain adequate reserves for loan and lease losses and high levels of capital.
| ● | Total loans and leases were $13.2$13.3 billion as of December 31, 2019,2020, an increase of $135.5$67.4 million or 1% as compared to December 31, 2018.2019. Growth was particularly strong in our commercial real estate and residential real estate mortgage portfolios. Growthindustrial loans stemming from PPP loans totaling $801.2 million, partially offset by decreases in our commercial real estateShared National Credits and dealer flooring portfolios. Additionally, the increase in loans was also due to increases in our construction portfolio, was a reflection of the demandpartially offset by both investorsdecreases in our consumer portfolio, primarily due to decreases in credit card balances and owner occupants to acquire new real estate assets in a low interest rate environment. Growthindirect automobile loans, as well as in our residential real estate mortgage portfolio was a reflection of the demand by owner occupants to refinance in a low interest rate environment. This growth was partially offset by the sale of $408.9 million commercial and industrial loans during the year ended December 31, 2019.portfolio. |
| ● | The AllowanceACL was $130.5$208.5 million as of December 31, 2019, a decrease2020, an increase of $11.2$77.9 million or 8%60% from December 31, 2018.2019. This increase was primarily due to the aforementioned higher expected credit losses as a result of COVID-19 and its impact on Hawaii’s economy, key industries, businesses and our customers. The ratio of our AllowanceACL to total loans and leases outstanding decreasedincreased to 1.57% as of December 31, 2020, compared to 0.99% as of December 31, 2019, compared to 1.08% as of December 31, 2018.2019. The overall level of the AllowanceACL was commensurate with our stable credit risk profile and the Hawaii economy. |
| ● | We continued to invest in high-grade investment securities, primarily collateralized mortgage obligations issued by the Government National Mortgage Association (“Ginnie Mae”), Fannie Mae and Freddie Mac. The total fair value of our investment securities portfolio was $4.1$6.1 billion as of December 31, 2019, a decrease2020, an increase of $422.7 million$2.0 billion or 9%49% compared to December 31, 2018.2019. The lowerhigher balances in investment securities were primarily due to redeploying runoff to fund growth in loans. Additionally, a restructuring of the investment portfolio was conducted in January 2019, whereby sales and purchases were conducted to improve the risk profile and return of the investment portfolio.excess balance sheet liquidity. |
| ● | Total deposits were $16.4$19.2 billion as of December 31, 2019, a decrease2020, an increase of $705.1 million$2.8 billion or 4%17% from December 31, 2018.2019. The decreaseincrease in total deposits was primarily due to a $502.0 million decrease$1.6 billion increase in public timedemand deposits, a $140.8 million decrease$1.0 billion increase in money marketsavings deposit balances and a $127.9 million decrease$0.3 billion increase in demandmoney market deposit balances, partially offset by a $145.6 million increase$0.2 billion decrease in savingstime deposit balances. |
| ● | Total stockholders’ equity was $2.6$2.7 billion as of December 31, 2019,2020, an increase of $115.4$103.8 million or 5%4% from December 31, 2018.2019. The increase in stockholders’ equity was primarily due to earnings for the year ended December 31, 20192020 of $284.4$185.8 million, a $100.4$63.4 million decreaseincrease in accumulated other comprehensive loss,income, net of tax, and equity-based awards of $5.1$7.4 million. This was partially offset by dividends declared and paid to the Company’s stockholders of $138.2$135.1 million, the cumulative effect adjustment of a change in an accounting principle of $12.5 million and common stock repurchases of $136.2$5.0 million. |
Analysis of Results of Operations Net Interest Income For the years ended December 31, 2020, 2019, 2018, and 2017,2018, average balances, related income and expenses, on a fully taxable-equivalent basis, and resulting yields and rates are presented in Table 1. An analysis of the change in net interest income, on a fully taxable-equivalent basis, is presented in Table 2. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Average Balances and Interest Rates | | | | | | | | | | | | | | | | | | | | | | | | | Table 1 | | | | | | | | | | | | | | | | | | | | | | | | Table 1 | | | Year Ended | | Year Ended | | Year Ended | | Year Ended | | Year Ended | | Year Ended | | | | December 31, 2019 | | December 31, 2018 | | December 31, 2017 | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 | | | | Average | | Income/ | | Yield/ | | Average | | Income/ | | Yield/ | | 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 | | Balance | | Expense | | Rate | | Balance | | Expense | | Rate | | Earning Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-Bearing Deposits in Other Banks | | $ | 437.8 | | $ | 9.3 | | | 2.11 | % | $ | 460.8 | | $ | 8.3 | | 1.81 | % | $ | 507.3 | | $ | 5.5 | | 1.09 | % | $ | 882.1 | | $ | 2.4 | | | 0.27 | % | $ | 437.8 | | $ | 9.3 | | 2.11 | % | $ | 460.8 | | $ | 8.3 | | 1.81 | % | Available-for-Sale Investment Securities | | | 4,310.2 | | | 92.5 | | | 2.15 | | | 4,843.0 | | | 107.1 | | 2.21 | | | 5,201.5 | | | 102.3 | | 1.97 | | | | | | | | | | | | | | | | | | | | | | | | | | | Taxable | | | 4,844.5 | | | 80.9 | | | 1.67 | | | 4,309.7 | | | 92.5 | | 2.15 | | | 4,823.2 | | | 106.6 | | 2.21 | | Non-Taxable | | | 62.0 | | | 1.1 | | | 1.77 | | | 0.5 | | | — | | 2.71 | | | 19.8 | | | 0.5 | | 2.71 | | Total Available-for-Sale Investment Securities | | | 4,906.5 | | | 82.0 | | | 1.67 | | | 4,310.2 | | | 92.5 | | 2.15 | | | 4,843.0 | | | 107.1 | | 2.21 | | Loans Held for Sale | | | 1.0 | | | — | | | 2.53 | | | 1.0 | | | — | | 3.60 | | | — | | | — | | — | | | 13.0 | | | 0.3 | | | 2.21 | | | 1.0 | | | — | | 2.53 | | | 1.0 | | | — | | 3.60 | | Loans and Leases(1) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | | 2,987.3 | | | 122.8 | | | 4.11 | | | 3,105.4 | | | 121.9 | | 3.93 | | | 3,230.2 | | | 103.6 | | 3.21 | | | 3,168.7 | | | 93.2 | | | 2.94 | | | 2,987.3 | | | 122.8 | | 4.11 | | | 3,105.4 | | | 121.9 | | 3.93 | | Commercial real estate | | | 3,176.6 | | | 143.9 | | | 4.53 | | | 2,918.5 | | | 118.7 | | 4.07 | | | 2,643.6 | | | 96.7 | | 3.66 | | | 3,419.1 | | | 116.9 | | | 3.42 | | | 3,176.6 | | | 143.9 | | 4.53 | | | 2,918.5 | | | 118.7 | | 4.07 | | Construction | | | 547.7 | | | 25.5 | | | 4.65 | | | 623.6 | | | 25.8 | | 4.13 | | | 537.8 | | | 18.6 | | 3.45 | | | 615.7 | | | 21.3 | | | 3.46 | | | 547.7 | | | 25.5 | | 4.65 | | | 623.6 | | | 25.8 | | 4.13 | | Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential mortgage | | | 3,626.0 | | | 150.9 | | | 4.16 | | | 3,254.9 | | | 138.4 | | 4.25 | | | 2,956.3 | | | 126.2 | | 4.27 | | | 3,698.7 | | | 148.4 | | | 4.01 | | | 3,626.0 | | | 150.9 | | 4.16 | | | 3,254.9 | | | 138.4 | | 4.25 | | Home equity line | | | 910.7 | | | 34.1 | | | 3.74 | | | 874.2 | | | 32.2 | | 3.68 | | | 865.2 | | | 29.6 | | 3.43 | | | 875.1 | | | 27.1 | | | 3.10 | | | 910.7 | | | 34.1 | | 3.74 | | | 874.2 | | | 32.2 | | 3.68 | | Consumer | | | 1,652.8 | | | 91.8 | | | 5.56 | | | 1,633.2 | | | 88.2 | | 5.40 | | | 1,540.0 | | | 83.1 | | 5.40 | | | 1,501.6 | | | 82.9 | | | 5.52 | | | 1,652.8 | | | 91.8 | | 5.56 | | | 1,633.2 | | | 88.2 | | 5.40 | | Lease financing | | | 162.6 | | | 5.0 | | | 3.08 | | | 160.4 | | | 4.7 | | 2.91 | | | 171.5 | | | 4.9 | | 2.87 | | | 239.4 | | | 6.9 | | | 2.90 | | | 162.6 | | | 5.0 | | 3.08 | | | 160.4 | | | 4.7 | | 2.91 | | Total Loans and Leases | | | 13,063.7 | | | 574.0 | | | 4.39 | | | 12,570.2 | | | 529.9 | | 4.22 | | | 11,944.6 | | | 462.7 | | 3.87 | | | 13,518.3 | | | 496.7 | | | 3.67 | | | 13,063.7 | | | 574.0 | | 4.39 | | | 12,570.2 | | | 529.9 | | 4.22 | | Other Earning Assets | | | 79.8 | | | 2.9 | | | 3.66 | | | 36.5 | | | 0.7 | | 1.93 | | | 27.5 | | | 0.3 | | 1.04 | | | 56.4 | | | 2.0 | | | 3.66 | | | 79.8 | | | 2.9 | | 3.66 | | | 36.5 | | | 0.7 | | 1.93 | | Total Earning Assets(2) | | | 17,892.5 | | | 678.7 | | | 3.79 | | | 17,911.5 | | | 646.0 | | 3.61 | | | 17,680.9 | | | 570.8 | | 3.23 | | | 19,376.3 | | | 583.4 | | | 3.01 | | | 17,892.5 | | | 678.7 | | 3.79 | | | 17,911.5 | | | 646.0 | | 3.61 | | Cash and Due from Banks | | | 340.1 | | | | | | | | | 328.3 | | | | | | | | 321.4 | | | | | | | | 304.9 | | | | | | | | | 340.1 | | | | | | | | 328.3 | | | | | | | Other Assets | | | 2,093.1 | | | | | | | | | 2,007.3 | | | | | | | | 1,940.5 | | | | | | | | 2,187.9 | | | | | | | | | 2,093.1 | | | | | | | | 2,007.3 | | | | | | | Total Assets | | $ | 20,325.7 | | | | | | | | $ | 20,247.1 | | | | | | | $ | 19,942.8 | | | | | | | $ | 21,869.1 | | | | | | | | $ | 20,325.7 | | | | | | | $ | 20,247.1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-Bearing Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-Bearing Deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Savings | | $ | 4,840.6 | | $ | 16.6 | | | 0.34 | % | $ | 4,638.6 | | $ | 11.0 | | 0.24 | % | $ | 4,475.2 | | $ | 3.9 | | 0.09 | % | $ | 5,538.1 | | $ | 5.2 | | | 0.09 | % | $ | 4,840.6 | | $ | 16.6 | | 0.34 | % | $ | 4,638.6 | | $ | 11.0 | | 0.24 | % | Money Market | | | 3,123.5 | | | 27.8 | | | 0.89 | | | 2,833.4 | | | 15.2 | | 0.53 | | | 2,576.0 | | | 3.3 | | 0.13 | | | 3,266.6 | | | 6.6 | | | 0.20 | | | 3,123.5 | | | 27.8 | | 0.89 | | | 2,833.4 | | | 15.2 | | 0.53 | | Time | | | 2,882.9 | | | 43.5 | | | 1.51 | | | 3,743.5 | | | 46.8 | | 1.25 | | | 4,096.4 | | | 34.8 | | 0.85 | | | 2,839.8 | | | 23.7 | | | 0.83 | | | 2,882.9 | | | 43.5 | | 1.51 | | | 3,743.5 | | | 46.8 | | 1.25 | | Total Interest-Bearing Deposits | | | 10,847.0 | | | 87.9 | | | 0.81 | | | 11,215.5 | | | 73.0 | | 0.65 | | | 11,147.6 | | | 42.0 | | 0.38 | | | 11,644.5 | | | 35.5 | | | 0.30 | | | 10,847.0 | | | 87.9 | | 0.81 | | | 11,215.5 | | | 73.0 | | 0.65 | | Short-Term Borrowings | | | 209.8 | | | 5.9 | | | 2.82 | | | 39.9 | | | 0.8 | | 2.13 | | | 2.2 | | | — | | 0.80 | | | 209.6 | | | 6.0 | | | 2.87 | | | 209.8 | | | 5.9 | | 2.82 | | | 39.9 | | | 0.8 | | 2.13 | | Long-Term Borrowings | | | 406.6 | | | 11.5 | | | 2.83 | | | 206.0 | | | 5.9 | | 2.87 | | | — | | | — | | — | | | 200.0 | | | 5.5 | | | 2.77 | | | 406.6 | | | 11.5 | | 2.83 | | | 206.0 | | | 5.9 | | 2.87 | | Total Interest-Bearing Liabilities | | | 11,463.4 | | | 105.3 | | | 0.92 | | | 11,461.4 | | | 79.7 | | 0.70 | | | 11,149.8 | | | 42.0 | | 0.38 | | | 12,054.1 | | | 47.0 | | | 0.39 | | | 11,463.4 | | | 105.3 | | 0.92 | | | 11,461.4 | | | 79.7 | | 0.70 | | Net Interest Income | | | | | $ | 573.4 | | | | | | | | $ | 566.3 | | | | | | | $ | 528.8 | | | | | | | $ | 536.4 | | | | | | | | $ | 573.4 | | | | | | | $ | 566.3 | | | | Interest Rate Spread | | | | | | | | | 2.87 | % | | | | | | | 2.91 | % | | | | | | | 2.85 | % | | | | | | | | 2.62 | % | | | | | | | 2.87 | % | | | | | | | 2.91 | % | Net Interest Margin | | | | | | | | | 3.20 | % | | | | | | | 3.16 | % | | | | | | | 2.99 | % | | | | | | | | 2.77 | % | | | | | | | 3.20 | % | | | | | | | 3.16 | % | Noninterest-Bearing Demand Deposits | | | 5,766.4 | | | | | | | | | 5,899.9 | | | | | | | | 5,868.8 | | | | | | | | 6,608.5 | | | | | | | | | 5,766.4 | | | | | | | | 5,899.9 | | | | | | | Other Liabilities | | | 486.5 | | | | | | | | | 428.0 | | | | | | | | 385.9 | | | | | | | | 507.6 | | | | | | | | | 486.5 | | | | | | | | 428.0 | | | | | | | Stockholders' Equity | | | 2,609.4 | | | | | | | | | 2,457.8 | | | | | | | | 2,538.3 | | | | | | | | 2,698.9 | | | | | | | | | 2,609.4 | | | | | | | | 2,457.8 | | | | | | | Total Liabilities and Stockholders' Equity | | $ | 20,325.7 | | | | | | | | $ | 20,247.1 | | | | | | | $ | 19,942.8 | | | | | | | $ | 21,869.1 | | | | | | | | $ | 20,325.7 | | | | | | | $ | 20,247.1 | | | | | | |
(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) | ForInterest income includes taxable-equivalent basis adjustments of $0.7 million for the year ended December 31, 2020 and nil for both the years ended December 31, 2019 2018 and 2017, the taxable-equivalent basis adjustments made to the table above were not material.2018. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Analysis of Change in Net Interest Income | | | | | | | | | | | | | | | | | | Table 2 | | | | | | | | | | | | | | | | | | Table 2 | | | Year Ended December 31, 2019 | | Year Ended December 31, 2018 | | Year Ended December 31, 2020 | | Year Ended December 31, 2019 | | | Compared to December 31, 2018 | | Compared to December 31, 2017 | | Compared to December 31, 2019 | | Compared to December 31, 2018 | (dollars in millions) | | Volume | | Rate | | Total(1) | | Volume | | Rate | | Total(1) | | Volume | | Rate | | Total(1) | | Volume | | Rate | | Total(1) | Change in Interest Income: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-Bearing Deposits in Other Banks | | $ | (0.4) | | $ | 1.4 | | $ | 1.0 | | $ | (0.5) | | $ | 3.3 | | $ | 2.8 | | $ | 5.0 | | $ | (11.9) | | $ | (6.9) | | $ | (0.4) | | $ | 1.4 | | $ | 1.0 | Available-for-Sale Investment Securities | | | (11.7) | | | (2.9) | | | (14.6) | | | (7.3) | | | 12.2 | | | 4.9 | | | | | | | | | | | | | | | | | | | Taxable | | | | 10.6 | | | (22.2) | | | (11.6) | | | (11.2) | | | (2.9) | | | (14.1) | Non-Taxable | | | | 1.1 | | | — | | | 1.1 | | | (0.5) | | | — | | | (0.5) | Total Available-for-Sale Investment Securities | | | | 11.7 | | | (22.2) | | | (10.5) | | | (11.7) | | | (2.9) | | | (14.6) | Loans Held for Sale | | | | 0.3 | | | — | | | 0.3 | | | — | | | — | | | — | Loans and Leases | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | | (4.7) | | | 5.6 | | | 0.9 | | | (4.1) | | | 22.4 | | | 18.3 | | | 7.1 | | | (36.7) | | | (29.6) | | | (4.7) | | | 5.6 | | | 0.9 | Commercial real estate | | | 11.0 | | | 14.2 | | | 25.2 | | | 10.6 | | | 11.5 | | | 22.1 | | | 10.3 | | | (37.3) | | | (27.0) | | | 11.0 | | | 14.2 | | | 25.2 | Construction | | | (3.3) | | | 3.0 | | | (0.3) | | | 3.2 | | | 4.0 | | | 7.2 | | | 2.9 | | | (7.1) | | | (4.2) | | | (3.3) | | | 3.0 | | | (0.3) | Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential mortgage | | | 15.6 | | | (3.1) | | | 12.5 | | | 12.7 | | | (0.4) | | | 12.3 | | | 3.0 | | | (5.5) | | | (2.5) | | | 15.6 | | | (3.1) | | | 12.5 | Home equity line | | | 1.4 | | | 0.5 | | | 1.9 | | | 0.3 | | | 2.2 | | | 2.5 | | | (1.3) | | | (5.7) | | | (7.0) | | | 1.4 | | | 0.5 | | | 1.9 | Consumer | | | 1.0 | | | 2.6 | | | 3.6 | | | 5.0 | | | — | | | 5.0 | | | (8.3) | | | (0.6) | | | (8.9) | | | 1.0 | | | 2.6 | | | 3.6 | Lease financing | | | — | | | 0.3 | | | 0.3 | | | (0.3) | | | 0.1 | | | (0.2) | | | 2.2 | | | (0.3) | | | 1.9 | | | — | | | 0.3 | | | 0.3 | Total Loans and Leases | | | 21.0 | | | 23.1 | | | 44.1 | | | 27.4 | | | 39.8 | | | 67.2 | | | 15.9 | | | (93.2) | | | (77.3) | | | 21.0 | | | 23.1 | | | 44.1 | Other Earning Assets | | | 1.3 | | | 0.9 | | | 2.2 | | | 0.1 | | | 0.3 | | | 0.4 | | | (0.9) | | | — | | | (0.9) | | | 1.3 | | | 0.9 | | | 2.2 | Total Change in Interest Income | | | 10.2 | | | 22.5 | | | 32.7 | | | 19.7 | | | 55.6 | | | 75.3 | | | 32.0 | | | (127.3) | | | (95.3) | | | 10.2 | | | 22.5 | | | 32.7 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Change in Interest Expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest-Bearing Deposits | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Savings | | | 0.5 | | | 5.1 | | | 5.6 | | | 0.1 | | | 7.0 | | | 7.1 | | | 2.1 | | | (13.5) | | | (11.4) | | | 0.5 | | | 5.1 | | | 5.6 | Money Market | | | 1.7 | | | 10.9 | | | 12.6 | | | 0.4 | | | 11.5 | | | 11.9 | | | 1.2 | | | (22.4) | | | (21.2) | | | 1.7 | | | 10.9 | | | 12.6 | Time | | | (11.9) | | | 8.6 | | | (3.3) | | | (3.2) | | | 15.2 | | | 12.0 | | | (0.6) | | | (19.2) | | | (19.8) | | | (11.9) | | | 8.6 | | | (3.3) | Total Interest-Bearing Deposits | | | (9.7) | | | 24.6 | | | 14.9 | | | (2.7) | | | 33.7 | | | 31.0 | | | 2.7 | | | (55.1) | | | (52.4) | | | (9.7) | | | 24.6 | | | 14.9 | Short-Term Borrowings | | | 4.7 | | | 0.4 | | | 5.1 | | | 0.8 | | | 0.1 | | | 0.9 | | | — | | | 0.1 | | | 0.1 | | | 4.7 | | | 0.4 | | | 5.1 | Long-Term Borrowings | | | 5.7 | | | (0.1) | | | 5.6 | | | 5.9 | | | — | | | 5.9 | | | (5.8) | | | (0.2) | | | (6.0) | | | 5.7 | | | (0.1) | | | 5.6 | Total Change in Interest Expense | | | 0.7 | | | 24.9 | | | 25.6 | | | 4.0 | | | 33.8 | | | 37.8 | | | (3.1) | | | (55.2) | | | (58.3) | | | 0.7 | | | 24.9 | | | 25.6 | Change in Net Interest Income | | $ | 9.5 | | $ | (2.4) | | $ | 7.1 | | $ | 15.7 | | $ | 21.8 | | $ | 37.5 | | $ | 35.1 | | $ | (72.1) | | $ | (37.0) | | $ | 9.5 | | $ | (2.4) | | $ | 7.1 |
(1) | The change in interest income and expense not solely due to changes in volume or rate has been allocated on a pro-rata basis to the volume and rate columns. |
Net interest income, on a fully taxable-equivalent basis, was $536.4 million for the year ended December 31, 2020, a decrease of $37.0 million or 6% as compared to the same period in 2019. Our net interest margin was 2.77% for the year ended December 31, 2020, a decrease of 43 basis points as compared to the same period in 2019. The decrease in net interest income, on a fully taxable-equivalent basis, was primarily due to lower yields in all loan categories and lower yields in our investment securities portfolio and interest-bearing deposits in other banks. This was partially offset by lower deposit funding costs and higher average balances in our investment securities portfolio. Yields on our loans and leases were 3.67% for the year ended December 31, 2020, a decrease of 72 basis points as compared to the same period in 2019. We experienced a decrease in our yield from total loans primarily due to decreases in adjustable rate commercial and industrial and commercial real estate loans, which are typically based on LIBOR. Decreases in the yield on commercial and industrial loans also stemmed from our participation in the PPP, as these loans have a fixed interest rate of one percent per annum. For the year ended December 31, 2020, the average balance of our investment securities portfolio increased $596.3 million or 14% to $4.9 billion. Yields on our investment securities portfolio were 1.67% for the year ended December 31, 2020, a decrease of 48 basis points from the same period in 2019. Deposit funding costs were $35.5 million for the year ended December 31, 2020, a decrease of $52.4 million compared to the same period in 2019. Rates paid on our interest-bearing deposits were 30 basis points for the year ended December 31, 2020, a decrease of 51 basis points compared to the same period in 2019. The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is affected by changes in the prime interest rate. The prime rate began in 2019 at 5.50% and decreased 50 basis points during the third quarter of 2019 (25 basis points in each of August and September) and 25 basis points in October 2019 to end the year at 4.75%. During 2020, the prime rate decreased 150 basis points in March to end the first quarter at 3.25%, where it remained as at the end of 2020. As noted above, our loan portfolio is also impacted by changes in the LIBOR. At December 31, 2020, the one-month and three-month U.S. dollar LIBOR interest rates were 0.14% and 0.24%, respectively, while at December 31, 2019, the one-month and three-month U.S. dollar LIBOR interest rates were 1.76% and 1.91%, respectively. The target range for the federal funds rate, which is the cost of immediately available overnight funds, began 2019 at 2.25% to 2.50% and decreased 50 basis points during the third quarter of 2019 (25 basis points in each of August and September) and 25 basis points in October 2019 to end the year at 1.50% to 1.75%. During 2020, the target range for the federal funds rate decreased 150 basis points in March to at 0.00% to 0.25%, where it remained as at the end of 2020. In December 2020, the Federal Reserve indicated that it expects to maintain the targeted federal funds rate through 2023. The decrease in the target range for the federal funds rate in 2020 was largely an emergency measure by the Federal Reserve aimed at mitigating the economic impact of COVID-19. Net interest income, on a fully taxable-equivalent basis, was $573.4 million for the year ended December 31, 2019, an increase of $7.1 million or 1% as compared to the same period in 2018. Our net interest margin was 3.20% for the year ended December 31, 2019, an increase of four basis points as compared to the same period in 2018. The increase in net interest income, on a fully taxable-equivalent basis, was primarily due to higher average balances and yields in most loan categories. This was partially offset by lower average balances in our investment securities portfolio, higher deposit funding costs and higher average balances in total borrowings. For the year ended December 31, 2019, the average balance of our loans and leases was $13.1 billion, an increase of $493.5 million or 4% compared to the same period in 2018. The higher average balance in loans and leases was primarily due to growth in our residential mortgage and commercial real estate lending portfolios, partially offset by declines in our commercial and industrial portfolio. Yields on our loans and leases were 4.39% for the year ended December 31, 2019, an increase of 17 basis points as compared to the same period in 2018. We experienced an increase in our yields from total loans primarily due to increases in adjustable rate commercial real estate loans, which are typically based on the LIBOR. For the year ended December 31, 2019, the average balance of our investment securities portfolio decreased $532.8 million or 11% to $4.3 billion. Yields on our investment securities portfolio were 2.15% for the year ended December 31, 2019, a decrease of six basis points from the same period in 2018. Deposit funding costs were $87.9 million for the year ended December 31, 2019, an increase of $14.9 million compared to the same period in 2018. Rates paid on our interest-bearing deposits were 81 basis points for the year ended December 31, 2019, an increase of 16 basis points compared to the same period in 2018. While we experienced higher rates paid on all interest-bearing deposit categories in the year ended December 31, 2019, high rates were paid on our money market deposits with an increase of 36 basis points compared to the same period in 2018. For the year ended December 31, 2019, the average balance of our total borrowings was $616.4 million, an increase of $370.5 million as compared to the same period in 2018. This was primarily due to increases in FHLB fixed-rate advances during the year ended December 31, 2019 compared to the same period in 2018. 49Provision for Credit Losses
Net interest income, on a fully taxable-equivalent basis,The Provision was $566.3$121.7 million for the year ended December 31, 2018,2020, which represented an increase of $37.5 million or 7% as compared to the same period in 2017. Our net interest margin was 3.16% for the year ended December 31, 2018, an increase of 17 basis points as compared to the same period in 2017. The increase in net interest income, on a fully taxable-equivalent basis, was primarily due to higher average balances and yields in most loan categories and higher yields in our investment securities portfolio. This was partially offset by lower average balances in our investment securities portfolio and higher deposit funding costs. For the year ended December 31, 2018, the average balance of our loans and leases was $12.6 billion, an increase of $625.6 million or 5% compared to the same period in 2017. The higher average balance in loans and leases was primarily due to growth in our residential mortgage, commercial real estate, consumer and construction lending portfolios, partially offset by declines in our commercial and industrial portfolio. Yields on our loans and leases were 4.22% for the year ended December 31, 2018, an increase of 35 basis points as compared to the same period in 2017. We experienced an increase in our yields from total loans primarily due to increases in adjustable rate commercial loans, which are typically based on the LIBOR. For the year ended December 31, 2018, the average balance of our investment securities portfolio decreased $358.5 million or 7% to $4.8 billion. Yields on our investment securities portfolio were 2.21% for the year ended December 31, 2018, an increase of 24 basis points from the same period in 2017. Deposit funding costs were $73.0 million for the year ended December 31, 2018, an increase of $31.0$107.9 million compared to the same period in 2017. Rates paid on our interest-bearing deposits were 65 basis points for2019. For the year ended December 31, 2018, an increase of 27 basis points compared to2020, the same periodProvision included $108.0 million in 2017. While we experienced higher rates paid on all interest-bearing deposit categoriesprovision for credit losses for loans and leases and $13.7 million in the year ended December 31, 2018, particularly high rates were paid on our time deposits with an increase of 40 basis points compared to the same period in 2017.
Provisionprovision for Loan and Lease Losses
The Provision was $13.8 millioncredit losses for the year ended December 31, 2019, which represented a decrease of $8.4 million compared to the same period in 2018.reserve for unfunded commitments. We recorded net charge-offs of $25.0$30.9 million and $17.7$25.0 million for the years ended December 31, 20192020 and 2018,2019, respectively. This represented net charge-offs of 0.19%0.23% and 0.14%0.19% of total average loans and leases for the years ended December 31, 20192020 and 2018,2019, respectively. The AllowanceACL was $130.5$208.5 million and $141.7$130.5 million as of December 31, 20192020 and 2018,2019, respectively, and represented 1.57% of total outstanding loans and leases as of December 31, 2020, compared to 0.99% of total outstanding loans and leases as of December 31, 2019, compared to 1.08% of total outstanding loans and leases2019. The reserve for unfunded commitments was $30.6 million as of December 31, 2018.2020, compared to $0.6 million as of December 31, 2019. The Provision is recorded to maintain the AllowanceACL and the reserve for unfunded commitments at levels deemed adequate by management based on the factors noted in the “Risk Governance and Quantitative and Qualitative Disclosures About Market Risk — Credit Risk” section of this MD&A.
Noninterest Income Table 3 presents the major components of noninterest income for the years ended December 31, 2020, 2019 2018 and 2017:2018: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Noninterest Income | | | | | | Table 3 | | | | | | Table 3 | | | Year Ended December 31, | | Change | | | Change | | | Year Ended December 31, | | Change | | | Change | | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | | 2019 | vs. | 2018 | | | | 2018 | vs. | 2017 | | | 2020 | | 2019 | | 2018 | | | 2020 | vs. | 2019 | | | | 2019 | vs. | 2018 | | Service charges on deposit accounts | | $ | 33,778 | | $ | 32,036 | | $ | 35,807 | | $ | 1,742 | | 5 | % | | $ | (3,771) | | (11) | % | | $ | 28,169 | | $ | 33,778 | | $ | 32,036 | | $ | (5,609) | | (17) | % | | $ | 1,742 | | 5 | % | Credit and debit card fees | | | 66,749 | | | 65,716 | | | 64,049 | | | 1,033 | | 2 | | | | 1,667 | | 3 | | | | 55,451 | | | 66,749 | | | 65,716 | | | (11,298) | | (17) | | | | 1,033 | | 2 | | Other service charges and fees | | | 36,253 | | | 38,316 | | | 34,063 | | | (2,063) | | (5) | | | | 4,253 | | 12 | | | | 33,876 | | | 36,253 | | | 38,316 | | | (2,377) | | (7) | | | | (2,063) | | (5) | | Trust and investment services income | | | 35,102 | | | 31,324 | | | 30,485 | | | 3,778 | | 12 | | | | 839 | | 3 | | | | 35,652 | | | 35,102 | | | 31,324 | | | 550 | | 2 | | | | 3,778 | | 12 | | Bank-owned life insurance | | | 15,479 | | | 9,217 | | | 13,283 | | | 6,262 | | 68 | | | | (4,066) | | (31) | | | | 15,754 | | | 15,479 | | | 9,217 | | | 275 | | 2 | | | | 6,262 | | 68 | | Investment securities losses, net | | | (2,715) | | | — | | | — | | | (2,715) | | n.m. | | | | — | | — | | | | (114) | | | (2,715) | | | — | | | 2,601 | | (96) | | | | (2,715) | | n.m. | | OTTI losses on available-for-sale debt securities | | | — | | | (24,085) | | | — | | | 24,085 | | n.m. | | | | (24,085) | | n.m. | | | | — | | | — | | | (24,085) | | | — | | n.m. | | | | 24,085 | | n.m. | | Other | | | 7,887 | | | 26,469 | | | 27,918 | | | (18,582) | | (70) | | | | (1,449) | | (5) | | | | 28,592 | | | 7,887 | | | 26,469 | | | 20,705 | | n.m. | | | | (18,582) | | (70) | | Total noninterest income | | $ | 192,533 | | $ | 178,993 | | $ | 205,605 | | $ | 13,540 | | 8 | % | | $ | (26,612) | | (13) | % | | $ | 197,380 | | $ | 192,533 | | $ | 178,993 | | $ | 4,847 | | 3 | % | | $ | 13,540 | | 8 | % |
n.m. – Denotes a variance that is not a meaningful metric to inform the change in noninterest income from the year ended December 31, 20182019 to the same period in 20192020 and from the year ended December 31, 20172018 to the same period in 2018.2019. Total noninterest income was $197.4 million for the year ended December 31, 2020, an increase of $4.8 million or 3% as compared to the same period in 2019. Total noninterest income was $192.5 million for the year ended December 31, 2019, an increase of $13.5 million or 8% as compared to the same period in 2018. Total noninterest income was $179.0 Service charges on deposit accounts were $28.2 million for the year ended December 31, 2018,2020, a decrease of $26.6$5.6 million or 13%17% as compared to the same period in 2017.
the COVID-19 pandemic, and a $0.8 million decrease in ATM interchange fees from customers, partially offset by a $0.7 million increase in account analysis service charges. Service charges on deposit accounts were $33.8 million for the year ended December 31, 2019, an increase of $1.7 million or 5% as compared to the same period in 2018. This increase was primarily due to a $0.8 million increase in overdraft and checking account fees, a $0.6 million increase in account analysis service charges and a $0.3 million increase in ATM interchange fees from customers. Service charges on deposit accounts Credit and debit card fees were $32.0$55.5 million for the year ended December 31, 2018,2020, a decrease of $3.8$11.3 million or 11%17% as compared to the same period in 2017.2019. This decrease was primarily due to a $3.7$8.3 million decrease in account analysisinterchange settlement fees and a $7.1 million decrease in merchant service chargesrevenues, both resulting from decreased transactions and spending due to higher earningthe impact of the COVID-19 pandemic. The decrease also related to a $2.3 million decrease in ATM interchange and surcharge fees, resulting from FHI waving ATM surcharge fees for a portion of the year ended December 31, 2020 as a response to the COVID-19 pandemic, and a $0.3 million decrease in credit rates thatcard fees from cash advances. This was partially offset fee income.
by a $7.1 million increase in network association dues. Credit and debit card fees were $66.7 million for the year ended December 31, 2019, an increase of $1.0 million or 2% as compared to the same period in 2018. This increase was primarily due to a $2.8 million increase in interchange settlement fees, partially offset by a $1.2 million decrease in merchant service revenues and a $0.5 million decrease in debit account interchange fees and ATM surcharge fees. Credit Other service charges and debit card fees were $65.7$33.9 million for the year ended December 31, 2018, an increase2020, a decrease of $1.7$2.4 million or 3%7% as compared to the same period in 2017.2019. This increasedecrease was primarily due to a $2.0$0.6 million increasedecrease in merchantinsurance income, a $0.6 million decrease in service revenuesfees related to participation loans, a $0.6 million decrease in foreign exchange processing fees, a $0.5 million decrease in online banking fees, a $0.3 million decrease in fees from standby letters of credit arrangements and a $1.5$0.3 million increasedecrease in interchange settlement fees,fee income from our cash management services. This was partially offset by a $1.6$1.0 million increase in network association dues.
fees from annuities and securities. Other service charges and fees were $36.3 million for the year ended December 31, 2019, a decrease of $2.1 million or 5% as compared to the same period in 2018. This decrease was primarily2018, due to a $2.1 million decrease in fee income from our cash management services. Other service charges Trust and fees were $38.3investment services income was $35.7 million for the year ended December 31, 2018,2020, an increase of $4.3$0.6 million or 12%2% as compared to the same period in 2017.2019. This increase was primarily due to a $2.5$1.1 million increase in investment management fees, from the sale of annuities and securities,partially offset by a $0.8$0.4 million increasedecrease in fee income from our cash management services, a $0.6 million increase inadministrative fees from standby letters of credit arrangements and a $0.5 million increase in residential mortgage loan servicing fees.
for retirement accounts. Trust and investment services income was $35.1 million for the year ended December 31, 2019, an increase of $3.8 million or 12% as compared to the same period in 2018. This increase was primarily due to a $3.1 million increase in business cash management fees and a $1.0 million increase in investment management fees. Trust and investment services BOLI income was $31.3$15.8 million for the year ended December 31, 2018,2020, an increase of $0.8$0.3 million or 3%2% as compared to the same period in 2017. This increase was primarily due to a $0.5 million increase in investment management fees and a $0.3 million increase in business cash management fees.
2019. BOLI income was $15.5 million for the year ended December 31, 2019, an increase of $6.3 million or 68% as compared to the same period in 2018. This increase was primarily due to a $4.9 million increase in BOLI earnings as well asand a $1.4 million increase in death benefits received. BOLI income was $9.2 Net losses on the sale of investment securities were $0.1 million for the year ended December 31, 2018,2020, a decrease in net losses of $4.1$2.6 million or 31% as compared to the same period in 2017. This decrease was primarily due to a $3.4 million decrease in BOLI earnings and a $0.6 million decrease in death benefits received.
2019. Net losses on the sale of investment securities were $2.7 million for the year ended December 31, 2019, a decreasean increase in net losses of $2.7 million as compared to the same period in 2018. The net loss was primarily due to the investment portfolio restructuring and sale of the 48 investment securities for which a non-credit related OTTI write-down was recorded in December 2018 as a result of our intent to sell as of December 31, 2018. In January 2019, the Company completed its sale of the 48 securities and recorded an additional loss of $2.6 million. There were no OTTI losses on available-for-sale debt securities during the year ended December 31, 2019. OTTI losses on available-for-sale debt securities were $24.1Other noninterest income was $28.6 million for the year ended December 31, 2018,2020, an increase of $24.1$20.7 million as compared to the same period in 2017. OTTI losses on available-for-sale debt securities for the year ended December 31, 2018 were2019. This increase was primarily due to our intenta $15.8 million increase in gains on the sale of residential and commercial loans, a $3.9 million increase in customer-related interest rate swap fees, a $1.6 million increase in net mortgage servicing rights income and a $0.7 million decrease in net losses recognized in income related to sell 48 securities withderivative contracts. This was partially offset by a book value of $898.2$1.1 million which were solddecrease in 2019. As a result, we recorded an OTTI write-down of $24.1 million, representing the entire difference between the amortized cost basis and fair value of the securities, during December 2018.
market adjustments for foreign exchange transactions. Other noninterest income was $7.9 million for the year ended December 31, 2019, a decrease of $18.6 million or 70% as compared to the same period in 2018. The decrease in other noninterest income was primarily due to a $13.2 million decrease in net gains recognized in income related to derivative contracts, a portion of which was attributable to the costs associated with the sale of Visa Class B restricted shares of $4.5 million recorded during the year ended December 31, 2019. The decrease was additionally due to a $2.8 million decrease in customer-related interest rate swap fees, $1.1 million loss on the sale of residential loans to government-sponsored enterprises and a $1.3 million decrease in gains on the sale of leased equipment. Other noninterest income was $26.5 million for the year ended December 31, 2018, a decrease of $1.4 million or 5% as compared to the same period in 2017. The decrease in other noninterest income was primarily due to a $7.0 million decrease related to gains on the sale of bank properties in 2017, a $2.2 million decrease in income due to adjustments to certain liabilities assumed as a result of the Reorganization Transactions, a $0.8 million decrease related to insurance proceeds from severe weather which affected the Hawaiian Islands and a $0.6 million decrease in merchant discount fees related to debit card transactions. This was partially offset by a $7.0 million increase in net gains recognized in income related to derivative contracts, a $1.2 million increase in gains on the sale of leased equipment and a $1.2 million general excise tax refund. Noninterest Expense Table 4 presents the major components of noninterest expense for the years ended December 31, 2020, 2019 2018 and 2017:2018: | | | | | | | | | | | | | | | | | | | | | | Noninterest Expense | | | | | | | | | | | | | | | | | | | | Table 4 | | | Year Ended December 31, | | Change | | | Change | | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | | 2019 | vs. | 2018 | | | | 2018 | vs. | 2017 | | Salaries and employee benefits(1) | | $ | 173,098 | | $ | 167,162 | | $ | 163,086 | | $ | 5,936 | | 4 | % | | $ | 4,076 | | 2 | % | Contracted services and professional fees | | | 56,321 | | | 49,775 | | | 45,011 | | | 6,546 | | 13 | | | | 4,764 | | 11 | | Occupancy | | | 28,753 | | | 27,330 | | | 23,485 | | | 1,423 | | 5 | | | | 3,845 | | 16 | | Equipment | | | 17,343 | | | 17,714 | | | 17,247 | | | (371) | | (2) | | | | 467 | | 3 | | Regulatory assessment and fees | | | 7,390 | | | 14,217 | | | 14,907 | | | (6,827) | | (48) | | | | (690) | | (5) | | Advertising and marketing | | | 6,910 | | | 4,813 | | | 6,191 | | | 2,097 | | 44 | | | | (1,378) | | (22) | | Card rewards program | | | 29,961 | | | 24,860 | | | 23,363 | | | 5,101 | | 21 | | | | 1,497 | | 6 | | Other(1) | | | 50,661 | | | 59,082 | | | 54,264 | | | (8,421) | | (14) | | | | 4,818 | | 9 | | Total noninterest expense | | $ | 370,437 | | $ | 364,953 | | $ | 347,554 | | $ | 5,484 | | 2 | % | | $ | 17,399 | | 5 | % |
(1) | The Company adopted ASU No. 2017-07 and applied the guidance retrospectively. As such $12.3 million previously reported in salaries and employee benefits were reclassified to other noninterest expense for the year ending December 31, 2017. |
| | | | | | | | | | | | | | | | | | | | | | Noninterest Expense | | | | | | | | | | | | | | | | | | | | Table 4 | | | Year Ended December 31, | | Change | | | Change | | (dollars in thousands) | | 2020 | | 2019 | | 2018 | | | 2020 | vs. | 2019 | | | | 2019 | vs. | 2018 | | Salaries and employee benefits | | $ | 174,221 | | $ | 173,098 | | $ | 167,162 | | $ | 1,123 | | 1 | % | | $ | 5,936 | | 4 | % | Contracted services and professional fees | | | 60,546 | | | 56,321 | | | 49,775 | | | 4,225 | | 8 | | | | 6,546 | | 13 | | Occupancy | | | 28,821 | | | 28,753 | | | 27,330 | | | 68 | | — | | | | 1,423 | | 5 | | Equipment | | | 20,277 | | | 17,343 | | | 17,714 | | | 2,934 | | 17 | | | | (371) | | (2) | | Regulatory assessment and fees | | | 8,659 | | | 7,390 | | | 14,217 | | | 1,269 | | 17 | | | | (6,827) | | (48) | | Advertising and marketing | | | 5,695 | | | 6,910 | | | 4,813 | | | (1,215) | | (18) | | | | 2,097 | | 44 | | Card rewards program | | | 22,114 | | | 29,961 | | | 24,860 | | | (7,847) | | (26) | | | | 5,101 | | 21 | | Other | | | 47,339 | | | 50,661 | | | 59,082 | | | (3,322) | | (7) | | | | (8,421) | | (14) | | Total noninterest expense | | $ | 367,672 | | $ | 370,437 | | $ | 364,953 | | $ | (2,765) | | (1) | % | | $ | 5,484 | | 2 | % |
Total noninterest expense was $367.7 million for the year ended December 31, 2020, a decrease of $2.8 million or 1% as compared to the same period in 2019. Total noninterest expense was $370.4 million for the year ended December 31, 2019, an increase of $5.5 million or 2% as compared to the same period in 2018. Total noninterest Salaries and employee benefits expense was $365.0$174.2 million for the year ended December 31, 2018,2020, an increase of $17.4$1.1 million or 5%1% as compared to the same period in 2017.
2019. This increase was primarily due to a $7.6 million increase in base salaries and related payroll taxes, a $1.5 million increase in incentive compensation and a $1.5 million increase in retirement plan expenses. This was partially offset by a $7.1 million increase in deferred loan origination costs, a $1.6 million decrease in group health plan costs and a $0.9 million decrease in other compensation, primarily related to bonuses resulting from the initial public offering and related stock-based compensation. Salaries and employee benefits expense was $173.1 million for the year ended December 31, 2019, an increase of $5.9 million or 4% as compared to the same period in 2018. This increase was primarily due to a $4.5 million increase in incentive compensation and a $1.7 million increase in other compensation, primarily related to costs incurred for a nonrecurring payment pursuant to the Bank’s Executive Change-in-Control Retention Plan, partially offset by a $0.5 million decrease in base salaries and related payroll taxes. Salaries Contracted services and employee benefits expense was $167.2professional fees were $60.5 million for the year ended December 31, 2018,2020, an increase of $4.1$4.2 million or 2%8% as compared to the same period in 2017.2019. This increase was primarily due to a $7.7$2.3 million increase in base salariescontracted data processing, primarily related to system upgrades and related payroll taxes andproduct enhancements, a $2.4$1.4 million increase in group health plan costs. This was partially offset byaudit, legal and consultant fees, and a $2.4$0.8 million increase in deferred loan origination costs, a $2.1 million decrease in incentive compensationoutside services, primarily attributable to marketing and a $1.4 million decrease in other compensation, primarily related to bonuses to employees due to the benefits from the Tax Act being passed in December 2017.
new customer services. Contracted services and professional fees were $56.3 million for the year ended December 31, 2019, an increase of $6.5 million or 13% as compared to the same period in 2018. This increase was primarily due to a $5.3 million increase in contracted data processing, primarily related to system upgrades and product enhancements, and a $2.6 million increase in outside services, primarily attributable to marketing and new customer services. This was partially offset by a $1.6 million decrease in audit, legal and consultant fees. Contracted services and professional fees were $49.8 Occupancy expense was $28.8 million for the year ended December 31, 2018,2020, an increase of $4.8$0.1 million or 11%less than 1% as compared to the same period in 2017. This increase was primarily due to a $2.5 million increase in outside services, primarily attributable to marketing and new customer services and a $1.9 million increase in contracted data processing, primarily related to new merchant billing services.
2019. Occupancy expense was $28.8 million for the year ended December 31, 2019, an increase of $1.4 million or 5% as compared to the same period in 2018. This increase was primarily due to a $0.9 million decrease in net sublease rental income and a $0.6 million increase in real property tax expense. Occupancy Equipment expense was $27.3$20.3 million for the year ended December 31, 2018,2020, an increase of $3.8$2.9 million or 16%17% as compared to the same period in 2017.2019. This increase was primarily due to a $2.6 million decrease in net sublease rental income, a $1.5 million increase in buildingtechnology-related license and maintenance expensefees and a $0.6$1.2 million increase in utilities expense. This was partially offset by a $0.9 million decrease in ATM rent expense.
furniture and equipment depreciation. Equipment expense was $17.3 million for the year ended December 31, 2019, a decrease of $0.4 million or 2% as compared to the same period in 2018. Equipment expense was $17.7 Regulatory assessment and fees were $8.7 million for the year ended December 31, 2018,2020, an increase of $0.5$1.3 million or 3%17% as compared to the same period in 2017.
2019. This increase was primarily due to a $1.3 million increase in the FDIC insurance assessment. Regulatory assessment and fees were $7.4 million for the year ended December 31, 2019, a decrease of $6.8 million or 48% as compared to the same period in 2018. Regulatory assessment and fees were $14.2 millionThe decrease was primarily based on the exclusion of an additional surcharge for the year ended December 31, 2018, a decrease of $0.7 million or 5% as compared to the same period in 2017.2019. Starting in the third quarter of 2016, there was a change inthe FDIC changed the calculation of the FDICits insurance assessment and the adoption ofrequired an additional surcharge, which resulted in a higher insurance rate. This additional surcharge required by the FDIC ended during the third quarter of 2018. The decrease of the regulatory assessment Advertising and feesmarketing expense was $5.7 million for the year ended December 31, 20192020, a decrease of $1.2 million or 18% as compared to the same period in 20182019. This decrease was based on the exclusion of the additional surcharge for all twelve months of 2019. Theprimarily due to a decrease of the regulatory assessment and fees for the year ended December 31, 2018 as comparedin advertising costs related to the same period in 2017 was based on the exclusion of the additional surcharge for the last three months of 2018.
direct mailing programs. Advertising and marketing expense was $6.9 million for the year ended December 31, 2019, an increase of $2.1 million or 44% as compared to the same period in 2018. This increase was primarily due to a $1.8 million decrease in vendor reimbursements and a $0.3 million increase in advertising costs. Advertising and marketing Card rewards program expense was $4.8$22.1 million for the year ended December 31, 2018,2020, a decrease of $1.4$7.8 million or 22%26% as compared to the same period in 2017.2019. This decrease was primarily due to a $2.0$3.8 million increasedecrease in vendor reimbursements, partially offsetpriority rewards card redemptions, a $2.8 million decrease in interchange fees paid to our credit card partners and a $1.2 million decrease in credit card cash reward redemptions. Decreased transactions and spending by our customers as a $0.6 million increase in advertising costs.
result of the COVID-19 pandemic led to decreased expenses for each of the aforementioned card reward programs. Card rewards program expense was $30.0 million for the year ended December 31, 2019, an increase of $5.1 million or 21% as compared to the same period in 2018. This increase was primarily due to a $2.3 million increase in priority rewards card redemptions, a $2.1 million increase in interchange fees paid to our credit card partners and a $0.6 million increase in credit card cash reward redemptions. Card rewards program Other noninterest expense was $24.9$47.3 million for the year ended December 31, 2018, an increase2020, a decrease of $1.5$3.3 million or 6%7% as compared to the same period in 2017.2019. This increasedecrease was primarily due to a $1.6$2.8 million decrease in pension-related expenses, a $1.0 million decrease in charitable contributions, a $0.8 million decrease in travel expenses, and a $0.6 million decrease in collection fees on delinquent consumer loans. This was partially offset by a $2.1 million increase in credit card cash reward redemptions.
software amortization expense. Other noninterest expense was $50.7 million for the year ended December 31, 2019, a decrease of $8.4 million or 14% as compared to the same period in 2018. This decrease was primarily due to a $4.1 million settlement recorded in 2018 in connection with a putative class action lawsuit against the Company, a $1.7 million decrease in operational losses (which includes losses as a result of bank error, fraud, items processing, or theft), a $0.9 million decrease in other tax expense, a $0.8 million decrease in software amortization expense and a $0.5 million decrease in shipping and delivery expenses. Other noninterest expense was $59.1 million for the year ended December 31, 2018, an increase of $4.8 million or 9% as compared to the same period in 2017. This increase was primarily due to a $4.1 million settlement recorded in connection with the class action lawsuit noted above, a $1.0 million increase in operational losses (which includes losses as a result of bank error, fraud, items processing, or theft), a $0.9 million increase in charitable contributions and a $0.7 million loss on our funding swap related to a decrease in the conversion rate of our Visa Class B restricted shares sold in 2016. This was partially offset by a $2.1 million decrease in pension-related expenses. Provision for Income Taxes The provision for income taxes was $58.0 million (reflecting an effective tax rate of 23.79%) for the year ended December 31, 2020, compared with a provision for income taxes of $97.3 million (reflecting an effective tax rate of 25.49%) for the year ended December 31, 2019, compared with a provision for income taxes of $93.8 million (reflecting an effective tax rate of 26.18%) for the same period in 2018.2019. Additional information about the provision for income taxes is presented in “Note 16. Income Taxes” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data. Analysis of Business Segments Our business segments are Retail Banking, Commercial Banking, and Treasury and Other. Table 5 summarizes net income (loss) from our business segments for the years ended December 31, 2020, 2019 2018 and 2017.2018. Additional information about operating segment performance is presented in “Note 23. Reportable Operating Segments” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data. In 2019, the Company made changes to the internal measurement of segment operating profits for the purpose of evaluating segment performance and resource allocation. The primary reason for the change was to align deposit balances within the business segment that directly manages them. Specifically, certain deposit balances previously included as part of the Retail Banking segment have been reclassified to the Commercial Banking segment. The reallocation of select deposit balances affected net interest income, net interest income after provision for loan and lease losses, noninterest income, provision for income taxes and net income. The Company has reported its selected financial information using the new deposit balance alignments for the year ended December 31, 2019. The Company has restated the selected financial information for the years ended December 31, 2018 and 2017 in order to conform with the current presentation.
Additionally, during the fourth quarter of 2019 the Company changed its assumptions embedded in allocating deposit costs to the business segments. The Company has reported its selected financial information using the new deposit cost assumptions starting with the fourth quarter of 2019.
| | | | | | | | | | | | | | | | | | | | Business Segment Net Income | | | | | | | | | Table 5 | | | | | | | | | | Table 5 | | | Year Ended December 31, | | | Year Ended December 31, | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | | 2020 | | 2019 | | 2018 | Retail Banking | | $ | 204,520 | | $ | 204,865 | | $ | 138,549 | | | $ | 158,764 | | $ | 204,520 | | $ | 204,865 | Commercial Banking | | | 92,632 | | | 94,344 | | | 69,571 | | | | 58,878 | | | 92,632 | | | 94,344 | Treasury and Other | | | (12,760) | | | (34,815) | | | (24,438) | | | | (31,888) | | | (12,760) | | | (34,815) | Total | | $ | 284,392 | | $ | 264,394 | | $ | 183,682 | | | $ | 185,754 | | $ | 284,392 | | $ | 264,394 |
Retail Banking. Our Retail Banking segment includes the financial products and services we provide to consumers, small businesses and certain commercial customers. Loan and lease products offered include residential and commercial mortgage loans, home equity lines of credit, automobile loans and leases, personal lines of credit, installment loans, and small business loans and leases. Deposit products offered include checking, savings and time deposit accounts. Our Retail Banking segment also includes our wealth management services. Products and services from Retail Banking are delivered to customers through 5854 banking locations throughout the State of Hawaii, Guam and Saipan. Net income for the Retail Banking segment was $158.8 million for the year ended December 31, 2020, a decrease of $45.8 million or 22% as compared to the same period in 2019. The decrease in net income for the Retail Banking segment was primarily due to a $46.5 million increase in the Provision, a $19.6 million decrease in net interest income and a $3.0 million increase in noninterest expense, partially offset by a $20.7 million decrease in the provision for income taxes and a $2.6 million increase in noninterest income. The increase in the Provision was primarily due to higher expected credit losses as a result of COVID-19 and its impact on our customers. The decrease in net interest income was primarily due to a decrease in transfer pricing credits on interest expenses from deposits as a result of lower yields on our deposit portfolio, partially offset by an increase in loan fees. The increase in noninterest expense was primarily due to higher overall expenses that were allocated to the Retail Banking segment and an increase in occupancy expense, partially offset by a decrease in salaries and employee benefits expense. The decrease in the provision for income taxes was primarily due to the decrease in pretax income. The increase in noninterest income was primarily due to increases in gains on the sale of residential loans and mortgage servicing rights, partially offset by a decrease in overdraft and checking account fees, an increase in amortization on mortgage servicing rights and a decrease in other service charges and fees. The increase in total assets for the Retail Banking segment was primarily due to PPP loans, partially offset by the sale of residential mortgages and decreases in consumer loans. Net income for the Retail Banking segment was $204.5 million for the year ended December 31, 2019, a decrease of $0.3 million as compared to the same period in 2018. The decrease in net income for the Retail Banking segment was primarily due to a $7.1 million decrease in net interest income and a $2.5 million increase in noninterest expense, partially offset by a $5.7 million increase in noninterest income, a $2.5 million decrease in the Provision and a $1.1 million decrease in the provision for income taxes. The decrease in net interest income was primarily due to lower spreads on our loan portfolio. The increase in noninterest expense was primarily due to higher overall expenses that were allocated to the Retail Banking segment, and an increase in occupancy expense and salaries and employee benefits expense, partially offset by a 2018 charge related to a settlement agreement to resolve a putative class action lawsuit against the Company, and a decrease in regulatory assessment and fees and contracted services and professional fees. The increase in noninterest income was primarily due to an increase in trust and investment services and service charges on deposit accounts. The decrease in the Provision was partially due to improvements in residential mortgage troubled loan trends. The decrease in the provision for income taxes was primarily due to the decrease in netpretax income. The increase in total assets for the Retail Banking segment was primarily due to growth in our residential real estate loans which benefited from the demand by owner occupants to refinance in a low interest rate environment.
Net income for the Retail Banking segment was $204.9 million for the year ended December 31, 2018, an increase of $66.3 million or 48% as compared to the same period in 2017. The increase in net income for the Retail Banking segment was primarily due to a $59.8 million decrease in the provision for income taxes and a $10.4 million increase in net interest income, partially offset by a $2.2 million increase in noninterest expense and a $1.9 million increase in the Provision. The decrease in the provision for income taxes was primarily due to the reduction of the corporate tax rate as a result of the Tax Act. The increase in net interest income was primarily due to higher earnings credits as a result of higher average balances and margins in our deposit portfolio. The increase in noninterest expense was primarily due to a charge related to a settlement agreement to resolve a putative class action lawsuit against the Company and an increase in salaries
and employee benefits expense, occupancy expense and contracted services and professional fees, partially offset by lower expenses that were allocated to the Retail Banking segment. The increase in total assets for the Retail Banking segment was primarily due to strong residential real estate loan growth, reflective of the strong housing market and economic conditions in Hawaii during 2018.
Commercial Banking. Our Commercial Banking segment includes our corporate banking, residential and commercial real estate loans, commercial lease financing, automobile loans and auto dealer financing, business deposit products and credit cards that we provide primarily to middle market and large companies in Hawaii, Guam, Saipan and California. Net income for the Commercial Banking segment was $58.9 million for the year ended December 31, 2020, a decrease of $33.8 million or 36% as compared to the same period in 2019. The decrease in net income for the Commercial Banking segment was primarily due to a $46.4 million increase in the Provision and a $7.9 million decrease in net interest income, partially offset by a $15.1 million decrease in the provision for income taxes and a $4.6 million increase in noninterest income. The increase in the Provision was primarily due to higher expected credit losses as a result of COVID-19 and its impact on our customers. The decrease in net interest income was primarily due to a decrease in transfer pricing credits on interest expenses from deposits as a result of lower yields on our deposit portfolio. The decrease in the provision for income taxes was primarily due to the decrease in pretax income. The increase in noninterest income was primarily due to gains on the sale of loans and increases in customer-related interest rate swap fees and volume-based incentives, partially offset by decreases in credit and debit card fees and other service charges and fees. The decrease in total assets for the Commercial Banking segment was primarily due to decreases in our Shared National Credits, dealer flooring portfolios, indirect automobile loans and credit card balances, partially offset by an increase in construction loans and PPP loans. Net income for the Commercial Banking segment was $92.6 million for the year ended December 31, 2019, a decrease of $1.7 million or 2% as compared to the same period in 2018. The decrease in net income for the Commercial Banking segment was primarily due to a $7.3 million decrease in noninterest income and a $1.6 million increase in noninterest expense, partially offset by a $5.9 million decrease in the Provision. The decrease in noninterest income was primarily due to a decrease in customer-related interest rate swap fees, fee income from our cash management services, volume-based incentives, merchant service revenues, lower gains on the sale of leased equipment and loss on the sale of residential loans to government-sponsored enterprises, partially offset by an increase in interchange settlement fees. The increase in noninterest expense was primarily due to an increase in card reward expenses and higher expenses that were allocated to the Commercial Banking segment, partially offset by a decrease in regulatory assessment and fees, operational losses and other taxes. The decrease in the Provision was partially due to the sale of $408.9 million commercial and industrial loans during the year ended December 31, 2019. The decrease in total assets for the Commercial Banking segment was primarily due to the sale of commercial and industrial loans and a decrease in other assets, partially offset by growth in our commercial real estate portfolio, reflective of the demand by both investors and owner occupants to refinance and/or to acquire new real estate assets. Net income for the Commercial Banking segment was $94.3 million for the year ended December 31, 2018, an increase of $24.8 million or 36% as compared to the same period in 2017. The increase in net income for the Commercial Banking segment was primarily due to a $25.2 million decrease in the provision for income taxes, a $8.6 million increase in net interest income and a $5.3 million increase in noninterest income, partially offset by a $12.6 million increase in noninterest expense and a $1.8 million increase in the Provision. The decrease in the provision for income taxes was primarily due to the reduction of the corporate tax rate as a result of the Tax Act. The increase in net interest income was primarily due to higher spread on our deposit portfolio and higher interest income from our commercial lending portfolio, particularly our commercial real estate loans. The increase in noninterest income was primarily due to an increase in merchant service revenues and interchange settlement fees, a gain on the sale of leased equipment and an increase in fee income from our cash management services, partially offset by an increase in network association dues. The increase in noninterest expense was primarily due to higher expenses that were allocated to the Commercial Banking segment and an increase in card reward expenses, contracted services and professional fees and operational losses. The increase in total assets for the Commercial Banking segment was primarily due to growth in our commercial real estate portfolio, reflective of a strong real estate market in Hawaii during 2018.
Treasury and Other. Our Treasury and Other segment includes our treasury business, which consists of corporate asset and liability management activities, including interest rate risk management. The assets and liabilities (and related interest income and expense) of our treasury business consist of interest-bearing deposits, investment securities, federal funds sold and purchased, government deposits, short and long-term borrowings and bank-owned properties. Our primary sources of noninterest income are from BOLI, net gains from the sale of investment securities, foreign exchange income related to customer driven currency requests from merchants and island visitors and management of bank-owned properties in Hawaii and Guam. The net residual effect of the transfer pricing of assets and liabilities is included in Treasury and Other, along with the elimination of intercompany transactions. Other organizational units (Technology, Operations, Credit and Risk Management, Human Resources, Finance, Administration, Marketing, and Corporate and Regulatory Administration) provide a wide range of support to our other income earning segments. Expenses incurred by these support units are charged to the applicable business segments through an internal cost allocation process. Net loss for the Treasury and Other segment was $31.9 million for the year ended December 31, 2020, an increase in net loss of $19.1 million as compared to the same period in 2019. The increase in net loss was primarily due to a $15.1 million increase in the Provision, a $10.2 million decrease in net interest income and a $2.3 million decrease in noninterest income, partially offset by a $4.9 million decrease in noninterest expense and a $3.5 million increase in the benefit for income taxes. The increase in the Provision was primarily due to higher expected credit losses as a result of COVID-19 and its impact on our customers. The decrease in net interest income was primarily due to lower earnings credits as a result of lower average yields in our loan portfolio and lower average yields in our investment securities portfolio and interest-bearing deposits in other banks, partially offset by a decrease in transfer pricing charges as a result of lower yields on our deposit portfolio. The decrease in noninterest income was primarily due to decreases in ATM surcharge fees, ATM interchange fees from customers and other service charges and fees, and insurance settlement income received in 2019, partially offset by a decrease in net losses on the sale of investment securities as a result of the investment portfolio restructuring and sale of 48 investment securities in January 2019. The decrease in noninterest expense was primarily due to lower overall expenses that were allocated to the Treasury and Other segment, and decreases in pension-related expenses, advertising and marketing expenses, charitable contributions and occupancy expense, partially offset by increases in equipment expense, salaries and employee benefits expense, software amortization expense and contracted services and professional fees. The increase in the benefit for income taxes was primarily due to the increase in pretax loss. The increase in total assets for the Treasury and Other segment was primarily due to increases in our investment securities portfolio and interest-bearing deposits in other banks. Net loss for the Treasury and Other segment was $12.8 million for the year ended December 31, 2019, a decrease in net loss of $22.1 million or 63% as compared to the same period in 2018. The decrease in net loss was primarily due to a $15.1 million increase in noninterest income and a $13.3 million increase in net interest income, partially offset by a $5.0 $5.0 million decrease in the benefit for income taxes and a $1.4 million increase in noninterest expense. The increase in noninterest income was primarily due to the OTTI losses on available-for-sale securities recorded in 2018 and higher BOLI income, partially offset by a decrease in net gains recognized in income related to derivative contracts. The increase in net interest income was primarily due to higher earnings credits as a result of higher average balances and yields in our loan portfolio, partially offset by lower average balances in our investment securities portfolio. The decrease in the benefit for income taxes was primarily due to the decrease in net loss. The increase in noninterest expense was primarily due to higher contracted services and professional fees, salaries and employee benefits expenses and advertising and marketing expenses, partially offset by lower overall expenses that were allocated to the Treasury and Other segment and a decrease in regulatory assessment and fees. The decrease in total assets for the Treasury and Other segment was primarily due to a decrease in our investment securities portfolio.
Net loss for the Treasury and Other segment was $34.8 million for the year ended December 31, 2018, an increase in net loss of $10.4 million or 42% as compared to the same period in 2017. The increase in net loss was primarily due to a $32.2 million decrease in noninterest income and a $2.6 million increase in noninterest expense, partially offset by an $18.5 million increase in net interest income and a $5.9 million increase in the benefit for income taxes. The decrease in noninterest income was primarily due to the OTTI losses on available-for-sale securities and a decrease in gains related to the sale of bank properties, BOLI income, income due to adjustments to certain liabilities assumed as a result of the Reorganization Transactions and insurance proceeds from severe weather which affected the Hawaiian Islands, partially offset by an increase in net gains recognized in income related to derivative contracts. The increase in noninterest expense was primarily due to an increase in occupancy expense, salaries and employee benefits expense, contracted services and professional fees, charitable contributions and a loss on our funding swap related to a decrease in the conversion rate of our Visa Class B restricted shares sold in 2016. This was partially offset by a decrease in pension-related expenses and advertisings costs. The increase in net interest income was primarily due to higher earnings credits as a result of higher average balances in our loan portfolio, partially offset by higher expense charges as a result of higher average balances and margins in our deposit portfolio. The increase in the benefit for income taxes was primarily due to the reduction of the corporate tax rate as a result of the Tax Act. The decrease in total assets for the Treasury and Other segment was primarily due to a decrease in our investment securities portfolio.
Analysis of Financial Condition Liquidity Liquidity refers to our ability to maintain cash flow that is adequate to fund operations and meet present and future financial obligations through either the sale or maturity of existing assets or by obtaining additional funding through liability management. We consider the effective and prudent management of liquidity to be fundamental to our health and strength. Our objective is to manage our cash flow and liquidity reserves so that they are adequate to fund our obligations and other commitments on a timely basis and at a reasonable cost. Liquidity is managed to ensure stable, reliable and cost-effective sources of funds to satisfy demand for credit, deposit withdrawals and investment opportunities. Funding requirements are impacted by loan originations and refinancings, deposit balance changes, liability issuances and settlements and off-balance sheet funding commitments. We consider and comply with various regulatory and internal guidelines regarding required liquidity levels and periodically monitor our liquidity position in light of the changing economic environment and customer activity. Based on periodic liquidity assessments, we may alter our asset, liability and off-balance sheet positions. The Company’s Asset Liability Management Committee (“ALCO”) monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change. This process, combined with our ability to raise funds in money and capital markets and through private placements, provides flexibility in managing the exposure to liquidity risk. Immediate liquid resources are available in cash which is primarily on deposit with the Federal Reserve Bank of San Francisco (the “FRB”). As of December 31, 20192020 and 2018,2019, cash and cash equivalents were $0.7$1.0 billion and $1.0$0.7 billion, respectively. Potential sources of liquidity also include investment securities in our available-for-sale portfolio. The carrying value of our available-for-sale investment securities were $4.1$6.1 billion and $4.5$4.1 billion as of December 31, 20192020 and 2018,2019, respectively. As of December 31, 20192020 and 2018,2019, we maintained our excess liquidity primarily in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac. As of December 31, 2019,2020, our available-for-sale investment securities portfolio was comprised of securities with a weighted average life of approximately 3.74.8 years. These funds offer substantial resources to meet either new loan demand or to help offset reductions in our deposit funding base. Liquidity is further enhanced by our ability to pledge loans to access secured borrowings from the FHLB and the FRB. As of December 31, 2019,2020, we have borrowing capacity of $1.7$2.0 billion from the FHLB and $596.8 million$1.1 billion from the FRB based on the amount of collateral pledged. Our core deposits have historically provided us with a long-term source of stable and relatively lower cost of funding. Our core deposits, defined as all deposits exclusive of time deposits exceeding $250,000, totaled $15.1$17.9 billion and $15.3$15.1 billion as of December 31, 20192020 and 2018,2019, which represented 92%93% and 89%92%, respectively, of our total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company, however, deposit levels could decrease if interest rates increase significantly or if corporate customers increase investing activities and reduce deposit balances. The Company’s routine funding requirements are expected to consist primarily of general corporate needs and capital to be returned to our shareholders. We expect to meet these obligations from dividends paid by the Bank to the Parent. Additional sources of liquidity available to us include selling residential real estate loans in the secondary market, taking out short- and long-term borrowings and the issuance ofissuing long-term debt and equity securities. At the start of the pandemic, we increased our liquidity position through additional public time deposits in anticipation of a surge in funding needs due to our participation in the PPP and other additional liquidity needs. While our public time deposits have since decreased from the first and second quarters of 2020, we have continued to maintain strong levels of liquidity as of December 31, 2020. Investment Securities Table 6 presents the estimated fair value of our available-for-sale investment securities portfolio as of December 31, 2020, 2019 2018 and 2017:2018: | | | | | | | | | | | | | | | | | | | Investment Securities | | | | | | | | | Table 6 | | | | | | | | | Table 6 | | | December 31, | | December 31, | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2020 | | 2019 | | 2018 | U.S. Treasury securities | | $ | 29,888 | | $ | 389,470 | | $ | 392,255 | | U.S. Treasury and government agency debt securities | | | $ | 171,421 | | $ | 29,888 | | $ | 389,470 | Government-sponsored enterprises debt securities | | | 101,439 | | | 241,594 | | | 242,601 | | | — | | | 101,439 | | | 241,594 | Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | Residential - Government agency | | | 291,209 | | | 411,536 | | | 351,390 | | | 160,462 | | | 291,209 | | | 411,536 | Residential - Government-sponsored enterprises | | | 399,492 | | | 150,847 | | | 174,741 | | | 447,200 | | | 399,492 | | | 150,847 | Commercial - Government agency | | | | 599,650 | | | — | | | — | Commercial - Government-sponsored enterprises | | | 101,719 | | | — | | | — | | | 932,157 | | | 101,719 | | | — | Collateralized mortgage obligations: | | | | | | | | | | | | | | | | | | | Government agency | | | 2,381,278 | | | 2,682,449 | | | 3,290,474 | | | 1,933,553 | | | 2,381,278 | | | 2,682,449 | Government-sponsored enterprises | | | 770,619 | | | 602,592 | | | 762,718 | | | 1,826,972 | | | 770,619 | | | 602,592 | Debt securities issued by states and political subdivisions | | | — | | | 19,854 | | | 20,479 | | | — | | | — | | | 19,854 | Total available-for-sale securities | | $ | 4,075,644 | | $ | 4,498,342 | | $ | 5,234,658 | | $ | 6,071,415 | | $ | 4,075,644 | | $ | 4,498,342 |
Table 7 presents the maturity distribution at amortized cost and weighted-average yield to maturity of our available-for-sale investment securities portfolio as of December 31, 2019:2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Maturities and Weighted-Average Yield on Securities(1) | Maturities and Weighted-Average Yield on Securities(1) | | | Table 7 | Maturities and Weighted-Average Yield on Securities(1) | | | Table 7 | | | 1 Year or Less | | After 1 Year - 5 Years | | After 5 Years - 10 Years | | Over 10 Years | | Total | | 1 Year or Less | | After 1 Year - 5 Years | | After 5 Years - 10 Years | | Over 10 Years | | Total | | | | | Weighted | | | | Weighted | | | | Weighted | | | | Weighted | | | | Weighted | | | | | | | Weighted | | | | Weighted | | | | Weighted | | | | Weighted | | | | Weighted | | | | | | | | Average | | | | Average | | | | Average | | | | Average | | | | Average | | Fair | | | | Average | | | | Average | | | | Average | | | | Average | | | | Average | | Fair | (dollars in millions) | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Value | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Value | As of December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2020 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Available-for-sale securities | | | | | | | | | | | | | | | | | | | | | | | | | | | ��� | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Treasury securities | | $ | 29.8 | | 2.40 | % | $ | — | | — | % | $ | — | | — | % | $ | — | | — | % | $ | 29.8 | | 2.40 | % | $ | 29.9 | | Government-sponsored enterprises debt securities(3) | | | 25.0 | | 2.00 | | | 76.7 | | 1.85 | | | — | | — | | | — | | — | | | 101.7 | | 1.88 | | | 101.4 | | U.S. Treasury and government agency debt securities | | | $ | — | | — | % | $ | 38.2 | | 0.82 | % | $ | 83.6 | | 1.05 | % | $ | 48.3 | | 1.65 | % | $ | 170.1 | | 1.17 | % | $ | 171.4 | Mortgage-backed securities(2): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential - Government agency | | | — | | — | | | 139.3 | | 2.80 | | | 150.8 | | 2.29 | | | — | | — | | | 290.1 | | 2.54 | | | 291.2 | | | — | | — | | | 155.2 | | 2.35 | | | — | | — | | | — | | — | | | 155.2 | | 2.35 | | | 160.5 | Residential - Government-sponsored enterprises | | | — | | — | | | 318.5 | | 2.65 | | | — | | — | | | 76.6 | | 2.79 | | | 395.1 | | 2.68 | | | 399.5 | | | — | | — | | | 368.6 | | 2.24 | | | 65.7 | | 1.32 | | | — | | — | | | 434.3 | | 2.11 | | | 447.2 | Commercial - Government agency | | | | — | | — | | | 465.8 | | 2.20 | | | 117.4 | | 1.68 | | | — | | — | | | 583.2 | | 2.10 | | | 599.6 | Commercial - Government-sponsored enterprises | | | — | | — | | | 29.4 | | 2.99 | | | 72.4 | | 2.39 | | | — | | — | | | 101.8 | | 2.57 | | | 101.7 | | | — | | — | | | 70.2 | | 1.95 | | | 539.7 | | 1.50 | | | 321.2 | | 1.53 | | | 931.1 | | 1.55 | | | 932.2 | Collateralized mortgage obligations(2): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Government agency | | | 10.4 | | 1.64 | | | 2,308.3 | | 2.17 | | | 71.5 | | 2.06 | | | — | | — | | | 2,390.2 | | 2.17 | | | 2,381.3 | | | 74.9 | | 1.91 | | | 1,671.8 | | 1.62 | | | 155.6 | | 1.20 | | | — | | — | | | 1,902.3 | | 1.60 | | | 1,933.5 | Government-sponsored enterprises | | | — | | — | | | 720.1 | | 2.24 | | | — | | — | | | 51.9 | | 3.11 | | | 772.0 | | 2.29 | | | 770.6 | | | 55.9 | | 2.08 | | | 994.2 | | 1.43 | | | 758.7 | | 1.38 | | | — | | — | | | 1,808.8 | | 1.43 | | | 1,827.0 | Total available-for-sale securities as of December 31, 2019 | | $ | 65.2 | | 2.13 | % | $ | 3,592.3 | | 2.25 | % | $ | 294.7 | | 2.26 | % | $ | 128.5 | | 2.92 | % | $ | 4,080.7 | | 2.27 | % | $ | 4,075.6 | | Total available-for-sale securities as of December 31, 2020 | | | $ | 130.8 | | 1.99 | % | $ | 3,764.0 | | 1.74 | % | $ | 1,720.7 | | 1.41 | % | $ | 369.5 | | 1.55 | % | $ | 5,985.0 | | 1.64 | % | $ | 6,071.4 |
(1) | Weighted-average yields were computed on a fully taxable-equivalent basis. |
(2) | Maturities for mortgage-backed securities and collateralized mortgage obligations anticipate future prepayments. |
(3) | Maturities for government-sponsored enterprises debt securities purchased at a premium are categorized by their first call date. |
The fair value of our available-for-sale investment securities portfolio was $4.1$6.1 billion as of December 31, 2019, a decrease2020, an increase of $422.7 million$2.0 billion or 9%49% compared to December 31, 2018.2019. The lowerhigher balances in investment securities were primarily due to redeploying runoff to fund growth in loans. Additionally, a restructuring of the investment portfolio was conducted in January 2019, whereby sales and purchases were conducted to improve the risk profile and return of the investment portfolio.deploying excess balance sheet liquidity. Our available-for-sale investment securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss), unless a security is deemed to be OTTI. or through the Provision.
As of December 31, 2019,2020, we maintained all of our investment securities in the available-for-sale category recorded at fair value in the consolidated balance sheets, with $3.2$3.8 billion invested in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac. Our available-for-sale portfolio also included $792.4 million$2.1 billion in mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac $101.4and Municipal Housing Authorities and $171.4 million in debt securities issued by government-sponsored enterprises (FHLB and Federal Farm Credit Banks Funding Corporation callable bonds) and $29.9 million inthe U.S. Treasury securities.and government agencies (U.S. International Development Finance Corporation bonds). We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability and the level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities and change the composition of our investment securities portfolio. Gross unrealized gains in our investment securities portfolio were $19.0$97.1 million and $0.1$19.0 million as of December 31, 20192020 and 2018,2019, respectively. Gross unrealized losses in our investment securities portfolio were $24.0$10.7 million and $142.2$24.0 million as of December 31, 2020 and 2019, and 2018, respectively. LowerHigher unrealized lossesgains in our investment securities portfolio were primarily due to lower market interest rates as of the year ended December 31, 2019,2020, relative to December 2018,31, 2019, resulting in higher valuation. The lower grosshigher unrealized lossgain positions were primarily related to our mortgage-backed securities, commercial mortgage-backed securities and collateralized mortgage obligations, the fair value of which is sensitive to changes in market interest rates. We conduct a regular assessment of our investment securities portfolio to determine whether any securities are OTTI. When assessing unrealized losses for OTTI, we considerimpaired. If this assessment indicates that a credit loss exists, the naturepresent value of cash flows expected to be collected from the security is compared to the amortized cost basis of the investment,security. If the financial conditionpresent value of the issuer, the extent and duration of unrealized losses, expected cash flows of underlying assetsexpected to be collected is less than the amortized cost basis, a credit loss exists and market conditions. As ofthe ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through the ACL is recognized in other comprehensive income. For the year ended December 31, 2019,2020, we have no plansdid not record any credit losses related to sellour investment securities with unrealized losses, and believe it is more likely than not that we would not be required to sell such securities before recovery of their amortized cost, which may be at maturity.portfolio. We are required to hold non-marketable equity securities, comprised of FHLB stock, as a condition of our membership in the FHLB system. Our FHLB stock is accounted for at cost, which equals par or redemption value. As of both December 31, 20192020 and 2018,2019, we held $18.1 million and $34.1 million in FHLB stock, respectively, which is recorded as a component of other assets in our consolidated balance sheets. See “Note 3. Investment Securities” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information on our investment securities portfolio. Loans and Leases Table 8 presents the composition of our loan and lease portfolio by major categories as of December 31 for each of the last five years: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and Leases | | | | | | | | | | | | | | | Table 8 | | | | | | | | | | | | | | | | Table 8 | | | | December 31, | | | December 31, | | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Commercial and industrial | | $ | 2,743,242 | | $ | 3,208,760 | | $ | 3,135,266 | | $ | 3,239,600 | | $ | 3,057,455 | | | $ | 3,019,507 | | $ | 2,743,242 | | $ | 3,208,760 | | $ | 3,135,266 | | $ | 3,239,600 | | Commercial real estate | | | 3,463,953 | | | 2,990,783 | | | 2,667,597 | | | 2,343,495 | | | 2,164,448 | | | | 3,392,676 | | | 3,463,953 | | | 2,990,783 | | | 2,667,597 | | | 2,343,495 | | Construction | | | 519,241 | | | 626,757 | | | 632,911 | | | 450,012 | | | 367,460 | | | | 735,819 | | | 519,241 | | | 626,757 | | | 632,911 | | | 450,012 | | Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential mortgage | | | 3,768,936 | | | 3,527,101 | | | 3,226,601 | | | 2,921,766 | | | 2,668,147 | | | | 3,690,218 | | | 3,768,936 | | | 3,527,101 | | | 3,226,601 | | | 2,921,766 | | Home equity line | | | 893,239 | | | 912,517 | | | 863,452 | | | 874,693 | | | 864,280 | | | | 841,624 | | | 893,239 | | | 912,517 | | | 863,452 | | | 874,693 | | Total residential | | | 4,662,175 | | | 4,439,618 | | | 4,090,053 | | | 3,796,459 | | | 3,532,427 | | | | 4,531,842 | | | 4,662,175 | | | 4,439,618 | | | 4,090,053 | | | 3,796,459 | | Consumer | | | 1,620,556 | | | 1,662,504 | | | 1,586,476 | | | 1,510,772 | | | 1,401,561 | | | | 1,353,842 | | | 1,620,556 | | | 1,662,504 | | | 1,586,476 | | | 1,510,772 | | Lease financing | | | 202,483 | | | 147,769 | | | 165,066 | | | 180,040 | | | 198,679 | | | | 245,411 | | | 202,483 | | | 147,769 | | | 165,066 | | | 180,040 | | Total loans and leases | | $ | 13,211,650 | | $ | 13,076,191 | | $ | 12,277,369 | | $ | 11,520,378 | | $ | 10,722,030 | | | $ | 13,279,097 | | $ | 13,211,650 | | $ | 13,076,191 | | $ | 12,277,369 | | $ | 11,520,378 | |
Total loans and leases were $13.2$13.3 billion as of December 31, 2019,2020, an increase of $135.5$67.4 million or 1% from December 31, 20182019, with increases in commercial real estateand industrial loans, residential real estateconstruction loans and lease financing. The increase in total loans and leases was primarily due to our participation in the PPP which had a total amortized cost basis of $801.2 million as of December 31, 2020. While we have not experienced declines in our loan portfolio in 2020, it is possible that the effects of COVID-19 on the economy could result in less demand for our loan products. Commercial and industrial loans are made primarily to corporations, middle market and small businesses for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes. We also offer a variety of automobile dealer flooring lines to our customers in Hawaii and California to assist with the financing of their inventory. Commercial and industrial loans were $2.7$3.0 billion as of December 31, 2019, a decrease2020, an increase of $465.5$276.3 million or 15%10% from December 31, 2018. The decrease2019. This increase was primarily due to the sale of $408.9PPP loans totaling $801.2 million, offset by decreases in loansour Shared National Credit and dealer flooring portfolios during the year and greater than expected prepayments.year. Commercial real estate loans are secured by first mortgages on commercial real estate at loan to value (“LTV”) ratios generally not exceeding 75% and a minimum debt service coverage ratio of 1.20 to 1. The commercial properties are predominantly apartments, neighborhood and grocery anchored retail, industrial, office, and to a lesser extent, specialized properties such as hotels. The primary source of repayment for investor property is cash flow from the property and for owner occupied property is the operating cash flow from the business. Commercial real estate loans were $3.5$3.4 billion as of December 31, 2019, an increase2020, a decrease of $473.2$71.3 million or 16%2% from December 31, 2018. Strong demand for commercial real estate lending activities was reflective of the demand by both investors and owner occupants to refinance and/or to acquire new real estate assets. 2019. Construction loans are for the purchase or construction of a property for which repayment will be generated by the property. Loans in this portfolio are primarily for the purchase of land, as well as for the development of commercial properties, single family homes and condominiums. We classify loans as construction until the completion of the construction phase. Following construction, if a loan is retained by the Bank, the loan is reclassified to the commercial real estate or residential real estate classes of loans. Construction loans were $519.2$735.8 million as of December 31, 2019, a decrease2020, an increase of $107.5$216.6 million or 17%42% from December 31, 2018.2019. The decreaseincrease in construction loans was primarily due to pay-offsstemmed from various disbursements of various large construction projects in 2019 that were outstanding as of December 31, 2018.project loans during the year. Residential real estate loans are generally secured by 1-4 unit residential properties and are underwritten using traditional underwriting systems to assess the credit risks and financial capacity and repayment ability of the consumer. Decisions are primarily based on LTV ratios, debt-to-income (“DTI”) ratios, liquidity and credit scores. LTV ratios generally do not exceed 80%, although higher levels are permitted with mortgage insurance. We offer fixed rate mortgage products and variable rate mortgage products with interest rates that are subject to change every year after the first, third, fifth or tenth year, depending on the product and are based on LIBOR. Variable rate residential mortgage loans are underwritten at fully-indexed interest rates. We generally do not offer interest-only, payment-option facilities, Alt-A loans or any product with negative amortization. Residential real estate loans were $4.7$4.5 billion as of December 31, 2019, an increase2020, a decrease of $222.6$130.3 million or 5%3% from December 31, 2018.2019. Our portfolio of residential real estate loans benefited fromdeclined due to the demand by owner occupants to refinancesale of $132.0 million in a low interest rate environment.residential mortgages originated for investment during the year. Consumer loans consist primarily of open- and closed-end direct and indirect credit facilities for personal, automobile and household purchases as well as credit card loans. We seek to maintain reasonable levels of risk in consumer lending by following prudent underwriting guidelines, which include an evaluation of personal credit history, cash flow and collateral values based on existing market conditions. Consumer loans were $1.6$1.4 billion as of December 31, 2019,2020, a decrease of $41.9$266.7 million or 3%17% from December 31, 2018.2019. The decrease in consumer loans was primarily due to lowerdecreases in credit card balances and indirect automobile loans. Lease financing consists of commercial single investor leases and leveraged leases. Underwriting of new lease transactions is based on our lending policy, including but not limited to an analysis of customer cash flows and secondary sources of repayment, including the value of leased equipment, the guarantors’ cash flows and/or other credit enhancements. No new leveraged leases are being added to the portfolio and all remaining leveraged leases are running off. Lease financing was $202.5$245.4 million as of December 31, 2019,2020, an increase of $54.7$42.9 million or 37%21% from December 31, 2018.2019. The increase in lease financing was due to portfolio growth in our commercial single investor leases. See “Note 4. Loans and Leases” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data and the discussion in “Analysis of Financial Condition — Allowance for Loan and LeaseCredit Losses” of this MD&A for more information on our loan and lease portfolio. The Company’s loan and lease portfolio includes adjustable-rate loans, primarily tied to Prime and LIBOR, hybrid-rate loans, for which the initial rate is fixed for a period from one year to as much as ten years, and fixed rate loans, for which the interest rate does not change through the life of the loan. Table 9 presents the recorded investment in our loan and lease portfolio as of December 31, 2019:2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and Leases by Rate Type | Loans and Leases by Rate Type | | | Table 9 | Loans and Leases by Rate Type | | | Table 9 | | | December 31, 2019 | | | December 31, 2020 | | | | Adjustable Rate | | Hybrid | | Fixed | | | | | Adjustable Rate | | Hybrid | | Fixed | | | | (dollars in thousands) | | Prime | | LIBOR | | Treasury | | Other | | Total | | Rate | | Rate | | Total | | | Prime | | LIBOR | | Treasury | | Other | | Total | | Rate | | Rate | | Total | | Commercial and industrial | | $ | 256,188 | | $ | 2,044,685 | | $ | — | | $ | 21,670 | | $ | 2,322,543 | | $ | 13,777 | | $ | 406,922 | | $ | 2,743,242 | | | $ | 208,119 | | $ | 1,609,210 | | $ | — | | $ | 1,963 | | $ | 1,819,292 | | $ | 32,927 | | $ | 1,167,288 | | $ | 3,019,507 | | Commercial real estate | | | 38,764 | | | 2,042,683 | | | 345 | | | 987,255 | | | 3,069,047 | | | 76,359 | | | 318,547 | | | 3,463,953 | | | | 142,188 | | | 1,998,682 | | | 328 | | | 854,259 | | | 2,995,457 | | | 126,151 | | | 271,068 | | | 3,392,676 | | Construction | | | 46,110 | | | 349,993 | | | 36 | | | 29,629 | | | 425,768 | | | 407 | | | 93,066 | | | 519,241 | | | | 71,204 | | | 554,120 | | | 30 | | | 27,955 | | | 653,309 | | | 975 | | | 81,535 | | | 735,819 | | Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential mortgage | | | 30,797 | | | 168,047 | | | 107,370 | | | 50,787 | | | 357,001 | | | 371,252 | | | 3,040,683 | | | 3,768,936 | | | | 18,829 | | | 169,686 | | | 86,000 | | | 59,714 | | | 334,229 | | | 362,254 | | | 2,993,735 | | | 3,690,218 | | Home equity line | | | 327,081 | | | — | | | 35,663 | | | — | | | 362,744 | | | 530,428 | | | 67 | | | 893,239 | | | | 344,466 | | | — | | | 7,265 | | | — | | | 351,731 | | | 489,856 | | | 37 | | | 841,624 | | Total residential | | | 357,878 | | | 168,047 | | | 143,033 | | | 50,787 | | | 719,745 | | | 901,680 | | | 3,040,750 | | | 4,662,175 | | | | 363,295 | | | 169,686 | | | 93,265 | | | 59,714 | | | 685,960 | | | 852,110 | | | 2,993,772 | | | 4,531,842 | | Consumer | | | 350,109 | | | 18,499 | | | 1,670 | | | 102 | | | 370,380 | | | 9,762 | | | 1,240,414 | | | 1,620,556 | | | | 298,674 | | | 16,137 | | | 1,300 | | | 126 | | | 316,237 | | | 133 | | | 1,037,472 | | | 1,353,842 | | Lease financing | | | — | | | — | | | — | | | — | | | — | | | — | | | 202,483 | | | 202,483 | | | | — | | | — | | | — | | | — | | | — | | | — | | | 245,411 | | | 245,411 | | Total loans and leases | | $ | 1,049,049 | | $ | 4,623,907 | | $ | 145,084 | | $ | 1,089,443 | | $ | 6,907,483 | | $ | 1,001,985 | | $ | 5,302,182 | | $ | 13,211,650 | | | $ | 1,083,480 | | $ | 4,347,835 | | $ | 94,923 | | $ | 944,017 | | $ | 6,470,255 | | $ | 1,012,296 | | $ | 5,796,546 | | $ | 13,279,097 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % by rate type at December 31, 2019 | | | 8 | % | | 35 | % | | 1 | % | | 8 | % | | 52 | % | | 8 | % | | 40 | % | | 100 | % | | % by rate type at December 31, 2020 | | | | 8 | % | | 33 | % | | 1 | % | | 7 | % | | 49 | % | | 7 | % | | 44 | % | | 100 | % |
Tables 10 and 11 present the geographic distribution of our loan and lease portfolio as of December 31, 20192020 and 2018:2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Geographic Distribution of Loan and Lease Portfolio | | | | | | | | | | | | | | | Table 10 | | | | | | | | | | | | | | | Table 10 | | | December 31, 2019 | | December 31, 2020 | | | | | | U.S. | | Guam & | | Foreign & | | | | | | | | U.S. | | Guam & | | Foreign & | | | | (dollars in thousands) | | Hawaii | | Mainland(1) | | Saipan | | Other | | Total | | Hawaii | | Mainland(1) | | Saipan | | Other | | Total | Commercial and industrial | | $ | 1,270,997 | | $ | 1,285,340 | | $ | 140,929 | | $ | 45,976 | | $ | 2,743,242 | | $ | 1,755,804 | | $ | 1,042,318 | | $ | 193,829 | | $ | 27,556 | | $ | 3,019,507 | Commercial real estate | | | 2,289,626 | | | 768,314 | | | 405,720 | | | 293 | | | 3,463,953 | | | 2,180,829 | | | 809,493 | | | 402,142 | | | 212 | | | 3,392,676 | Construction | | | 261,089 | | | 253,577 | | | 4,575 | | | — | | | 519,241 | | | 333,112 | | | 398,218 | | | 4,489 | | | — | | | 735,819 | Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential mortgage | | | 3,642,251 | | | 2,708 | | | 123,977 | | | — | | | 3,768,936 | | | 3,568,827 | | | 1,662 | | | 119,729 | | | — | | | 3,690,218 | Home equity line | | | 861,079 | | | 78 | | | 32,082 | | | — | | | 893,239 | | | 811,964 | | | — | | | 29,660 | | | — | | | 841,624 | Total residential | | | 4,503,330 | | | 2,786 | | | 156,059 | | | — | | | 4,662,175 | | | 4,380,791 | | | 1,662 | | | 149,389 | | | — | | | 4,531,842 | Consumer | | | 1,202,762 | | | 22,521 | | | 393,045 | | | 2,228 | | | 1,620,556 | | | 1,001,868 | | | 18,993 | | | 331,255 | | | 1,726 | | | 1,353,842 | Lease financing | | | 85,842 | | | 110,630 | | | 6,011 | | | — | | | 202,483 | | | 80,670 | | | 149,934 | | | 14,807 | | | — | | | 245,411 | Total Loans and Leases | | $ | 9,613,646 | | $ | 2,443,168 | | $ | 1,106,339 | | $ | 48,497 | | $ | 13,211,650 | | $ | 9,733,074 | | $ | 2,420,618 | | $ | 1,095,911 | | $ | 29,494 | | $ | 13,279,097 | Percentage of Total Loans and Leases | | | 73% | | | 18% | | | 8% | | | 1% | | | 100% | | | 73% | | | 18% | | | 8% | | | 1% | | | 100% |
(1) | For secured loans and leases, classification as U.S. Mainland is made based on where the collateral is located. For unsecured loans and leases, classification as U.S. Mainland is made based on the location where the majority of the borrower's business operations are conducted. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Geographic Distribution of Loan and Lease Portfolio | | | | | | | | | | | | | | | Table 11 | | | | | | | | | | | | | | | Table 11 | | | December 31, 2018 | | December 31, 2019 | | | | | | U.S. | ��� | Guam & | | Foreign & | | | | | | | | U.S. | | Guam & | | Foreign & | | | | (dollars in thousands) | | Hawaii | | Mainland(1) | | Saipan | | Other | | Total | | Hawaii | | Mainland(1) | | Saipan | | Other | | Total | Commercial and industrial | | $ | 1,289,171 | | $ | 1,707,713 | | $ | 130,477 | | $ | 81,399 | | $ | 3,208,760 | | $ | 1,270,997 | | $ | 1,285,340 | | $ | 140,929 | | $ | 45,976 | | $ | 2,743,242 | Commercial real estate | | | 2,003,997 | | | 615,364 | | | 370,546 | | | 876 | | | 2,990,783 | | | 2,289,626 | | | 768,314 | | | 405,720 | | | 293 | | | 3,463,953 | Construction | | | 326,006 | | | 272,709 | | | 28,042 | | | — | | | 626,757 | | | 261,089 | | | 253,577 | | | 4,575 | | | — | | | 519,241 | Residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential mortgage | | | 3,405,867 | | | 2,890 | | | 118,344 | | | — | | | 3,527,101 | | | 3,642,251 | | | 2,708 | | | 123,977 | | | — | | | 3,768,936 | Home equity line | | | 882,805 | | | — | | | 29,712 | | | — | | | 912,517 | | | 861,079 | | | 78 | | | 32,082 | | | — | | | 893,239 | Total residential | | | 4,288,672 | | | 2,890 | | | 148,056 | | | — | | | 4,439,618 | | | 4,503,330 | | | 2,786 | | | 156,059 | | | — | | | 4,662,175 | Consumer | | | 1,239,563 | | | 23,038 | | | 397,783 | | | 2,120 | | | 1,662,504 | | | 1,202,762 | | | 22,521 | | | 393,045 | | | 2,228 | | | 1,620,556 | Lease financing | | | 46,409 | | | 93,954 | | | 7,406 | | | — | | | 147,769 | | | 85,842 | | | 110,630 | | | 6,011 | | | — | | | 202,483 | Total Loans and Leases | | $ | 9,193,818 | | $ | 2,715,668 | | $ | 1,082,310 | | $ | 84,395 | | $ | 13,076,191 | | $ | 9,613,646 | | $ | 2,443,168 | | $ | 1,106,339 | | $ | 48,497 | | $ | 13,211,650 | Percentage of Total Loans and Leases | | | 70% | | | 21% | | | 8% | | | 1% | | | 100% | | | 73% | | | 18% | | | 8% | | | 1% | | | 100% |
(1) | For secured loans and leases, classification as U.S. Mainland is made based on where the collateral is located. For unsecured loans and leases, classification as U.S. Mainland is made based on the location where the majority of the borrower's business operations are conducted. |
Our lending activities are concentrated primarily in Hawaii. However, we also have lending activities on the U.S. mainland, Guam and Saipan. Our commercial lending activities on the U.S. mainland include automobile dealer flooring activities in California, participation in the Shared National Credits Program and selective commercial real estate projects based on existing customer relationships. Our lease financing portfolio includes commercial leveraged and single investor lease financing activities both in Hawaii and on the U.S. mainland, but this portfolio continues to run off andmainland. However, no new leveraged leases are being added to the portfolio.portfolio and all remaining leveraged leases are running off. Our consumer lending activities are concentrated primarily in Hawaii and to a smaller extent, Guam and Saipan. Table 12 presents certain contractual loan maturity categories and sensitivities of those loans to changes in interest rates as of December 31, 2019:2020: | | | | | | | | | | | | | | | | | | | | | | | | | | Maturities for Selected Loan Categories(1) | | | | | | | | | | | | Table 12 | | | | | | | | | | | | Table 12 | | | | December 31, 2019 | | December 31, 2020 | | | | Due in One | | Due After One | | Due After | | | | | Due in One | | Due After One | | Due After | | | | | (dollars in thousands) | | Year or Less | | to Five Years | | Five Years | | Total | | Year or Less | | to Five Years | | Five Years | | Total | | Commercial and industrial | | $ | 1,226,493 | | $ | 1,191,975 | | $ | 324,774 | | $ | 2,743,242 | | $ | 955,817 | | $ | 1,809,058 | | $ | 254,632 | | $ | 3,019,507 | | Construction | | | 191,260 | | | 242,985 | | | 84,996 | | | 519,241 | | | 294,532 | | | 366,993 | | | 74,294 | | | 735,819 | | Total Selected Loans | | $ | 1,417,753 | | $ | 1,434,960 | | $ | 409,770 | | $ | 3,262,483 | | $ | 1,250,349 | | $ | 2,176,051 | | $ | 328,926 | | $ | 3,755,326 | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total of loans with: | | | | | | | | | | | | | | | | | | | | | | | | | | Adjustable interest rates | | $ | 1,304,539 | | $ | 1,148,553 | | $ | 295,219 | | $ | 2,748,311 | | $ | 1,165,411 | | $ | 1,074,963 | | $ | 232,227 | | $ | 2,472,601 | | Hybrid interest rates | | | 1,315 | | | 5,164 | | | 7,705 | | | 14,184 | | | 545 | | | 26,246 | | | 7,111 | | | 33,902 | | Fixed interest rates | | | 111,899 | | | 281,243 | | | 106,846 | | | 499,988 | | | 84,393 | | | 1,074,842 | | | 89,588 | | | 1,248,823 | | Total Selected Loans | | $ | 1,417,753 | | $ | 1,434,960 | | $ | 409,770 | | $ | 3,262,483 | | $ | 1,250,349 | | $ | 2,176,051 | | $ | 328,926 | | $ | 3,755,326 | |
(1) | Based on contractual maturities. |
Credit Quality We evaluate certain loans and leases, including commercial and industrial loans, commercial real estate loans and construction loans, individually for impairment and non-accrual status. A loan is considered to be impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. We generally place a loan on non-accrual status when management believes that collection of principal or interest has become doubtful or when a loan or lease becomes 90 days past due as to principal or interest, unless it is well secured and in the process of collection. Loans on non-accrual status are generally classified as impaired, but not all impaired loans are necessarily placed on non-accrual status. See “Note 5. Allowance for Loan and LeaseCredit Losses” in the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information about our credit quality indicators. For purposes of managing credit risk and estimating the Allowance,ACL, management has identified three categories of loans (commercial, residential real estate and consumer) that we use to develop our systematic methodology to determine the Allowance.ACL. The categorization of loans for the evaluation of credit risk is specific to our credit risk evaluation process and these loan categories are not necessarily the same as the loan categories used for other evaluations of our loan portfolio. See “Note 5. Allowance for Loan and LeaseCredit Losses” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information about our approach to estimating the Allowance.ACL. The following tables and discussion address non-performing assets, loans and leases that are 90 days past due but are still accruing interest, impaired loans and loans modified in a troubled debt restructuring. Non-Performing Assets and Loans and Leases Past Due 90 Days or More and Still Accruing Interest Table 13 presents information on our Non-Performing Assets (“NPAs”) and Accruing Loans and Leases Past Due 90 Days or More for each of the last five years: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More | | | | | Table 13 | Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More | | | Table 13 | | | | December 31, | | | December 31, | | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Non-Performing Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Non-Accrual Loans and Leases | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | $ | 32 | | $ | 274 | | $ | 2,932 | | $ | 2,730 | | $ | 3,958 | | | $ | 518 | | $ | 32 | | $ | 274 | | $ | 2,932 | | $ | 2,730 | | Commercial real estate | | | 30 | | | 1,658 | | | 1,786 | | | — | | | 138 | | | | 80 | | | 30 | | | 1,658 | | | 1,786 | | | — | | Construction | | | | 2,043 | | | — | | | — | | | — | | | — | | Lease financing | | | — | | | — | | | — | | | 153 | | | 181 | | | | — | | | — | | | — | | | — | | | 153 | | Total Commercial Loans | | | 62 | | | 1,932 | | | 4,718 | | | 2,883 | | | 4,277 | | | | 2,641 | | | 62 | | | 1,932 | | | 4,718 | | | 2,883 | | Residential Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential mortgage | | | 5,406 | | | 4,611 | | | 5,107 | | | 6,547 | | | 12,344 | | | | 6,441 | | | 5,406 | | | 4,611 | | | 5,107 | | | 6,547 | | Total Residential Loans | | | 5,406 | | | 4,611 | | | 5,107 | | | 6,547 | | | 12,344 | | | | 6,441 | | | 5,406 | | | 4,611 | | | 5,107 | | | 6,547 | | Total Non-Accrual Loans and Leases | | 5,468 | | | 6,543 | | | 9,825 | | | 9,430 | | | 16,621 | | | 9,082 | | | 5,468 | | | 6,543 | | | 9,825 | | | 9,430 | | Other Real Estate Owned ("OREO") | | | 319 | | | 751 | | | 329 | | | 329 | | | 154 | | | | — | | | 319 | | | 751 | | | 329 | | | 329 | | Total Non-Performing Assets | | $ | 5,787 | | $ | 7,294 | | $ | 10,154 | | $ | 9,759 | | $ | 16,775 | | | $ | 9,082 | | $ | 5,787 | | $ | 7,294 | | $ | 10,154 | | $ | 9,759 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accruing Loans and Leases Past Due 90 Days or More | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | $ | 1,429 | | $ | 141 | | $ | 220 | | $ | 449 | | $ | 2,496 | | | $ | 2,108 | | $ | 1,429 | | $ | 141 | | $ | 220 | | $ | 449 | | Commercial real estate | | | 1,013 | | | — | | | 1,400 | | | — | | | 161 | | | | 882 | | | 1,013 | | | — | | | 1,400 | | | — | | Construction | | | 2,367 | | | — | | | — | | | — | | | — | | | | 93 | | | 2,367 | | | — | | | — | | | — | | Lease financing | | | — | | | — | | | — | | | 83 | | | 174 | | | | — | | | — | | | — | | | — | | | 83 | | Total Commercial Loans | | | 4,809 | | | 141 | | | 1,620 | | | 532 | | | 2,831 | | | | 3,083 | | | 4,809 | | | 141 | | | 1,620 | | | 532 | | Residential Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential mortgage | | 74 | | | 32 | | | — | | | — | | | 106 | | | — | | | 74 | | | 32 | | | — | | | — | | Home equity line | | | 2,995 | | | 2,842 | | | 1,360 | | | 866 | | | 631 | | | | 4,818 | | | 2,995 | | | 2,842 | | | 1,360 | | | 866 | | Total Residential Loans | | | 3,069 | | | 2,874 | | | 1,360 | | | 866 | | | 737 | | | | 4,818 | | | 3,069 | | | 2,874 | | | 1,360 | | | 866 | | Consumer | | | 4,272 | | | 3,373 | | | 1,394 | | | 1,870 | | | 1,454 | | | | 3,266 | | | 4,272 | | | 3,373 | | | 1,394 | | | 1,870 | | Total Accruing Loans and Leases Past Due 90 Days or More | | $ | 12,150 | | $ | 6,388 | | $ | 4,374 | | $ | 3,268 | | $ | 5,022 | | | $ | 11,167 | | $ | 12,150 | | $ | 6,388 | | $ | 4,374 | | $ | 3,268 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Restructured Loans on Accrual Status and Not Past Due 90 Days or More | | $ | 14,493 | | $ | 24,033 | | $ | 34,130 | | $ | 44,496 | | $ | 28,351 | | | $ | 16,684 | | $ | 14,493 | | $ | 24,033 | | $ | 34,130 | | $ | 44,496 | | Total Loans and Leases | | $ | 13,211,650 | | $ | 13,076,191 | | $ | 12,277,369 | | $ | 11,520,378 | | $ | 10,722,030 | | | $ | 13,279,097 | | $ | 13,211,650 | | $ | 13,076,191 | | $ | 12,277,369 | | $ | 11,520,378 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Ratio of Non-Accrual Loans and Leases to Total Loans and Leases | | | 0.04 | % | | 0.05 | % | | 0.08 | % | | 0.08 | % | | 0.16 | % | | | 0.07 | % | | 0.04 | % | | 0.05 | % | | 0.08 | % | | 0.08 | % | Ratio of Non-Performing Assets to Total Loans and Leases and OREO | | | 0.04 | % | | 0.06 | % | | 0.08 | % | | 0.08 | % | | 0.16 | % | | | 0.07 | % | | 0.04 | % | | 0.06 | % | | 0.08 | % | | 0.08 | % | Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More to Total Loans and Leases and OREO | | | 0.14 | % | | 0.10 | % | | 0.12 | % | | 0.11 | % | | 0.20 | % | | | 0.15 | % | | 0.14 | % | | 0.10 | % | | 0.12 | % | | 0.11 | % |
Table 14 presents the activity in NPAs for the years ended December 31, 20192020 and 2018:2019: | | | | | | | | | | | | | Non-Performing Assets | | | | | | Table 14 | | | | | | Table 14 | | | Year Ended | | | | December 31, | | Year Ended December 31, | (dollars in thousands) | | 2019 | | 2018 | | 2020 | | 2019 | Balance at beginning of year | | $ | 7,294 | | $ | 10,154 | | $ | 5,787 | | $ | 7,294 | Additions | | | 12,767 | | | 7,817 | | | 51,864 | | | 12,767 | Reductions | | | | | | | | | | | | | Payments | | | (10,783) | | | (7,384) | | | (15,125) | | | (10,783) | Return to accrual status | | | (1,910) | | | (1,831) | | | (1,364) | | | (1,910) | Sales of other real estate owned | | | (751) | | | (691) | | | (766) | | | (751) | Transfers to loans held for sale | | | | (14,566) | | | — | Charge-offs/write-downs | | | (830) | | | (771) | | | (16,748) | | | (830) | Total Reductions | | | (14,274) | | | (10,677) | | | (48,569) | | | (14,274) | Balance at end of year | | $ | 5,787 | | $ | 7,294 | | $ | 9,082 | | $ | 5,787 |
The level of NPAs represents an indicator of the potential for future credit losses. NPAs consist of non-accrual loans and leases and OREO. Changes in the level of non-accrual loans and leases typically represent increases for loans and leases that reach a specified past due status, offset by reductions for loans and leases that are charged-off, paid down, sold, transferred to held for sale classification, transferred to OREO or are no longer classified as non-accrual because they have returned to accrual status as a result of continued performance and an improvement in the borrower’s financial condition and loan repayment capabilities. Total NPAs were $5.8$9.1 million as of December 31, 2019, a decrease2020, an increase of $1.5$3.3 million or 21%57% from December 31, 2018.2019. The ratio of our NPAs to total loans and leases and OREO was 0.04%0.07% as of December 31, 2019, a decrease2020, an increase of 2three basis points from December 31, 2018.2019. The decreaseincrease in total NPAs was primarily due to a $1.6$2.0 million decreaseincrease in commercial real estateconstruction loans, and a $0.4 million decrease in OREO, partially offset by a $0.8$1.0 million increase in residential mortgage loans. loans and a $0.5 million increase in commercial and industrial loans, partially offset by a $0.3 million decrease in OREO. The largest component of our NPAs continues to be residential mortgage loans. The level of these NPAs remains elevated due to a lengthy judicial foreclosure process in Hawaii. As of December 31, 2019,2020, residential mortgage non-accrual loans were $5.4$6.4 million, an increase of $0.8$1.0 million or 17%19% from December 31, 2018.2019. As of December 31, 2019,2020, our residential mortgage non-accrual loans were comprised of 2839 loans with a weighted average current loan-to-value (“LTV”) ratio of 66%49%. Construction non-accrual loans were $2.0 million as of December 31, 2020, an increase of $2.0 million or 100% from December 31, 2019. This increase was primarily due to the addition of one construction non-accrual loan of $2.2 million, partially offset by a $0.4 million charge-off. Commercial and industrial non-accrual loans were $0.5 million as of December 31, 2020, an increase of $0.5 million from December 31, 2019. This increase was primarily due to additions in commercial and industrial loans totaling $28.6 million, partially offset by $13.6 million in charge-offs, $9.3 million in transfers to loans held for sale and $5.3 million in payments. The additions in commercial and industrial loans during the year was primarily due to the impact of COVID-19 and the shut-down of the tourism industry in Hawaii. Commercial real estate non-accrual loans were nil$0.1 million as of December 31, 2019, a decrease2020, an increase of $1.6$0.1 million or 98% from December 31, 2018. This decrease was attributable to payoffs of four2019. During the year, there were additions in commercial real estate non-accrual loans totaling $15.9 million, offset by $7.8 million in 2019.
Commercialpayments, $5.3 million in transfers to loans held for sale and industrial non-accrual$2.7 million in charge-offs. The additions in commercial real estate loans were nil asduring the year was primarily due to the impact of December 31, 2019, a decreaseCOVID-19 and the shut-down of $0.2 million or 88% from December 31, 2018.the tourism industry in Hawaii.
OREO represents property acquired as a result of borrower defaults on loans. OREO is recorded at fair value, less estimated selling costs, at the time of foreclosure. On an ongoing basis, properties are appraised as required by market conditions and applicable regulations. As of December 31, 2020, we did not hold any OREO. As of December 31, 2019, OREO was $0.3 million and $0.8 million as of December 31, 2019 and 2018, respectively, and waswhich comprised of two residential properties as of both December 31, 2019 and 2018.
We attribute the lower level of NPAs to stable general economic conditions in Hawaii, led by strong tourism and construction industries, relatively low unemployment and favorable real estate valuations. We have also continued to remain diligent in our collection and recovery efforts and have continued to seek new lending opportunities while maintaining sound judgment and underwriting practices.properties.
Loans and Leases Past Due 90 Days or More and Still Accruing Interest. Loans and leases in this category are 90 days or more past due, as to principal or interest, and are still accruing interest because they are well secured and in the process of collection. Loans and leases past due 90 days or more and still accruing interest were $12.2$11.2 million as of December 31, 2019, an increase2020, a decrease of $5.8$1.0 million or 90%8% as compared to December 31, 2018.2019. Construction commercial and industrial and commercial real estateconsumer loans that were past due 90 days or more and still accruing interest increaseddecreased by $2.4 million, $1.3$2.3 million and $1.0 million, respectively, fromduring the year ended December 31, 2018.2020. This was partially offset by increases in home equity lines and commercial and industrial loans that were past due 90 days or more and still accruing interest of $1.8 million and $0.7 million, respectively, during the year ended December 31, 2020. Impaired Loans. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. For a loan that has been modified in a troubled debt restructuring, the contractual terms of the loan agreement refer to the contractual terms specified by the original loan agreement, not the contractual terms specified by the modified loan agreement. Impaired loans were $20.6$25.8 million and $30.6$20.6 million as of December 31, 20192020 and 2018,2019, respectively. These impaired loans had a related AllowanceACL of $0.2$2.4 million and $0.5$0.2 million as of December 31, 20192020 and 2018,2019, respectively. The decreaseincrease in impaired loans during 20192020 was primarily due to payoffs of sixincreases in commercial real estate loans and construction loans totaling $5.0$6.5 million and removals due to payoffs, returns to accrual status$1.8 million, respectively, partially offset by decreases in commercial and transfers to OREO of fifteenindustrial loans and residential mortgage loansmortgages totaling $4.1 million.$2.1 million and $1.1 million, respectively. The decreases in impaired loan balance of impaired loans was also affected byinclude charge-offs and paydowns. For the years ended December 31, 20192020 and 2018,2019, we recorded charge-offs of $0.6$16.8 million and $0.7$0.6 million, respectively, related to our total impaired loans. Our impaired loans are considered in management’s assessment of the overall adequacy of the Allowance.ACL. If interest due on the balances of all non-accrual loans as of December 31, 20192020 had been accrued under the original terms, approximately $0.2$1.0 million in additional interest income would have been recorded in the year ended December 31, 20192020 and approximately $0.5$0.2 million in additional interest income would have been recorded for 2018.2019. Actual interest income recorded on these loans was $0.2 million for the year ended December 31, 2020 and $1.8 million for the year ended December 31, 20192019. COVID-19 Financial Hardship Relief Programs Certain borrowers have been unable to meet their contractual payment obligations because of the adverse effects of COVID-19. To help mitigate these effects, we have been offering various relief programs to assist customers who are experiencing financial hardship due to COVID-19. For example, for certain residential mortgage and $1.9 millioncommercial loans, various relief options were available on a case-by-case basis, including payment deferrals for up to six months. For certain consumer loans, loan assistance was being offered in the year endedform of payment deferrals for up to three months, which extended the term of the loan by the number of months deferred, and interest continued to accrue on the principal balance. The short-term modifications for payment deferrals, extensions of repayment terms, or delays in payment described above that are insignificant and made on a good faith basis in response to borrowers impacted by COVID-19 who were current prior to any relief are not required to be accounted for and disclosed as TDRs under GAAP. Please see “Note 1. Organization and Summary of Significant Accounting Policies” in the notes to our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for further discussion on short-term modifications. Table 15 presents information on our loans and leases that received payment deferrals under our COVID-19 financial hardship relief programs as of December 31, 2018.2020: | | | | | | | | Loans and Leases that Received Payment Deferrals under COVID-19 Financial Hardship Relief Programs | | | | | | Table 15 | | | December 31, 2020 | | | | Number of Loans | | Amortized | | (dollars in thousands) | | and Leases | | Cost Basis | | Loans and Leases that Received Payment Deferrals under COVID-19 Financial Hardship Relief Programs | | | | | | | | Commercial and industrial | | | 1,098 | | $ | 888,451 | | Commercial real estate | | | 421 | | | 1,150,566 | | Construction | | | 33 | | | 55,768 | | Lease financing | | | 59 | | | 11,162 | | Residential mortgage | | | 1,568 | | | 670,071 | | Consumer | | | 18,145 | | | 239,915 | | Total Loans and Leases that Received Payment Deferrals under COVID-19 Financial Hardship Relief Programs | | | 21,324 | | $ | 3,015,933 | | Total Loans and Leases | | | | | $ | 13,279,097 | | | | | | | | | | Ratio of Loans and Leases that Received Payment Deferrals under COVID-19 Financial Hardship Relief Programs to Total Loans and Leases | | | | | | 22.7 | % |
In addition to the relief programs described above, we are also participating in the PPP offered by the SBA. The PPP is intended to help small businesses impacted by the COVID-19 pandemic by providing “fully forgivable” loans to cover payroll expenses, including employee benefits, and can also be used for various other eligible expenses. PPP loans have a fixed interest rate of one percent per annum and a maturity date of up to five years, with the ability to prepay the loan in full without penalty. The first payment is deferred for 10 months or until compensation is received for forgiven amounts, and interest will continue to accrue during the initial deferment period. The borrower may apply with the Bank for loan forgiveness of the amount due on the loan in an amount equal to payroll, employee benefits, and other eligible expenses incurred, subject to limitations, in accordance with the PPP and CARES Act, as amended by the PPPF Act and CAA. Because the purpose of the PPP is to help small businesses keep their workers employed and paid, if the business spends less than 60% of loan proceeds on payroll costs, uses the loan proceeds for non-payroll costs that are not eligible expenses, or significantly reduces its employee count or compensation levels without qualifying for other exceptions, a portion of the loan will not be forgiven, and the business will be required to repay that portion of the loan to the Bank over the remaining term of the loan. Table 16 presents information on our PPP loans outstanding as of December 31, 2020 to borrowers operating in industries we consider to be the most impacted by the COVID-19 pandemic (“high impact industries”) and all other industries: | | | | | | | | PPP Loans Outstanding to Borrowers by Industry | | | | | | Table 16 | | | December 31, 2020 | | | | Number | | Amortized | | (dollars in thousands) | | of Loans | | Cost Basis | | PPP Loans Outstanding to Borrowers by Industry | | | | | | | | High Impact Industries: | | | | | | | | Food service | | | 587 | | $ | 107,839 | | Automobile dealers | | | 65 | | | 54,202 | | Retail | | | 494 | | | 52,153 | | Hospitality/Hotel | | | 91 | | | 55,382 | | Transportation | | | 161 | | | 32,763 | | Total PPP Loans Outstanding to Borrowers Operating in High Impact Industries | | | 1,398 | | | 302,339 | | All other industries (1) | | | 4,334 | | | 498,902 | | Total PPP Loans Outstanding (2) | | | 5,732 | | $ | 801,241 | | Total Loans and Leases | | | | | $ | 13,279,097 | | | | | | | | | | Ratio of PPP Loans Outstanding to Borrowers Operating in High Impact Industries to Total Loans and Leases | | | | | | 2.3 | % | Ratio of PPP Loans Outstanding to Total Loans and Leases | | | | | | 6.0 | % |
(1) | “All other industries” represent borrowers that received PPP loans that did not operate in the five high impact industries listed above, which is primarily comprised of the construction, health care, professional services, and administrative and support services industries. |
(2) | Outstanding loan balances, which are a component of commercial and industrial loans, are reported net of deferred loan costs and fees of $1.5 million and $14.7 million, respectively, at December 31, 2020. |
Loans Modified in a Troubled Debt Restructuring Table 1517 presents information on loans whose terms have been modified in a troubled debt restructuring (“TDR”) as of December 31 2019 and 2018:for each of the last five years: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans Modified in a Troubled Debt Restructuring | | | | | | | | | | | | | | | Table 15 | | | | | | | | | | | | | | | Table 17 | | | December 31, | | December 31, | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | Commercial and industrial | | $ | 4,919 | | $ | 8,445 | | $ | 15,251 | | $ | 24,842 | | $ | 11,888 | | $ | 2,298 | | $ | 4,919 | | $ | 8,445 | | $ | 15,251 | | $ | 24,842 | Commercial real estate | | | 692 | | | 4,086 | | | 8,850 | | | 12,546 | | | 5,649 | | | 7,126 | | | 692 | | | 4,086 | | | 8,850 | | | 12,546 | Total commercial | | | 5,611 | | | 12,531 | | | 24,101 | | | 37,388 | | | 17,537 | | | 9,424 | | | 5,611 | | | 12,531 | | | 24,101 | | | 37,388 | Residential mortgage | | | 10,487 | | | 12,128 | | | 12,394 | | | 13,813 | | | 11,906 | | | 7,553 | | | 10,487 | | | 12,128 | | | 12,394 | | | 13,813 | Total | | $ | 16,098 | | $ | 24,659 | | $ | 36,495 | | $ | 51,201 | | $ | 29,443 | | $ | 16,977 | | $ | 16,098 | | $ | 24,659 | | $ | 36,495 | | $ | 51,201 |
Loans modified in a TDR were $16.1$17.0 million as of December 31, 2019, a decrease2020, an increase of $8.6$0.9 million or 35%5% from 2018.2019. This decreaseincrease was primarily due to payoffs of twoincreases in commercial real estate loans totaling $3.4$6.4 million, and payoffs of fivepartially offset by decreases in residential mortgage loans totaling $1.9of $2.9 million and commercial and industrial loans of $2.6 million. This was further decreased by charge-offs and paydowns on existing loans. As of December 31, 2019, $14.52020, $16.7 million or 90%98% of our loans modified in a TDR were performing in accordance with their modified contractual terms and were on accrual status. Generally, loans modified in a TDR are returned to accrual status after the borrower has demonstrated performance under the modified terms by making six consecutive timely payments. See “Note 5. Allowance for Loan1. Organization and Lease Losses”Summary of Significant Accounting Policies” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data and “Analysis of Financial Condition — COVID-19 Financial Hardship Relief Programs” for more information and a description of the modification programs that we currently offerhave been offering to our customers. As noted above, we have been providing our borrowers with opportunities to defer payments, or portions thereof. In the absence of intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral). Allowance for LoanCredit Losses for Loans and Lease LossesLeases & Reserve for Unfunded Commitments We maintainadopted the Allowance atprovisions of ASU No. 2016-13 on January 1, 2020. This guidance changes the accounting for credit losses from an “incurred loss” model, which estimates a levelloss allowance based on current known and inherent losses within a loan portfolio to an “expected loss” model, which in our judgment, is adequateestimates a loss based on losses expected to absorb probable losses that have been incurred in our loan and lease portfolio asbe recorded over the life of the balance sheet date.loan portfolio. Effective January 1, 2020, we recorded a pre-tax cumulative effect adjustment to increase the ACL by $0.8 million and to increase the reserve for unfunded commitments by $16.3 million. The Allowance consists of two components, allocatedCompany’s ACL under CECL is significantly more dependent on the quantitative model and unallocated.less on the qualitative assessment, compared to the previous incurred loss model. The allocated portionincrease in the ACL was primarily related to our indirect auto, commercial real estate and consumer loan products. This was partially offset by the decrease in the ACL related to our commercial and industrial, home equity lines and residential real estate loan products. These directional changes were predominantly due to differences between the loss emergence periods previously used under the incurred loss methodology and the remaining life of the Allowance includes reserves that are allocated based on impairment analyses of specific loans or pools of loans.loan as required under CECL. The unallocated component of the Allowance incorporateslarge increase to our judgment of the determination of the risks inherentreserve for unfunded commitments was primarily due to an increase in the loan and lease portfolio, economic uncertainties and imprecision in the estimation process. Although we determine the amount of each component of the Allowance separately, the Allowance asutilization rates estimated using our CECL methodology. a whole was considered appropriate by management as of December 31, 2019 and 2018 based on our ongoing analysis of estimated probable credit losses, credit risk profiles, economic conditions, coverage ratios and other relevant factors.
Table 1618 presents an analysis of our AllowanceACL for the years indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allowance for Loan and Lease Losses | | | | | | | | | | | | | | | Table 16 | | Allowance for Credit Losses | | | | | | | | | | | | | | | Table 18 | | | | December 31, | | December 31, | | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Balance at Beginning of Year | | $ | 141,718 | | $ | 137,253 | | $ | 135,494 | | $ | 135,484 | | $ | 134,799 | | $ | 130,530 | | $ | 141,718 | | $ | 137,253 | | $ | 135,494 | | $ | 135,484 | | Adjustment to Adopt ASC Topic 326 | | | 770 | | | — | | | — | | | — | | | — | | After Adoption of ASC Topic 326 | | | 131,300 | | | 141,718 | | | 137,253 | | | 135,494 | | | 135,484 | | Loans and Leases Charged-Off | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | (2,718) | | | (778) | | | (1,519) | | | (348) | | | (866) | | | (15,572) | | | (2,718) | | | (778) | | | (1,519) | | | (348) | | Commercial real estate | | | (2,753) | | | — | | | — | | | — | | | — | | Construction | | | (379) | | | — | | | — | | | — | | | — | | Lease financing | | | (24) | | | — | | | (147) | | | — | | | — | | | — | | | (24) | | | — | | | (147) | | | — | | Total Commercial Loans | | | (2,742) | | | (778) | | | (1,666) | | | (348) | | | (866) | | | (18,704) | | | (2,742) | | | (778) | | | (1,666) | | | (348) | | Residential | | | (438) | | | (165) | | | (408) | | | (799) | | | (618) | | | Residential Loans: | | | | | | | | | | | | | | | | | Residential mortgage | | | (14) | | | (243) | | | (125) | | | (294) | | | (242) | | Home equity line | | | (54) | | | (195) | | | (40) | | | (114) | | | (557) | | Total Residential Loans | | | (68) | | | (438) | | | (165) | | | (408) | | | (799) | | Consumer | | | (32,807) | | | (26,630) | | | (23,851) | | | (18,791) | | | (18,312) | | | (28,791) | | | (32,807) | | | (26,630) | | | (23,851) | | | (18,791) | | Total Loans and Leases Charged-Off | | | (35,987) | | | (27,573) | | | (25,925) | | | (19,938) | | | (19,796) | | | (47,563) | | | (35,987) | | | (27,573) | | | (25,925) | | | (19,938) | | Recoveries on Loans and Leases Previously Charged-Off | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial Loans: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial and industrial | | | 410 | | | 232 | | | 844 | | | 251 | | | 940 | | | 5,005 | | | 410 | | | 232 | | | 844 | | | 251 | | Commercial real estate | | | 263 | | | 216 | | | 596 | | | 3,329 | | | 1,115 | | | 615 | | | 263 | | | 216 | | | 596 | | | 3,329 | | Construction | | | 200 | | | — | | | — | | | — | | | — | | Lease financing | | | — | | | — | | | — | | | 2 | | | 3 | | | — | | | — | | | — | | | — | | | 2 | | Total Commercial Loans | | | 673 | | | 448 | | | 1,440 | | | 3,582 | | | 2,058 | | | 5,820 | | | 673 | | | 448 | | | 1,440 | | | 3,582 | | Residential | | | 967 | | | 940 | | | 687 | | | 1,358 | | | 2,198 | | | Residential Loans: | | | | | | | | | | | | | | | | | Residential mortgage | | | 216 | | | 741 | | | 523 | | | 299 | | | 626 | | Home equity line | | | 167 | | | 226 | | | 417 | | | 388 | | | 732 | | Total Residential Loans | | | 383 | | | 967 | | | 940 | | | 687 | | | 1,358 | | Consumer | | | 9,359 | | | 8,470 | | | 7,057 | | | 6,408 | | | 6,325 | | | 10,499 | | | 9,359 | | | 8,470 | | | 7,057 | | | 6,408 | | Total Recoveries on Loans and Leases Previously Charged-Off | | | 10,999 | | | 9,858 | | | 9,184 | | | 11,348 | | | 10,581 | | | 16,702 | | | 10,999 | | | 9,858 | | | 9,184 | | | 11,348 | | Net Loans and Leases Charged-Off | | | (24,988) | | | (17,715) | | | (16,741) | | | (8,590) | | | (9,215) | | | (30,861) | | | (24,988) | | | (17,715) | | | (16,741) | | | (8,590) | | Provision for Loan and Lease Losses | | | 13,800 | | | 22,180 | | | 18,500 | | | 8,600 | | | 9,900 | | | Provision for Credit Losses - Loans and Leases | | | 108,015 | | | 13,800 | | | 22,180 | | | 18,500 | | | 8,600 | | Balance at End of Year | | $ | 130,530 | | $ | 141,718 | | $ | 137,253 | | $ | 135,494 | | $ | 135,484 | | $ | 208,454 | | $ | 130,530 | | $ | 141,718 | | $ | 137,253 | | $ | 135,494 | | Average Loans and Leases Outstanding | | $ | 13,063,716 | | $ | 12,570,182 | | $ | 11,944,596 | | $ | 11,175,213 | | $ | 10,297,834 | | $ | 13,518,308 | | $ | 13,063,716 | | $ | 12,570,182 | | $ | 11,944,596 | | $ | 11,175,213 | | Ratio of Net Loans and Leases Charged-Off to Average Loans and Leases Outstanding | | | 0.19 | % | | 0.14 | % | | 0.14 | % | | 0.08 | % | | 0.09 | % | | 0.23 | % | | 0.19 | % | | 0.14 | % | | 0.14 | % | | 0.08 | % | Ratio of Allowance for Loan and Lease Losses to Loans and Leases Outstanding | | | 0.99 | % | | 1.08 | % | | 1.12 | % | | 1.18 | % | | 1.26 | % | | Ratio of Allowance for Credit Losses for Loans and Leases to Loans and Leases Outstanding | | | 1.57 | % | | 0.99 | % | | 1.08 | % | | 1.12 | % | | 1.18 | % |
Tables 1719 and 1820 present the allocation of the AllowanceACL by loan category, in both dollars and as a percentage of total loans and leases outstanding, as of the dates indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allocation of the Allowance by Loan and Lease Category | | Table 17 | | | Allocation of the Allowance for Credit Losses by Loan and Lease Category | | Allocation of the Allowance for Credit Losses by Loan and Lease Category | | Table 19 | | | | December 31, | | | December 31, | | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Commercial and industrial | | $ | 28,975 | | $ | 34,501 | | $ | 34,006 | | $ | 33,129 | | $ | 34,025 | | | $ | 24,711 | | $ | 28,975 | | $ | 34,501 | | $ | 34,006 | | $ | 33,129 | | Commercial real estate | | | 22,325 | | | 19,725 | | | 18,044 | | | 18,448 | | | 18,489 | | | | 58,123 | | | 22,325 | | | 19,725 | | | 18,044 | | | 18,448 | | Construction | | | 4,844 | | | 5,813 | | | 6,817 | | | 4,513 | | | 3,793 | | | | 10,039 | | | 4,844 | | | 5,813 | | | 6,817 | | | 4,513 | | Lease financing | | | 424 | | | 432 | | | 611 | | | 847 | | | 888 | | | | 3,298 | | | 424 | | | 432 | | | 611 | | | 847 | | Total commercial | | | 56,568 | | | 60,471 | | | 59,478 | | | 56,937 | | | 57,195 | | | | 96,171 | | | 56,568 | | | 60,471 | | | 59,478 | | | 56,937 | | Residential | | | 39,179 | | | 44,906 | | | 42,852 | | | 43,436 | | | 46,099 | | | Residential mortgage | | | | 40,461 | | | 29,303 | | | 33,525 | | | 32,585 | | | 32,058 | | Home equity line | | | | 7,163 | | | 9,876 | | | 11,381 | | | 10,267 | | | 11,378 | | Total residential | | | | 47,624 | | | 39,179 | | | 44,906 | | | 42,852 | | | 43,436 | | Consumer | | | 34,644 | | | 35,813 | | | 31,249 | | | 28,388 | | | 28,385 | | | | 64,659 | | | 34,644 | | | 35,813 | | | 31,249 | | | 28,388 | | Unallocated | | | 139 | | | 528 | | | 3,674 | | | 6,733 | | | 3,805 | | | | — | | | 139 | | | 528 | | | 3,674 | | | 6,733 | | Total Allowance for Loan and Lease Losses | | $ | 130,530 | | $ | 141,718 | | $ | 137,253 | | $ | 135,494 | | $ | 135,484 | | | Total Allowance for Credit Losses for Loans and Leases | | | $ | 208,454 | | $ | 130,530 | | $ | 141,718 | | $ | 137,253 | | $ | 135,494 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Allocation of the Allowance by Loan and Lease Category (as a percentage of total loans and leases outstanding) | Table 18 | | Allocation of the Allowance for Credit Losses by Loan and Lease Category (as a percentage of total loans and leases outstanding) | | Allocation of the Allowance for Credit Losses by Loan and Lease Category (as a percentage of total loans and leases outstanding) | | Table 20 | | | | | December 31, | | | | December 31, | | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | | Allocated | | Loan | | Allocated | | Loan | | Allocated | | Loan | | Allocated | | Loan | | Allocated | | Loan | | | | Allocated | | Loan | | Allocated | | Loan | | Allocated | | Loan | | Allocated | | Loan | | Allocated | | Loan | | | ACL as | | category as | | ACL as | | category as | | ACL as | | category as | | ACL as | | category as | | ACL as | | category as | | | | Allowance as | | category as | | Allowance as | | category as | | Allowance as | | category as | | Allowance as | | category as | | Allowance as | | category as | | | % of loan or | | % of total | | % of loan or | | % of total | | % of loan or | | % of total | | % of loan or | | % of total | | % of loan or | | % of total | | | | % of loan or | | % of total | | % of loan or | | % of total | | % of loan or | | % of total | | % of loan or | | % of total | | % of loan or | | % of total | | | lease | | loans and | | lease | | loans and | | lease | | loans and | | lease | | loans and | | lease | | loans and | | | | lease category | | loans and leases | | lease category | | loans and leases | | lease category | | loans and leases | | lease category | | loans and leases | | lease category | | loans and leases | | | category | | leases | | category | | leases | | category | | leases | | category | | leases | | category | | leases | | Commercial and industrial | | 1.06 | % | 20.76 | % | 1.08 | % | 24.54 | % | 1.08 | % | 25.54 | % | 1.02 | % | 28.12 | % | 1.11 | % | 28.52 | % | | 0.82 | % | 22.74 | % | 1.06 | % | 20.76 | % | 1.08 | % | 24.54 | % | 1.08 | % | 25.54 | % | 1.02 | % | 28.12 | % | Commercial real estate | | 0.64 | | 26.22 | | 0.66 | | 22.87 | | 0.68 | | 21.73 | | 0.79 | | 20.34 | | 0.85 | | 20.19 | | | 1.71 | | 25.55 | | 0.64 | | 26.22 | | 0.66 | | 22.87 | | 0.68 | | 21.73 | | 0.79 | | 20.34 | | Construction | | 0.93 | | 3.93 | | 0.93 | | 4.79 | | 1.08 | | 5.16 | | 1.00 | | 3.91 | | 1.03 | | 3.43 | | | 1.36 | | 5.54 | | 0.93 | | 3.93 | | 0.93 | | 4.79 | | 1.08 | | 5.16 | | 1.00 | | 3.91 | | Lease financing | | 0.21 | | 1.53 | | 0.29 | | 1.13 | | 0.37 | | 1.34 | | 0.47 | | 1.56 | | 0.45 | | 1.85 | | | 1.34 | | 1.85 | | 0.21 | | 1.53 | | 0.29 | | 1.13 | | 0.37 | | 1.34 | | 0.47 | | 1.56 | | Total commercial | | 0.82 | | 52.44 | | 0.87 | | 53.33 | | 0.90 | | 53.77 | | 0.92 | | 53.93 | | 0.99 | | 53.99 | | | 1.30 | | 55.68 | | 0.82 | | 52.44 | | 0.87 | | 53.33 | | 0.90 | | 53.77 | | 0.92 | | 53.93 | | Residential | | 0.84 | | 35.29 | | 1.01 | | 33.96 | | 1.05 | | 33.31 | | 1.14 | | 32.96 | | 1.31 | | 32.94 | | | Residential mortgage | | | 1.10 | | 27.78 | | 0.78 | | 28.53 | | 0.95 | | 26.98 | | 1.01 | | 26.28 | | 1.10 | | 25.37 | | Home equity line | | | 0.85 | | 6.34 | | 1.11 | | 6.76 | | 1.25 | | 6.98 | | 1.19 | | 7.03 | | 1.30 | | 7.59 | | Total residential | | | 1.05 | | 34.12 | | 0.84 | | 35.29 | | 1.01 | | 33.96 | | 1.05 | | 33.31 | | 1.14 | | 32.96 | | Consumer | | 2.14 | | 12.27 | | 2.15 | | 12.71 | | 1.97 | | 12.92 | | 1.88 | | 13.11 | | 2.03 | | 13.07 | | | 4.78 | | 10.20 | | 2.14 | | 12.27 | | 2.15 | | 12.71 | | 1.97 | | 12.92 | | 1.88 | | 13.11 | | Total | | 0.99 | % | 100.00 | % | 1.08 | % | 100.00 | % | 1.12 | % | 100.00 | % | 1.18 | % | 100.00 | % | 1.26 | % | 100.00 | % | | 1.57 | % | 100.00 | % | 0.99 | % | 100.00 | % | 1.08 | % | 100.00 | % | 1.12 | % | 100.00 | % | 1.18 | % | 100.00 | % |
As of December 31, 2019,2020, the AllowanceACL was $208.5 million or 1.57% of total loans and leases outstanding, compared with an ACL of $130.5 million or 0.99% of total loans and leases outstanding compared with an Allowance of $141.7 million or 1.08% of total loans and leases outstanding as of December 31, 2018.2019. The level of the AllowanceACL was commensurate with our stable credit risk profile, loan portfolio growththe adverse impacts that COVID-19 is having on the Hawaii and composition and a stable Hawaiiglobal economy. Net charge-offs of loans and leases were $25.0$30.9 million or 0.19%0.23% of total average loans and leases outstanding for the year ended December 31, 20192020 compared to $17.7$25.0 million or 0.14%0.19% for 2018.2019. Net charge-offs in our commercial lending portfolio were $2.1$12.9 million for the year ended December 31, 20192020 compared to net charge-offs of $0.3$2.1 million for 2018.2019. Net recoveries in our residential lending portfolio were $0.5$0.3 million for the year ended December 31, 20192020 compared to net recoveries of $0.8$0.5 million for 2018.2019. Our net recovery position in this portfolio segment is largely attributable to rising real estate prices in Hawaii. Net charge-offs in our consumer lending portfolio were $23.4$18.3 million for the year ended December 31, 20192020 compared to net charge-offs of $18.2$23.4 million for 2018.2019. Net charge-offs in our consumer portfolio segment include those related to credit card, automobile loans, installment loans and small business lines of credit and reflect the inherent risk associated with these loans. Although we determine the amount of each component of the AllowanceACL separately, the AllowanceACL as a whole was considered appropriate by management as of December 31, 20192020 and 20182019 based on our ongoing analysis of estimated probableexpected credit losses, credit risk profiles, economic conditions, coverage ratios and other relevant factors. The increase in the ACL during year ended December 31, 2020 was primarily due to the adverse economic impact that COVID-19 is having and is expected to continue to have on the global, national and local economies. Business closures and the ripple effect it has had and will continue to have on unemployment filings is expected to impact the ability of our borrowers to continue to remain current on their loans and leases. As noted earlier, a significant number of our customers (primarily individuals and small businesses) have taken advantage of payment deferral programs in assisting them while they may be temporarily unemployed or while their businesses have closed. We continue to monitor the impact of COVID-19 on our tourism industry and the re-opening of the Hawaii economy under new guidelines. Once these measures are relaxed, we expect that local consumption of goods and services will begin to resume over an extended period of time. Although the State of Hawaii has begun to allow passengers from the U.S. mainland to bypass its mandatory 10-day self-quarantine requirement with an approved negative COVID-19 test within 72 hours prior to arrival in the state, the timing and extent of the return of air travel and the recovery of the Hawaii tourism industry is highly uncertain and is dependent upon the number of cases declining around the globe. As of December 31, 2019,2020, the higher allocation of our ACL to all of our portfolio segments is primarily due to expected credit losses related to COVID-19 and the Allowanceimpact it continues to have on the Hawaii economy, local businesses and our commercial loans decreased by $3.9 million or 6% from 2018. As of December 31, 2019, the allocation of the Allowance to our residential real estate loan portfolio decreased by $5.7 million or 13% from 2018. The Company reviews qualitative factors periodically to reflect changing conditions, which resulted in a net decrease in the allocated Allowance as a percentage of loan or lease category for both commercial loans and residential loans.customers. See “Note 5. Allowance for Loan and LeaseCredit Losses” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information on the Allowance.ACL. Goodwill Goodwill was $995.5 million as of both December 31, 20192020 and 2018.2019. Our goodwill originated from the acquisition of the Company by BNPP in December of 2001. Goodwill generated in that acquisition was recorded on the balance sheet of the Bank as a result of push down accounting treatment, and remains on our consolidated balance sheets. Goodwill The Company’s policy is not amortized but is subject, at a minimum, to annual testsassess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit level. Determiningbelow its carrying amount. Impairment is the amount of goodwill impairment, if any, includes assessing the current implied fair value of the reporting unit as if it were being acquired in a business combination and comparing it tocondition that exists when the carrying amount of a reporting unit exceeds its fair value. The Company performed its annual assessment of the reporting unit’s goodwill. Therecriteria included in Accounting Standards Codification Topic 350, Intangibles – Goodwill and Other, and based on such assessment, the Company concluded that there was no impairment in our goodwill for the year ended December 31, 2019.2020. Future events, including the ongoing impacts of the COVID-19 pandemic, that could cause a significant decline in our expected future cash flows or a significant adverse change in our business or the business climate may necessitate taking charges in future reporting periods related to the impairment of our goodwill and other intangible assets.goodwill. Other Assets Other assets were $490.6$603.5 million as of December 31, 2019,2020, an increase of $44.2$112.9 million or 10%23% from December 31, 2018.2019. This increase was primarily due to a $51.2$66.4 million increase in interest rate swap agreements, a $44.3$40.1 million increase stemming from our adoption of Accounting Standard Update No. 2016-02, Leases (Topic 842), which required us to record right-of-use assets related to our operating leases,in prepaid expenses, and a $34.1$24.6 million increase in investments in affordable housing and other tax credit partnership interests. This was partially offset by a $52.2an $11.1 million decrease in current tax receivables and deferred tax assets and a $31.9 million decrease in interest-earning advances.assets. Deposits Deposits are the primary funding source for the Bank and are acquired from a broad base of local markets, including both individual and corporate customers. We obtain funds from depositors by offering a range of deposit types, including demand, savings, money market and time. Table 1921 presents the composition of our deposits as of December 31, 20192020 and 2018:December 31, 2019: | | | | | | | | | | | | | Deposits | | | | | | Table 19 | | | | | | Table 21 | | | December 31, | | December 31, | (dollars in thousands) | | 2019 | | 2018 | | 2020 | | 2019 | Demand | | $ | 5,880,072 | | $ | 6,007,941 | | $ | 7,522,114 | | $ | 5,880,072 | Savings | | | 4,998,933 | | | 4,853,285 | | | 6,020,075 | | | 4,998,933 | Money Market | | | 3,055,832 | | | 3,196,678 | | | 3,337,236 | | | 3,055,832 | Time | | | 2,510,157 | | | 3,092,164 | | | 2,348,298 | | | 2,510,157 | Total Deposits(1) | | $ | 16,444,994 | | $ | 17,150,068 | | $ | 19,227,723 | | $ | 16,444,994 |
(1) | Public deposits were $1.6 billion as of December 31, 2020, an increase of $634.1 compared to December 31, 2019. |
Total deposits were $16.4$19.2 billion as of December 31, 2019, a decrease2020, an increase of $705.1 million$2.8 billion or 4%17% from December 31, 2018.2019. The decreaseincrease in deposit balances stemmed from a $582.0 million or 19% decrease in time deposit balances, primarily from a $502.0 million decrease$1.6 billion increase in public time deposits, a $140.8 million or 4% decrease in money marketdemand deposit balances and a $127.9$629.7 million or 2% decreaseincrease in demandpublic savings deposit balances. This was partially offset by a $145.6$139.0 million or 3% increase7% decrease in savingsnon-public time deposit balances. We increased our liquidity position in anticipation of a surge in funding needs, primarily due to our participation in the PPP. Table 2022 presents the amount of time deposits of $100,000 or more issued by the Company, further segregated by time remaining until maturity, as of December 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Table 20 | | | | | | | | | Table 22 | (dollars in thousands) | | Domestic | | Foreign | | Total | | Domestic | | Foreign | | Total | Three months or less | | $ | 807,189 | | $ | 75,074 | | $ | 882,263 | | $ | 509,469 | | $ | 49,155 | | $ | 558,624 | Over three through six months | | | 291,299 | | | 31,354 | | | 322,653 | | | 390,007 | | | 33,299 | | | 423,306 | Over six through twelve months | | | 301,231 | | | 41,181 | | | 342,412 | | | 422,563 | | | 43,630 | | | 466,193 | Over twelve months | | | 192,603 | | | 59,277 | | | 251,880 | | | 202,023 | | | 40,267 | | | 242,290 | Total | | $ | 1,592,322 | | $ | 206,886 | | $ | 1,799,208 | | $ | 1,524,062 | | $ | 166,351 | | $ | 1,690,413 |
Short-term and Long-term Borrowings Short-termThere were no short-term borrowings were $400.0 million as of December 31, 2019, an increase2020, a decrease of $400.0 million from December 31, 2018. This increase2019. The decrease was due to the reclassification of $400.0 million in FHLB fixed-rate advances from long-term borrowings to short-term borrowings as the maturity dates for these advances are less than one year from the consolidated balance sheet date. These short-term FHLB fixed-rate advances have a weighted average interest ratematuring during 2020.
Long-term borrowings were $200.0 million as of both December 31, 2019, a decrease of $400.0 million from December 31, 2018 due to the reclassification of $400.0 million in FHLB fixed-rate advances from2020 and 2019. The Company’s long-term borrowings to short-term borrowings as the maturity dates for these advances are less than one year. The Company's long-term borrowings includedcomprised $200.0 million in FHLB fixed-rate advances with a weighted average interest rate of 2.73% and maturity dates ranging from 2023 to 2024. Long-term borrowings mature in excess of one year from the consolidated balance sheet date. As of December 31, 2020 and 2019, the available remaining borrowing capacity with the FHLB was $2.0 billion and $1.7 billion.billion, respectively. The FHLB fixed ratefixed-rate advances and remaining borrowing capacity were secured by residential real estate loan collateral as of December 31, 2020 and 2019. Pension and Postretirement Plan Obligations We have a qualified noncontributory defined benefit pension plan, an unfunded supplemental executive retirement plan for certain key executives (“SERP”), a directors’ retirement plan, a non-qualified pension plan for eligible directors and a postretirement benefit plan providing life insurance and healthcare benefits that we offer to our directors and employees, as applicable. The qualified noncontributory defined benefit pension plan, the SERP and the directors’ retirement plan are all frozen plans to new participants. In March 2019, the Company’s board of directors approved an amendment to the SERP to freeze the SERP, which became effective on July 1, 2019. As a result of the amendment, since the effective date, there have not been any, and there will be no, new accruals of benefits, including service accruals. Existing benefits under the SERP, as of the effective date of the amendment described above, will otherwise continue in accordance with the terms of the SERP. To calculate annual pension costs, we use the following key variables: (1) size of the employee population, length of service and estimated compensation increases; (2) actuarial assumptions and estimates; (3) expected long-term rate of return on plan assets; and (4) discount rate. Pension and postretirement benefit plan obligations, net of pension plan assets, were $121.9$127.1 million as of December 31, 2019,2020, an increase of $2.7$5.2 million or 2%4% from December 31, 2018.2019. The balance as of December 31, 20192020 included retirement benefits payable of $138.2$143.4 million for the Company’s underfunded plans, partially offset by pension plan assets for overfunded plans, recorded as a component of other assets on the consolidated balance sheets, of $16.3$16.2 million. See “Note 15. Benefit Plans” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information on our pension and postretirement benefit plans. Foreign Activities Cross-border outstandings are defined as loans (including accrued interest), acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets which are denominated in dollars or other non-local currency. As of December 31, 2020, there were no aggregate cross-border outstandings in countries which amounted to 0.75% to 1% of our total consolidated assets. As of December 31, 2019 and 2018, aggregate cross-border outstandings in countries which amounted to 0.75% to 1% of our total consolidated assets totaled approximately $174.7 million and $186.3 million, respectively, to Japan and $162.1 million and nil, respectively, to Canada. As of December 31, 2018 and 2017, aggregate cross-border outstandings in countries which amounted to 0.75% to 1% of our total consolidated assets totaled approximately $186.3 million and $177.3 million to Japan, respectively. There were no cross-border outstandings in excess of 1% of our total consolidated assets. Capital The Company and the Bank are subject to the Capital Rules, which implemented the Basel Committee on Banking Supervision’s December 2010 final capital framework for strengthening international capital standards, known as Basel III, and various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Capital Rules require bank holding companies and their bank subsidiaries to maintain substantially more capital than previously required, with a greater emphasis on common equity. The Capital Rules, among other things, (i) impose a capital measure called CET1, (ii) specify that Tier 1 capital consists of CET1 and ‘‘Additional Tier 1 capital’’ instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments to capital as compared to existing regulations. The Capital Rules also require a 2.5% capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is composed entirely of CET1, on top of these minimum risk weighted asset ratios, effectively resulting in minimum ratios of (i) 7% CET1 to risk-weighted assets, (ii) 8.5% Tier 1 capital to risk-weighted assets, and (iii) 10.5% total capital to risk-weighted assets. As of December 31, 2019,2020, our capital levels remained characterized as “well capitalized” under the Capital Rules. Our regulatory capital ratios, calculated in accordance with the Capital Rules, are presented in Table 2123 below. There have been no conditions or events since December 31, 20192020 that management believes have changed either the Company’s or the Bank’s capital classifications. | | | | | | | | | | | | | | | Regulatory Capital | | | | | | Table 21 | | | | | | Table 23 | | | | | | | | | | | | December 31, | | | December 31, | | December 31, | | (dollars in thousands) | | 2019 | | 2018 | | | 2020 | | 2019 | | Stockholders' Equity | | $ | 2,640,258 | | $ | 2,524,839 | | | $ | 2,744,104 | | $ | 2,640,258 | | Less: | | | | | | | | | | | | | | | Goodwill | | | 995,492 | | | 995,492 | | | | 995,492 | | | 995,492 | | Accumulated other comprehensive loss, net | | | (31,749) | | | (132,195) | | | Accumulated other comprehensive income (loss), net | | | | 31,604 | | | (31,749) | | Common Equity Tier 1 Capital and Tier 1 Capital | | $ | 1,676,515 | | $ | 1,661,542 | | | $ | 1,717,008 | | $ | 1,676,515 | | Add: | | | | | | | | | | | | | | | Allowable Reserve for Loan and Lease Losses and Unfunded Commitments | | | 131,130 | | | 142,318 | | | Qualifying allowance for credit losses and reserve for unfunded commitments | | | | 172,950 | | | 131,130 | | Total Capital | | $ | 1,807,645 | | $ | 1,803,860 | | | $ | 1,889,958 | | $ | 1,807,645 | | Risk-Weighted Assets | | $ | 14,110,799 | | $ | 13,884,976 | | | $ | 13,769,885 | | $ | 14,110,799 | | | | | | | | | | | | | | | | | Key Regulatory Capital Ratios | | | | | | | | | | | | | | | Common Equity Tier 1 Capital Ratio | | | 11.88 | % | | 11.97 | % | | | 12.47 | % | | 11.88 | % | Tier 1 Capital Ratio | | | 11.88 | % | | 11.97 | % | | | 12.47 | % | | 11.88 | % | Total Capital Ratio | | | 12.81 | % | | 12.99 | % | | | 13.73 | % | | 12.81 | % | Tier 1 Leverage Ratio | | | 8.79 | % | | 8.72 | % | | | 8.00 | % | | 8.79 | % |
Total stockholders’ equity was $2.6$2.7 billion as of December 31, 2019,2020, an increase of $115.4$103.8 million or 5%4% from December 31, 2018.2019. The increase in stockholders’ equity was primarily due to earnings for the year ended December 31, 20192020 of $284.4$185.8 million and a net changegain in the fair value of our investment securities of $100.1$67.0 million. This was partially offset by dividends declared and paid to the Company’s stockholders of $138.2$135.1 million, the cumulative effect adjustment of a change in accounting principle of $12.5 million and common stock repurchased of $136.2$5.0 million. In January 2020, the Company announced a stock repurchase program for up to $80.0 million of its outstanding common stock during 2020. Under this plan, the Company repurchased 217,759 shares at a total cost of approximately $5.0 million during the first quarter of 2020. In April 2020, the Company’s boardBoard of directorsDirectors voted to suspend the stock repurchase program. In February 2021, the Company announced a stock repurchase program for up to $75.0 million of its outstanding common stock during 2021. The timing and amount of stock repurchases, if any, are influenced by various internal and external factors. In January 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.26 per share on our outstanding shares. The dividend is to be paid on March 6, 20205, 2021 to shareholders of record at the close of business on February 24, 2020. In addition, In January 2020 the Company announced a share repurchase program for $80 million of its common stock during 2020. The timing and amount of share repurchases, if any, are influenced by various internal and external factors.22, 2021. Off-Balance Sheet Arrangements and Guarantees Off-Balance Sheet Arrangements We hold interests in several unconsolidated variable interest entities (“VIEs”). These unconsolidated VIEs are primarily low-income housing tax credit investments in partnerships and limited liability companies. Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in an entity’s net asset value. The primary beneficiary consolidates the VIE. Based on our analysis, we have determined that the Company is not the primary beneficiary of these entities. As a result, we do not consolidate these VIEs. Guarantees We sell residential mortgage loans in the secondary market primarily to Fannie Mae or Freddie Mac. The agreements under which we sell residential mortgage loans to Fannie Mae or Freddie Mac contain provisions that include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the specific representations and warranties vary among investors, insurance or guarantee agreements, they typically cover: ownership of the loan; validity of the lien securing the loan; the absence of delinquent taxes or liens against the property securing the loan; compliance with loan criteria set forth in the applicable agreement; compliance with applicable federal, state, and local laws; and other matters. As of December 31, 20192020 and 2018,2019, the unpaid principal balance of our portfolio of residential mortgage loans sold was $2.3$2.2 billion and $2.7$2.3 billion, respectively. The agreements under which we sell residential mortgage loans require delivery of various documents to the investor or its document custodian. Although these loans are primarily sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred if a loan review reveals that underwriting and documentation standards were potentially not met in the origination of those loans. Upon receipt of a repurchase request, we work with investors to arrive at a mutually agreeable resolution. Repurchase demands are typically reviewed on an individual loan by loan basis to validate the claims made by the investor to determine if a contractually required repurchase event has occurred. We manage the risk associated with potential repurchases or other forms of settlement through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards. For the year ended December 31, 2019,2020, there was one repurchasewere two repurchases of a residential mortgage loanloans of $0.4$0.8 million and one pending repurchase request of a residential mortgage loan of $0.3 million. In addition to servicing loans in our portfolio, substantially all of the loans we sell to investors are sold with servicing rights retained. We also service loans originated by other mortgage loan originators. As servicer, our primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans, or loan modifications or short sales. Each agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by the Company in such capacity and provides protection against expenses and liabilities incurred by the Company when acting in compliance with the respective servicing agreements. However, if we commit a material breach of obligations as servicer, we may be subject to termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards vary by investor. These standards and remedies are determined by servicing guides issued by the investors as well as the contract provisions established between the investors and the Company. Remedies could include repurchase of an affected loan. For the year ended December 31, 2019,2020, we had no repurchase requests related to loan servicing activities, nor were there any pending repurchase requests as of December 31, 2019.2020. Although to date repurchase requests related to representation and warranty provisions and servicing activities have been limited, it is possible that requests to repurchase mortgage loans may increase in frequency as investors more aggressively pursue all means of recovering losses on their purchased loans. However, as of December 31, 2019,2020, management believes that this exposure is not material due to the historical level of repurchase requests and loss trends and thus has not established a liability for losses related to mortgage loan repurchases. As of December 31, 2019, 99%2020, 97% of our residential mortgage loans serviced for investors were current. We maintain ongoing communications with investors and continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in loans sold to investors. Contractual Obligations Our contractual obligations as of December 31, 20192020 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Contractual Obligations | | | | | | | | | | | | | | | Table 22 | | | | | | | | | | | | | | | Table 24 | | | Less Than | | | | | | After | | | | | Less Than | | | | | | After | | | | (dollars in thousands) | | One Year | | 1 - 3 Years | | 4 - 5 Years | | 5 Years | | Total | | One Year | | 1 - 3 Years | | 4 - 5 Years | | 5 Years | | Total | Contractual Obligations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Time certificates of deposits | | $ | 2,026,957 | | $ | 341,492 | | $ | 141,676 | | $ | 32 | | $ | 2,510,157 | | $ | 1,889,975 | | $ | 327,474 | | $ | 130,588 | | $ | 261 | | $ | 2,348,298 | Short-term borrowings | | | 400,000 | | | — | | | — | | | — | | | 400,000 | | Long-term borrowings(1) | | | 9 | | | 10 | | | 200,000 | | | — | | | 200,019 | | | 10 | | | 100,000 | | | 100,000 | | | — | | | 200,010 | Noncancelable operating leases | | | 8,776 | | | 13,537 | | | 5,685 | | | 32,227 | | | 60,225 | | | 8,928 | | | 10,167 | | | 6,538 | | | 42,746 | | | 68,379 | Postretirement benefit contributions | | | 1,205 | | | 2,725 | | | 3,033 | | | 8,085 | | | 15,048 | | | 1,227 | | | 2,736 | | | 2,984 | | | 7,960 | | | 14,907 | Purchase obligations | | | 56,518 | | | 57,178 | | | 16,246 | | | 551 | | | 130,493 | | | 45,653 | | | 35,410 | | | 28,186 | | | 9,870 | | | 119,119 | Affordable housing commitments | | | 94,063 | | | 7,400 | | | 282 | | | 1,047 | | | 102,792 | | | 67,192 | | | 21,130 | | | 162 | | | 542 | | | 89,026 | Total Contractual Obligations | | $ | 2,587,528 | | $ | 422,342 | | $ | 366,922 | | $ | 41,942 | | $ | 3,418,734 | | $ | 2,012,985 | | $ | 496,917 | | $ | 268,458 | | $ | 61,379 | | $ | 2,839,739 |
| (1) | Amounts include the Company’s finance lease obligation. |
Commitments to extend credit, standby letters of credit and commercial letters of credit do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon; therefore, these items are not included in the table above. Purchase obligations arise from agreements to purchase goods or services that are enforceable and legally binding. Other contracts included in purchase obligations primarily consist of service agreements for various systems and applications supporting bank operations. Postretirement benefit contributions represent the minimum expected contribution to the postretirement benefit plan. Actual contributions may differ from these estimates. Our liability for unrecognized tax benefits (“UTBs”) as of December 31, 2020 and 2019 and 2018 were $149.0$154.5 million and $144.1$149.0 million, respectively. The increase in UTB was primarily due to additions related to previously identified tax positions. We are unable to reasonably estimate the period of cash settlement with the respective taxing authority. As a result, our liability for UTBs is not disclosed in the table above. See the discussion of credit, lease and other contractual commitments in “Note 4. Loans and Leases” and “Note 18. Commitments and Contingent Liabilities” in the notes to the consolidated financial statements included Item 8. Financial Statements and Supplementary Data. Critical Accounting Policies Our consolidated financial statements were prepared in accordance with GAAP and follow general practices within the industries in which we operate. The most significant accounting policies we follow are presented in “Note 1. Organization and Summary of Significant Accounting Policies” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data. 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 those that are related to the determination of the Allowance,ACL, goodwill, fair value estimates, pension and postretirement benefit obligations and income taxes. Allowance for Loan and LeaseCredit Losses
We perform periodic and systematic detailed reviews of our loan and lease portfolio to assess overall collectability.
The Allowance provides for probable and estimable losses inherent in the loan and lease portfolio. The Allowance is increased or decreased through the provisioning process. There is no exact method of predicting specific losses or amounts that ultimately may be charged off on particular categories of the loan and lease portfolio.
Management's evaluation of the adequacy of the AllowanceACL is often the most critical of accounting estimates for a financial institution. Our determination of the amount of the AllowanceACL is a critical accounting estimate as it requires significant reliance on the accuracy of credit risk ratings on individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on impaired loans, significant reliance on estimated loss rates on homogenous portfolios and consideration of our quantitative and qualitative evaluation of economicmacro-economic factors and trends. While our methodology in establishing the AllowanceACL attributes portions of the AllowanceACL to the commercial, residential real estate and consumer portfolios,portfolio segments, the entire AllowanceACL is available to absorb credit losses inherent in the total loan and lease portfolio. The AllowanceACL is a valuation account that is deducted from the amortized cost basis of loans and leases to present the net amount expected to be collected from loans and leases. Loans and leases are charged-off against the ACL when management believes the uncollectibility of a loan or lease balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. Changes in the ACL and, therefore, in the related Provision, can materially affect net income. In applying the judgment and review required to our commercial portfolio is generally most sensitive todetermine the accuracy of credit risk ratings assigned to each borrower. Commercial loan risk ratings are evaluated based on each situation by experienced senior credit officers and are subject to periodic review by an independent internal team of credit specialists. The Allowance related to our residential real estate portfolio is most sensitive to the accuracy of delinquency data. Further refinement of the Allowance related to the residential real estate portfolio requiresACL, management to evaluate the borrower's financial conditionconsiders changes in economic conditions, customer behavior, and collateral values,value, among other factors. The Allowance relatedFrom time to our consumertime, economic factors or business decisions may affect the composition and mix of the loan and lease portfolio, is generally most sensitivecausing management to economic assumptions and delinquency trends.increase or decrease the ACL. The following are some of the significant judgments and inherent limitations which affect the estimate of the ACL: | ● | The Accuracy of Internal Credit Risk Ratings, Monitoring of Loans Past Due and Delinquency Trends. The ACL related to our commercial portfolio segment is generally most sensitive to the accuracy of internal credit risk ratings assigned to each borrower. Commercial loan risk ratings are evaluated based on each situation by experienced senior credit officers and are subject to periodic review by an independent internal team of credit specialists. |
| ● | Data. We have applied considerable judgments about the sufficiency and applicability of our internal data to provide an accurate view of historical loss information. For each of our portfolio segments we have examined between 8 and 12 years of historical data. For many of our residential real estate and consumer loan classes, we have assumed that the historical loss period observed is sufficient to capture a full credit loss cycle and that the credit loss exposures observed over this historical loss period are representative of those for which we will be making estimates of future expected credit losses under CECL. In making this assumption, we have relied on the fact that the historical loss period incorporated the most recent observed recessionary period as well as the subsequent period of sustained recovery and growth. |
| ● | Reasonable and Supportable Forecast Period. For contractual periods which extend beyond the one-year reasonable and supportable forecast period, management elected an immediate reversion to the mean approach. Management will continue to assess whether a one-year reasonable and supportable forecast period is appropriate. Changes to the economic environment and uncertainty with regards to the timing and extent of an economic recovery may result in management decreasing or increasing the current reasonable and supportable forecast period. |
| ● | Economic Adjustments over the Reasonable and Supportable Forecast Period. The Company’s economic forecast team meets at least quarterly to discuss the economic outlook over the reasonable and supportable forecast period and determines whether economic adjustments should be applied in estimating the total ACL. The adjustments could be attributable to forecasted levels of local and national employment, visitor arrivals and spending, interest rates and real estate prices. Various economic forecasts ranging from mild, medium to severe are evaluated to forecast losses over the reasonable and supportable forecast period. Such adjustments are highly subjective and are a result of significant management judgment. |
| ● | Qualitative Adjustments. For risks not captured in the long-run default rates or in the economic forecast over the reasonable and supportable forecast period, the Company applies segment level dollar adjustments. These adjustments are estimated based on the best information available as of the reporting date and may include, as appropriate, adjustments for model limitations, regulatory determinants, overlays for natural disasters, and other events such as the COVID-19 pandemic. |
The Allowance attributable to each portfolio also includes an unallocated amount for imprecision in the estimation process. Furthermore, the estimate of the Allowance may change due to modifications in the mix and level of loan and lease balances outstanding and general economic conditions as evidenced by changes in interest rates, unemployment rates, bankruptcy filings and real estate values. While no one factor is dominant, each has the ability to result in actual loan losses which differ from originally estimated amounts.
| ● | Identification and Measurement of Individually Assessed Loans, including Loans Modified in a TDR. Our experienced senior credit officers may consider a loan impaired based on their evaluation of current information and events, including loans modified in a TDR. The measurement of impairment is typically based on an analysis of the present value of expected future cash flows. The development of these expectations requires significant management judgment and estimation. |
See “Note 5. Allowance for Loan and LeaseCredit Losses” in the notes to the consolidated financial statements included in Item 8. Financial Statement and Supplementary Data and “— Analysis“Analysis of Financial Condition — Allowance for Loan and LeaseCredit Losses” for more information on the Allowance.ACL. Goodwill Goodwill represents the cost of acquired businesses in excess of the fair value of the net assets acquired. The Company’s policy is to assess goodwill for impairment at the reporting unit level on an annual basis at December 31 or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill is tested for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. Impairment is the condition that exists when the carrying amount of a reporting unit exceeds its fair value, and an impairment loss would be recognized in an amount equal to that excess. Subsequent reversals of goodwill impairment are prohibited. The fair value of our reporting units is estimated using valuation methods based on the market and income approaches: | ● | The market approach involves the calculation of valuation multiples of comparable public companies (e.g., based on market capitalization, net income, book equity and tangible book equity). Because the initial fair value determined under the market approach represents a noncontrolling interest, a control premium is applied to arrive at the estimated fair value on a controlling basis. The key assumptions with respect to this method are the selected multiples and control premium. |
| ● | The income approach uses a discounted cash flow (DCF) method to value a company on a going concern basis. The DCF method is based on the present value of (1) multi-period projections of free cash flows and (2) a terminal value. The sum of the present value of the cash flows from the discrete period and the present value of the terminal value represents the fair value of the reporting unit under the income approach. The projected cash flows and terminal value are converted to present value through applying a discount rate. The key assumptions with respect to this method are the determination of the free cash flows, discount rate and terminal value. |
The Company performed its annual quantitative impairment test in accordance with Accounting Standards Codification Topic 350, Intangibles – Goodwill and Other, and based on such assessment, the Company concluded that there was no impairment in our goodwill for the year ended December 31, 2020. Estimating the fair value of a reporting unit requires significant judgment and often involves the use of estimates and assumptions that could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. Changes in these factors, as well as downturns in economic or business conditions, including the ongoing impacts of the COVID-19 pandemic, could have a significant adverse impact on the fair value of our reporting units in relation to their carrying amounts and could necessitate taking charges in future reporting periods related to the impairment of our goodwill. See “Note 7. Other Assets” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information on goodwill. Fair Value Measurements Fair value is 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. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments that are traded actively and have quoted market prices or observable market inputs, there is minimal subjectivity involved in measuring fair value. However, when quoted market prices or observable market inputs are not fully available, significant management judgment may be necessary to estimate fair value. In developing our fair value measurements, we maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy defines Level 1 valuations as those based on quoted prices, unadjusted, for identical instruments traded in active markets. Level 2 valuations are those based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active or model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 valuations are based on model-based techniques that use at least one significant assumption not observable in the market, or significant management judgment or estimation, some of which may be internally developed. Financial assets that are recorded at fair value on a recurring basis include available for sale investment securities, and derivative financial instruments. As of December 31, 2020 and 2019, $6.2 billion or 27% and 2018, $4.1 billion or 21% and $4.5 billion or 22%, respectively, of our total assets consisted of financial assets recorded at fair value on a recurring basis and most of these financial assets consisted of available for sale investment securities measured using information from a third-party pricing service. These investments in debt securities and mortgage backed securities were classified in Level 2 of the fair value hierarchy. Financial liabilities that were recorded at fair value on a recurring basis were comprised of derivative financial instruments. As of December 31, 2020 and 2019, and 2018, $4.9$5.8 million or less than 1% and $14.7$4.9 million or less than 1%, respectively, of our total liabilities, consisted of financial liabilities recorded at fair value on a recurring basis. As of December 31, 2020 and 2019, and 2018, $0.7$1.3 million and $12.1$0.7 million, respectively, was classified in Level 2 of the fair value hierarchy and $4.2$4.6 million and $2.6$4.2 million, respectively, was classified in Level 3 of the fair value hierarchy. As of December 31, 20192020 and 2018,2019, the liability which was classified in Level 3 of the fair value hierarchy was related to the sale of our Visa Class B restricted shares in 2016. We recorded a derivative liability which requires payment to the buyer of the Visa Class B restricted shares in the event Visa further reduces the conversion rate to its publicly traded Visa Class A shares. Our third-party pricing service makes no representations or warranties that the pricing data provided to us is complete or free from errors, omissions or defects. As a result, we have processes in place to monitor and periodically review the information provided to us by our third-party pricing service: (1) | Our third-party pricing service provides us with documentation by asset class of inputs and methodologies used to value securities. We review this documentation to evaluate the inputs and valuation methodologies used to place securities into the appropriate level of the fair value hierarchy. This documentation is periodically updated by our third-party pricing service. Accordingly, transfers of securities within the fair value hierarchy are made if deemed necessary. During the year ended December 31, 2019,2020, there were no transfers of securities within the fair value hierarchy. |
(2) | On a monthly basis, management reviews the pricing information received from our third-party pricing service. This review process includes a comparison to non-binding third-party broker quotes, as well as a review of market related conditions impacting the information provided by our third-party pricing service. We also identify |
| investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume or frequency of trades relative to historic levels, as well as instances of a significant widening of the bid ask spread in the brokered markets. As of December 31, 2019,2020, management did not make adjustments to prices provided by our third-party pricing service as a result of illiquid or inactive markets. |
(3) | On an annual basis, to the extent available, we obtain and review independent auditor's reports from our third-party pricing service related to controls placed in operation and tests of operating effectiveness. We did not note any significant control deficiencies in our review of the independent auditors'auditors’ reports related to services rendered by our third-party pricing service. |
(4) | Our third-party pricing service has also established processes for us to submit inquiries regarding quoted prices. Periodically, we will challenge the quoted prices provided by our third-party pricing service. Our third-party pricing service will review the inputs to the evaluation in light of the new market data presented by us. Our third-party pricing service may then affirm the original quoted price or may update the evaluation on a going forward basis. |
Based on the composition of our investment securities portfolio, we believe that we have developed appropriate internal controls and performed appropriate due diligence procedures to prevent or detect material misstatements by our third-party pricing service. See “Note 22. Fair Value” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information on our use of fair value estimates. Pension and Postretirement Benefit Obligations We use the following key variables to calculate annual pension costs: (1) size of the employee population, length of service and estimated compensation increases; (2) actuarial assumptions and estimates; (3) expected long-term rate of return on plan assets; and (4) discount rate. Pension cost is directly affected by the number of employees eligible for pension benefits and their estimated compensation increases. To calculate estimated compensation increases, management reviews our salary increases each year and compares this data with industry information. For all pension and postretirement plan calculations, we use a measurement date of December 31. The expected long-term rate of return was based on a calculated rate of return from average rates of return on various asset classes over a 20-year historical time horizon. Using long-term historical data allows the Company to capture multiple economic environments, which management believes is relevant when using historical returns. Net actuarial gains or losses that exceed a 5% corridor of the greater of the projected benefit obligation or the fair value of plan assets as of the beginning of the year are amortized from accumulated other comprehensive income into net periodic pension cost on a straight-line basis over five years. In estimating the projected benefit obligation, an independent actuary bases assumptions on factors such as mortality rate, turnover rate, retirement rate, disability rate and other assumptions related to the population of individuals in the pension plan. If significant actuarial gains or losses occur, the actuary reviews the demographic and economic assumptions with management, at which time the Company considers revising these assumptions based on actual results. Our determination of the pension and postretirement benefit plan obligations and net periodic benefit cost is a critical accounting estimate as it requires the use of estimates and judgment related to the amount and timing of expected future cash out flowsoutflows for benefit payments and cash inflows for maturities and return on plan assets. Changes in estimates and assumptions related to mortality rates and future health care costs could also have a material impact to our financial condition or results of operations. The discount rate assumption is used to determine the present value of future benefit obligations and the net periodic benefit cost. The discount rate assumption used to value the present value of future benefit obligations as of each year end is the rate used to determine the net periodic benefit cost for the following year. See “Note 15. Benefit Plans” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information on pension and postretirement benefit plan obligations. Income Taxes In estimating income taxes payable or receivable, we assess the relative merits and risks of the appropriate tax treatment considering statutory, judicial and regulatory guidance in the context of each tax position. Accordingly, previously estimated liabilities are regularly reevaluated and adjusted through the provision for income taxes. Changes in the estimate of income taxes payable or receivable occur periodically due to changes in tax rates, interpretations of tax law, the status of examinations being conducted by various taxing authorities, the expiration of statutes of limitations and newly enacted statutory, judicial and regulatory guidance that impact the relative merits and risks of each tax position. These changes, when they occur, may affect the provision for income taxes as well as current and deferred income taxes, and may be significant to our consolidated statements of income and balance sheets. Management's determination of the realization of net deferred tax assets is based upon management's judgment of various future events and uncertainties, including the timing and amount of future income, as well as the implementation of various tax planning strategies to maximize realization of the deferred tax assets. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. We are also required to record a liability for UTBs for the entire amount of a tax benefit taken in a prior or future income tax return when we determine that a tax position has a less than 50% likelihood of being accepted by the taxing authority. As of December 31, 20192020 and 2018,2019, our liabilities for UTBs were $149.0$154.5 million and $144.1$149.0 million, respectively. See “Note 16. Income Taxes” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information on income taxes. Future Application of Accounting Pronouncements For a discussion of the expected impact of accounting pronouncements recently issued but not adopted by us as of December 31, 2019,2020, see “Note 1. Organization and Summary of Significant Accounting Policies — Recent Accounting Pronouncements” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information. Risk Governance and Quantitative and Qualitative Disclosures About Market Risk Managing risk is an essential part of successfully operating our business. Management believes that the most prominent risk exposures for the Company are credit risk, market risk, liquidity risk management, capital management and operational risk. See “Analysis of Financial Condition — Liquidity” and “—Capital” sections of this MD&A for further discussions of liquidity risk management and capital management, respectively. Credit Risk Credit risk is the risk that borrowers or counterparties will be unable or unwilling to repay their obligations in accordance with the underlying contractual terms. We manage and control credit risk in the loan and lease portfolio by adhering to well-defined underwriting criteria and account administration standards established by management. Written credit policies document underwriting standards, approval levels, exposure limits and other limits or standards deemed necessary and prudent. Portfolio diversification at the obligor, industry, product, and/or geographic location levels is actively managed to mitigate concentration risk. In addition, credit risk management also includes an independent credit review process that assesses compliance with commercial, real estate and consumer credit policies, risk ratings and other critical credit information. In addition to implementing risk management practices that are based upon established and sound lending practices, we adhere to sound credit principles. We understand and evaluate our customers’ borrowing needs and capacity to repay, in conjunction with their character and history. Management has identified three categories of loans that we use to develop our systematic methodology to determine the Allowance:ACL: commercial, residential real estate and consumer. Commercial lending is further categorized into four distinct classes based on characteristics relating to the borrower, transaction and collateral. These classes are: commercial and industrial, commercial real estate, construction and lease financing. Commercial and industrial loans are primarily for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes by medium to larger Hawaii based corporations, as well as U.S. mainland and international companies. Commercial and industrial loans are typically secured by non-real estate assets whereby the collateral is trading assets, enterprise value or inventory. As with many of our customers, our commercial and industrial loan customers are heavily dependent on tourism, government expenditures and real estate values. Commercial real estate loans are secured by real estate, including but not limited to structures and facilities to support activities designated as retail, health care, general office space, warehouse and industrial space. Our bank’sBank’s underwriting policy generally requires that net cash flows from the property be sufficient to service the debt while still maintaining an appropriate amount of reserves. Commercial real estate loans in Hawaii are characterized by having a limited supply of real estate at commercially attractive locations, long delivery time frames for development and high interest rate sensitivity. Our construction lending portfolio consists primarily of land loans, single family and condominium development loans. Financing of construction loans is subject to a high degree of credit risk given the long delivery time frames for such projects. Construction lending activities are underwritten on a project financing basis whereby the cash flows or lease rents from the underlying real estate collateral or the sale of the finished inventory is the primary source of repayment. Market feasibility analysis is typically performed by assessing market comparables, market conditions and demand in the specific lending area and general community. We require presales of finished inventory prior to loan funding. However, because this analysis is typically performed on a forward-looking basis, real estate construction projects typically present a higher risk profile in our lending activities. Lease financing activities include commercial single investor leases and leveraged leases used to purchase items ranging from computer equipment to transportation equipment. Underwriting of new leasing arrangements typically includes analyzing customer cash flows, evaluating secondary sources of repayment, such as the value of the leased asset, the guarantors’ net cash flows as well as other credit enhancements provided by the lessee. Residential real estatelending is further categorized into the following classes: residential mortgages (loans secured by 1-4 family residential properties and home equity loans) and home equity lines of credit. Our bank’sBank’s underwriting standards typically require LTV ratios of not more than 80%, although higher levels are permitted with accompanying mortgage insurance. First mortgage loans secured by residential properties generally carry a moderate level of credit risk, with an average loan size of approximately $346,000.$359,000. Residential mortgage loan production is added to our loan portfolio or is sold in the secondary market, based on management’s evaluation of our liquidity, capital and loan portfolio mix as well as market conditions. Changes in interest rates, the economic environment and other market factors have impacted, and will likely continue to impact, the marketability and value of collateral and the financial condition of our borrowers which impacts the level of credit risk inherent in this portfolio, although we remain in a supply constrained housing environment in Hawaii. Geographic concentrations exist for this portfolio as nearly all residential mortgage loans and home equity lines of credit are for residences located in Hawaii, Guam or Saipan. These island locales are susceptible to a wide array of potential natural disasters including, but not limited to, hurricanes, floods, tsunamis and earthquakes. We offer home equity lines of credit with variable rates; fixed rate lock options may be available post-closing. All lines are underwritten at 2% over the fully indexed rate. Our procedures for underwriting home equity lines of credit include an assessment of an applicant’s overall financial capacity and repayment ability. Decisions are primarily based on repayment ability via debt-to-income ratios, LTV ratios and an evaluation of credit history. Consumer lending is further categorized into the following classes of loans: credit cards, automobile loans and other consumer-related installment loans. Consumer loans are either unsecured or secured by the borrower’s personal assets. The average loan size is generally small and risk is diversified among many borrowers. We offer a wide array of credit cards for business and personal use. In general, our customers are attracted to our credit card offerings on the basis of price, credit limit, reward programs and other product features. Credit card underwriting decisions are generally based on repayment ability of our borrower via DTI ratios, credit bureau information, including payment history, debt burden and credit scores, such as FICO, and analysis of financial capacity. Automobile lending activities include loans and leases secured by new or used automobiles. We originate the majority of our automobile loans and leases on an indirect basis through selected dealerships. Our procedures for underwriting automobile loans include an assessment of an applicant’s overall financial capacity and repayment ability, credit history and the ability to meet existing obligations and payments on the proposed loan or lease. Although an applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the collateral security to the proposed loan amount. We require borrowers to maintain full coverage automobile insurance on automobile loans and leases, with the Bank listed as either the loss payee or additional insured. Installment loans consist of open and closed end facilities for personal and household purchases. We seek to maintain reasonable levels of risk in installment lending by following prudent underwriting guidelines which include an evaluation of personal credit history and cash flow. In addition to geographic concentration risk, we also monitor our exposure to industry risk. While the Bank, our customers and our customersresults of operations could be adversely impacted by events affecting the tourism industry, we also monitor our other industry exposures, including, but not limited to, our exposures in the oil, gas and energy industries. As of December 31, 20192020 and 2018,2019, we did not have material exposures to customers in the oil, gas and energy industries. Market Risk Market risk is the potential of loss arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices, including the correlation among these factors and their volatility. When the value of an instrument is tied to such external factors, the holder faces market risk. We are exposed to market risk primarily from interest rate risk, which is defined as the risk of loss of net interest income or net interest margin because of changes in interest rates. 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. In the banking industry, changes in interest rates can significantly impact earnings and the safety and soundness of an entity. Interest rate risk arises primarily from our core business activities of extending loans and accepting deposits. This occurs when our interest earning loans and interest-bearing deposits mature or reprice at different times, on a different basis or in unequal amounts. Interest rates may also affect loan demand, credit losses, mortgage origination volume, pre- payment speeds and other items affecting earnings. 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 United States and its agencies, particularly the Federal Reserve. The monetary policies of the Federal Reserve can influence the overall growth of loans, investment securities and deposits and the level of interest rates earned on assets and paid for liabilities. Market Risk Measurement We primarily use net interest income simulation analysis to measure and analyze interest rate risk. We run various hypothetical interest rate scenarios and compare these results against a measured base case scenario. Our net interest income simulation analysis incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results. These assumptions include: (1) the timing of changes in interest rates, (2) shifts or rotations in the yield curve, (3) re-pricing characteristics for market rate sensitive instruments on and off-balance sheet, (4) differing sensitivities of financial instruments due to differing underlying rate indices and (5) varying loan prepayment speeds for different interest rate scenarios. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset liability management strategies to manage our interest rate risk. Table 2325 presents, for the twelve months subsequent to December 31, 20192020 and 2018,2019, an estimate of the changes in net interest income that would result from ramps (gradual changes) and shocks (immediate changes) in market interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario. Ramp scenarios assume interest rates move gradually in parallel across the yield curve relative to the base case scenario. Shock scenarios assume an immediate and sustained parallel shift in interest rates across the entire yield curve, relative to the base case scenario. The base case scenario assumes that the balance sheet isand interest rates are generally unchanged. We evaluate the sensitivity by using a static forecast, where the balance sheets as of December 31, 20192020 and 20182019 are held constant. | | | | | | | | | | | | | | | | | | | | | | | Net Interest Income Sensitivity Profile - Estimated Percentage Change Over 12 Months | | | Table 23 | | | Table 25 | | | | Static Forecast | | | Static Forecast | | | | Static Forecast | | | Static Forecast | | | | December 31, 2019 | | December 31, 2018 | | | December 31, 2020 | | December 31, 2019 | | Ramp Change in Interest Rates (basis points) | | | | | | | | | | | | | | | | | | | | | | | +100 | | | | | 4.0 | % | | | | 2.4 | % | | | | | 6.4 | % | | | | 4.0 | % | +50 | | | | | 1.9 | | | | | 1.2 | | | | | | 3.2 | | | | | 1.9 | | (50) | | | | | (2.3) | | | | | (1.2) | | | | | | (1.7) | | | | | (2.3) | | (100) | | | | | (4.4) | | | | | (2.5) | | | | | | (2.5) | | | | | (4.4) | | | | | | | | | | | | | | | | | | | | | | | | | Immediate Change in Interest Rates (basis points) | | | | | | | | | | | | | | | | | | | | | | | +100 | | | | | 8.9 | % | | | | 5.5 | % | | | | | 12.4 | % | | | | 8.9 | % | +50 | | | | | 4.4 | | | | | 2.7 | | | | | | 6.3 | | | | | 4.4 | | (50) | | | | | (4.9) | | | | | (2.8) | | | | | | (3.0) | | | | | (4.9) | | (100) | | | | | (9.6) | | | | | (6.2) | | | | | | (4.4) | | | | | (9.6) | |
The table above shows the effects of a simulation which estimates the effect of a gradual and immediate sustained parallel shift in the yield curve of −100, −50, +50 and +100 basis points in market interest rates over a twelve-month period on our net interest income. Currently, our interest rate profile is such that we project net interest income will benefit from higher interest rates as our assets would reprice faster and to a greater degree than our liabilities, while in the case of lower interest rates, our assets would reprice downward and to a greater degree than our liabilities. Under the static balance sheet forecast as of December 31, 2019,2020, our net interest income sensitivity profile is more sensitive in higher interest rate scenarios and less sensitive in lower interest rate scenarios as compared to similar forecasts as of December 31, 2018.2019. The higher sensitivity isimpacts described above are primarily due to lowerholding a larger federal funds position and market interest rates whichbeing lower as of December 31, 2020 as compared with December 31, 2019. A larger federal funds position has the effect of magnifying the impact of higher interest rate scenarios. Lower market interest rates have the effect of higher prepayments ofon loans and investment securities and reinvestments which occur at lower rates. Because market interest rates. Also contributing to the higher net interest income sensitivity as of December 31, 2019, is lower balances in ourrates have been approaching an interest rate sensitive deposit products.floor, this dampens the impact of the lower interest rate scenarios for both ramp and shock scenarios. The comparisons above provide insight into the potential effects of changes in interest rates on net interest income. The Company believes that its approach to interest rate risk has appropriately considered its susceptibility to both rising and falling rates and has adopted strategies which minimize the impact of such risks. We also have longer term interest rate risk exposures which may not be appropriately measured by net interest income simulation analysis. We use market value of equity (“MVE”) sensitivity analysis to study the impact of long-term cash flows on earnings and capital. MVE involves discounting present values of all cash flows of on-balance sheet and off-balance sheet items under different interest rate scenarios. The discounted present value of all cash flows represents our MVE. MVE analysis requires modifying the expected cash flows in each interest rate scenario, which will impact the discounted present value. The amount of base case measurement and its sensitivity to shifts in the yield curve allow management to measure longer term repricing option risk in the balance sheet. We also analyze the historical sensitivity of our interest-bearing transaction accounts to determine the portion that it classifies as interest rate sensitive versus the portion classified over one year. This analysis divides interest bearing assets and liabilities into maturity categories and measures the “gap” between maturing assets and liabilities in each category.
Limitations of Market Risk Measures The results of our simulation analyses are hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from those projected, our net interest income might vary significantly. Non-parallel yield curve shifts such as a flattening or steepening of the yield curve or changes in interest rate spreads would also cause our net interest income to be different from that depicted. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term liabilities re-price faster than expected or faster than our assets re-price. Actual results could differ from those projected if we grow assets and liabilities faster or slower than estimated, if we experience a net outflow of deposits or if our mix of assets and liabilities otherwise changes. For example, while we maintain relatively large cash balances with the FRB,high levels of liquidity, a faster than expected withdrawal of deposits out of the bank may cause us to seek higher cost sources of funding. Actual results could also differ from those projected if we experience substantially different prepayment speeds in our loan portfolio than those assumed in the simulation analyses. Finally, these simulation results do not consider all the actions that we may undertake in response to potential or actual changes in interest rates, such as changes to our loan, investment, deposit, funding or hedging strategies. Market Risk Governance We seek to achieve consistent growth in net interest income and capital while managing volatility arising from changes in market interest rates. The objective of our interest rate risk management process is to increase net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity. To manage the impact on net interest income, we manage our exposure to changes in interest rates through our asset and liability management activities within guidelines established by our ALCO and approved by our board of directors. The ALCO has the responsibility for approving and ensuring compliance with the ALCO management policies, including interest rate risk exposures. 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. Through review and oversight by the ALCO, we attempt to engage in strategies that neutralize interest rate risk as much as possible. Our use of derivative financial instruments, as detailed in “Note 17. Derivative Financial Instruments” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, 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. Management uses the results of its various simulation analyses to formulate strategies to achieve a desired risk profile within the parameters of our capital and liquidity guidelines. Operational Risk Operational risk is the risk of loss arising from inadequate or failed processes, people or systems, external events (such as natural disasters), or compliance, reputational or legal matters, including the risk of loss resulting from fraud, litigation and breaches in data security. Operational risk is inherent in all of our business ventures and the management of that risk is important to the achievement of our objectives. We have a framework in place that includes the reporting and assessment of any operational risk events, and the assessment of our mitigating strategies within our key business lines. This framework is implemented through our policies, processes and reporting requirements. We measure and report operational risk using the seven operational risk event types projected by the Basel Committee on Banking Supervision in Basel II: (1) external fraud; (2) internal fraud; (3) employment practices and workplace safety; (4) clients, products and business practices; (5) damage to physical assets; (6) business disruption and system failures; and (7) execution, delivery and process management. Our operational risk review process is also a core part of our assessment of material new products or activities. Selected Quarterly Financial Data (Unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Table 24 | | | | | | | | | | | | | | | | | | | | | | Table 26 | | | 2019 | | 2018 | | | 2020 | | 2019 | | (dollars in thousands, | | Quarters Ended | | Quarters Ended | | | Quarters Ended | | Quarters Ended | | except per share data) | | 12/31 | | 9/30 | | 6/30 | | 3/31 | | 12/31 | | 9/30 | | 6/30 | | 3/31 | | | 12/31 | | 9/30 | | 6/30 | | 3/31 | | 12/31 | | 9/30 | | 6/30 | | 3/31 | | Interest income | | $ | 162,132 | | $ | 170,181 | | $ | 173,818 | | $ | 172,561 | | $ | 168,044 | | $ | 164,052 | | $ | 159,019 | | $ | 154,936 | | | $ | 141,681 | | $ | 141,927 | | $ | 140,619 | | $ | 158,532 | | $ | 162,132 | | $ | 170,181 | | $ | 173,818 | | $ | 172,561 | | Interest expense | | | 22,513 | | | 27,100 | | | 28,205 | | | 27,472 | | | 24,059 | | | 22,794 | | | 17,616 | | | 15,264 | | | | 6,454 | | | 7,925 | | | 12,797 | | | 19,849 | | | 22,513 | | | 27,100 | | | 28,205 | | | 27,472 | | Net interest income | | | 139,619 | | | 143,081 | | | 145,613 | | | 145,089 | | | 143,985 | | | 141,258 | | | 141,403 | | | 139,672 | | | | 135,227 | | | 134,002 | | | 127,822 | | | 138,683 | | | 139,619 | | | 143,081 | | | 145,613 | | | 145,089 | | Provision for loan and lease losses | | | 4,250 | | | - | | | 3,870 | | | 5,680 | | | 5,750 | | | 4,460 | | | 6,020 | | | 5,950 | | | Provision for credit losses | | | | 20,000 | | | 5,072 | | | 55,446 | | | 41,200 | | | 4,250 | | | — | | | 3,870 | | | 5,680 | | Noninterest income(1) | | | 46,708 | | | 49,980 | | | 48,773 | | | 47,072 | | | 33,091 | | | 47,405 | | | 49,797 | | | 48,700 | | | | 53,598 | | | 48,898 | | | 45,656 | | | 49,228 | | | 46,708 | | | 49,980 | | | 48,773 | | | 47,072 | | Noninterest expense(2) | | | 91,058 | | | 93,466 | | | 93,290 | | | 92,623 | | | 89,354 | | | 93,147 | | | 91,865 | | | 90,587 | | | | 88,127 | | | 91,629 | | | 91,450 | | | 96,466 | | | 91,058 | | | 93,466 | | | 93,290 | | | 92,623 | | Income before income taxes | | | 91,019 | | | 99,595 | | | 97,226 | | | 93,858 | | | 81,972 | | | 91,056 | | | 93,315 | | | 91,835 | | | | 80,698 | | | 86,199 | | | 26,582 | | | 50,245 | | | 91,019 | | | 99,595 | | | 97,226 | | | 93,858 | | Provision for income taxes | | | 23,183 | | | 25,396 | | | 24,793 | | | 23,934 | | | 21,977 | | | 23,668 | | | 24,262 | | | 23,877 | | | | 18,959 | | | 21,098 | | | 6,533 | | | 11,380 | | | 23,183 | | | 25,396 | | | 24,793 | | | 23,934 | | Net income | | $ | 67,836 | | $ | 74,199 | | $ | 72,433 | | $ | 69,924 | | $ | 59,995 | | $ | 67,388 | | $ | 69,053 | | $ | 67,958 | | | $ | 61,739 | | $ | 65,101 | | $ | 20,049 | | $ | 38,865 | | $ | 67,836 | | $ | 74,199 | | $ | 72,433 | | $ | 69,924 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Per share information: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Earnings Per Common Share - Basic | | $ | 0.52 | | $ | 0.56 | | $ | 0.54 | | $ | 0.52 | | $ | 0.44 | | $ | 0.50 | | $ | 0.50 | | $ | 0.49 | | | $ | 0.48 | | $ | 0.50 | | $ | 0.15 | | $ | 0.30 | | $ | 0.52 | | $ | 0.56 | | $ | 0.54 | | $ | 0.52 | | Earnings Per Common Share - Diluted | | $ | 0.52 | | $ | 0.56 | | $ | 0.54 | | $ | 0.52 | | $ | 0.44 | | $ | 0.50 | | $ | 0.50 | | $ | 0.49 | | | $ | 0.47 | | $ | 0.50 | | $ | 0.15 | | $ | 0.30 | | $ | 0.52 | | $ | 0.56 | | $ | 0.54 | | $ | 0.52 | | Cash dividends declared per common share | | $ | 0.26 | | $ | 0.26 | | $ | 0.26 | | $ | 0.26 | | $ | 0.24 | | $ | 0.24 | | $ | 0.24 | | $ | 0.24 | | | $ | 0.26 | | $ | 0.26 | | $ | 0.26 | | $ | 0.26 | | $ | 0.26 | | $ | 0.26 | | $ | 0.26 | | $ | 0.26 | | Common share price: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | High | | $ | 29.47 | | $ | 27.84 | | $ | 28.20 | | $ | 27.67 | | $ | 27.49 | | $ | 30.02 | | $ | 31.28 | | $ | 32.36 | | | $ | 23.90 | | $ | 18.96 | | $ | 21.50 | | $ | 31.25 | | $ | 29.47 | | $ | 27.84 | | $ | 28.20 | | $ | 27.67 | | Low | | $ | 25.48 | | $ | 24.25 | | $ | 24.83 | | $ | 22.13 | | $ | 21.19 | | $ | 27.02 | | $ | 27.09 | | $ | 26.92 | | | $ | 14.16 | | $ | 14.32 | | $ | 13.56 | | $ | 15.42 | | $ | 25.48 | | $ | 24.25 | | $ | 24.83 | | $ | 22.13 | | Quarter-end | | $ | 28.85 | | $ | 26.70 | | $ | 25.87 | | $ | 26.05 | | $ | 22.51 | | $ | 27.16 | | $ | 29.02 | | $ | 27.83 | | | $ | 23.58 | | $ | 14.47 | | $ | 17.24 | | $ | 16.53 | | $ | 28.85 | | $ | 26.70 | | $ | 25.87 | | $ | 26.05 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Performance Ratios: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Return on average tangible stockholders' equity (non-GAAP)(3) | | | 16.40 | % | | 17.81 | % | | 17.99 | % | | 18.35 | % | | 16.51 | % | | 18.66 | % | | 18.83 | % | | 18.32 | % | | | 14.14 | % | | 15.16 | % | | 4.74 | % | | 9.39 | % | | 16.40 | % | | 17.81 | % | | 17.99 | % | | 18.35 | % | Return on average tangible assets (non-GAAP)(3) | | | 1.41 | % | | 1.52 | % | | 1.50 | % | | 1.45 | % | | 1.25 | % | | 1.38 | % | | 1.45 | % | | 1.42 | % | | | 1.14 | % | | 1.21 | % | | 0.38 | % | | 0.81 | % | | 1.41 | % | | 1.52 | % | | 1.50 | % | | 1.45 | % | Efficiency ratio | | | 48.86 | % | | 48.41 | % | | 47.99 | % | | 48.20 | % | | 50.45 | % | | 49.36 | % | | 48.04 | % | | 48.08 | % | | | 46.59 | % | | 50.01 | % | | 52.70 | % | | 51.33 | % | | 48.86 | % | | 48.41 | % | | 47.99 | % | | 48.20 | % | Net interest margin | | | 3.15 | % | | 3.19 | % | | 3.25 | % | | 3.23 | % | | 3.23 | % | | 3.11 | % | | 3.18 | % | | 3.13 | % | | | 2.71 | % | | 2.70 | % | | 2.58 | % | | 3.12 | % | | 3.15 | % | | 3.19 | % | | 3.25 | % | | 3.23 | % |
(1) | Noninterest income for the quarter ended December 31, 2020 included a $4.8 million loss related to an adjustment to revalue the Visa Class B derivative liability. Noninterest income for the quarter ended December 31, 2019 included a $4.5 million loss related to an adjustment to revalue the Visa Class B derivative liability. Noninterest income for the quarter ended March 31, 2019 included $2.6 million related to net losses due to the investment portfolio restructuring and sale of 48 investment securities. Noninterest income for the quarter ended December 31, 2018 included $24.1 million related to OTTI losses on available-for-sale debt securities and a non-recurring $7.6 million mark-to-market adjustment related to two cash flow hedges that matured in December 2018. |
(2) | Noninterest expense for the quarter ended September 30, 2018 included $4.1 million related to the litigation settlement agreement. |
(3) | Return on average tangible stockholders’ equity and return on average tangible assets are non-GAAP financial measures. For a reconciliation to the most directly comparable GAAP financial measures for return on average tangible stockholders’ equity and return on average tangible assets, see “Item 6. Selected Financial Data - GAAP to Non-GAAP Reconciliation.” |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK See “Item 7. MD&A - Risk Governance and Quantitative and Qualitative Disclosures About Market Risk.” ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To Thethe Stockholders and the Board of Directors of First Hawaiian, Inc. Honolulu, Hawaii Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of First Hawaiian, Inc. and Subsidiarysubsidiary (the "Company"“Company”) as of December 31, 20192020 and 2018,2019, the related consolidated statements of income, comprehensive income, shareholders'stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2019,2020, and the related notes (collectively referred to as the "financial statements"“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019,2020, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2020,25, 2021, expressed an unqualified opinion on the Company's internal control over financial reporting. Change in Accounting Principle As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for its allowance for credit losses in 2020 due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Basis for Opinion These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Allowance for Loan and LeaseCredit Losses (ACL) — Refer to Note 5 to the consolidated financial statements. Critical Audit Matter Description TheOn January 1, 2020, the Company maintains anadopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which modified the accounting for the allowance for loan and lease losses (the “Allowance”) at a level which, in management’s judgment, is adequate to absorb probable credit losses in the Company’s loan and lease portfolio. At December 31, 2019, the Company’s Allowance was $130.5 million. from an incurred loss model to an expected loss model.
The Company’s allowanceACL methodology considers many factors including, but not limited to, historical loss rate analysisexperience and qualitative adjustments.estimated defaults based on portfolio trends, delinquencies, and future economic conditions that will impact the amount of such future losses. Management’s expectation of future economic conditions is reflected in management’s selected economic forecast, ranging from mild, medium, to severe, based on various economic information including forecasted levels of employment, visitor arrivals and spending, interest rates and real estate prices. Management also incorporates qualitative adjustments to the historical loss rates or other static sources as these rates mayquantitative model to capture the impact of events that are not be an accurate indicator of inherent losseseasily captured in the current portfolio. To arrive atmodel. Determining the appropriate economic forecast adjustment and level of qualitative adjustments, management considers factors including global, nationaloverlays is inherently subjective and local economic conditions; levels and trends in problem loans; the effect of credit concentrations; collateral value trends; changes in risk due to changes in lending policies and practices; management expertise; industry and regulatory trends; and volume of loans.
The selection of relevant and appropriate qualitative adjustments in calculating the Allowance requiresrelies on significant management judgment. Given the magnitude of the impact of the economic forecast and qualitative adjustmentsoverlays and significant amount of judgment required by management in developing the qualitative component of the overall allowance,these estimates, performing audit procedures to evaluate the reasonableness of the AllowanceACL required a high degree of auditor judgment, an increased levelextent of audit effort, and the need to involve more experienced audit professionals.
How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the Allowanceeconomic forecast adjustment and qualitative overlays included the following procedures, among others: | ●• | We tested the effectiveness of controls over the Allowance,ACL, including management’s controls over the respective economic forecast and qualitative adjustments.overlays selected. |
| ●• | We evaluated the reasonableness and conceptual soundness of the AllowanceACL modeling framework, including the selection of the economic forecast adjustment and the use of qualitative adjustments. |
| ●• | We tested the mathematical accuracy of the calculation of the qualitative component of the AllowanceACL, as well as the accuracy and completeness of data used as inputs to the determination of the qualitative adjustments. |
| ●• | We evaluated the reasonableness of the economic forecast selection, including assessing the basis for the selection, as well as the accuracy and completeness of data used as inputs to the determination of the economic forecast selection. |
| • | We evaluated the qualitative adjustmentsoverlays to the historical loss rates, under the incurred loss model, including assessing the basis for the adjustments and the reasonableness of the significant assumptions. |
| ●• | We evaluated the magnitude and proportion of the overall allowance, including the directional consistency and magnitude of the qualitative adjustmentsoverlays as compared to the prior periods,year and prior quarters, as well as the absolute value of the AllowanceACL attributable to the qualitative adjustments.overlays. |
| ●• | In order to identify potential bias in the determination of the Allowance,ACL, we performed analytical analysis, including retrospective review, where we compared the estimate of lossesvarious coverage and ratio analysis, and peer institution analysis, to actual losses, analyzed ratios of the Allowance to loans and other relevant metrics, such as losses and nonperforming loans, performed peer analysis where we compared relevant metrics to comparable financial institutions, and evaluatedevaluate the relevance of the underlying key performance indicatorsdrivers used to determine qualitative adjustments,overlays and the economic forecast adjustment to identify potential biascredit losses in the determination of the Allowance.loan portfolios. |
Organization and Summary of Significant Accounting Policies – Recent Accounting Pronouncements – Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments – Refer to Note 1 to the consolidated financial statements
Critical Audit Matter Description
On January 1, 2020, the Company will adopt ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, which eliminated the probable recognition threshold for credit losses on financial assets measured at amortized cost. For loans and held-to-maturity debt securities, this guidance requires a current expected credit loss (“CECL”) approach to determine the allowance for credit losses (“ACL”). CECL requires loss estimates for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. CECL also applies to off-balance sheet credit exposures, except for unconditionally cancellable commitments.
Based on the Company’s portfolio balances and forecasted economic conditions as of January 1, 2020, management believes the adoption of the CECL standard will result in an increase in the ACL of approximately 10% to 15%, as compared to the Company’s reserve levels as of December 31, 2019. The CECL model requires management to make estimates of the expected credit losses over the remaining estimated life of the loans, including using estimates of future economic conditions that will impact the amount of such future losses. The implementation of CECL will require significant operational changes, particularly in data collection and analysis. The Company also engaged a new software vendor, ran multiple parallel productions, completed model validations and user acceptance testing, in order to align with the CECL model.
The estimation of credit losses significantly changes under the CECL model, including the application of new accounting policies, the use of new subjective judgments, and changes made to the loss estimation models. Accordingly, the procedures performed to audit the disclosure of the expected impact of the adoption of ASU No. 2016-13 involved a high degree of auditor judgment and required significant effort, including the need to involve our credit specialists.
Other Assets - Goodwill – Refer to Note 7 to the financial statements. Critical Audit Matter Description The Company’s goodwill balance was $995.5 million as of December 31, 2020, which was allocated to the Retail and Commercial reporting units. The fair values of the Company’s reporting units exceeded their carrying values as of the measurement date and, therefore, no impairment was recognized. The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company applied an equal weighting of the income approach (discounted cash flows) and market approach to estimate fair value. The income approach requires management to make significant estimates and assumptions related to the discount rates and forecasts of future net interest income and net income. Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. Given the significant judgments made by management to estimate the fair value of its reporting units and the difference between the fair value and carrying value, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the selection of the discount rates and forecasts of future net interest income and net income, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the disclosurediscount rates and forecasts of the expected impact of adopting ASU No. 2016-13future net interest income and net income for each reporting unit included the following procedures, among others: | ●• | We tested the effectiveness of controls over management’s internal controls coveringgoodwill impairment evaluation, including those over the key assumptions and judgments, CECL estimation models, selection and applicationdetermination of new accounting policies, and disclosurefair value of the impactRetail and Commercial reporting units, including controls related to management’s forecasts and selection of adoption in the consolidated financial statements.discount rates and forecasts of future net interest income and net income. |
| ●• | We evaluated the adequacy of the Company’s disclosure relatedmanagement’s ability to the adoption of ASU No. 2016-13.accurately forecast future cash flows by comparing actual results to management’s historical forecasts. |
| ● | We evaluated the appropriateness of the Company’s policies, methodologies, and elections involved in the adoption of the CECL model. |
| ● | We tested the mathematical accuracy of the CECL estimation models, including the completeness and accuracy of inputs to the models. |
| ● | We involved credit specialists to assist us in evaluating the reasonableness and conceptual soundness of the methodology as applied in the CECL estimation models. |
| ●• | We evaluated the reasonableness of management’s key assumptions and judgments in estimatingforecasts of future credit losses.cash flows by comparing the forecasts to: |
| o | Supporting calculations of net interest income and net income. |
| o | Internal communications to management and the Board of Directors. |
| o | Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies. |
| • | With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) the discount rates by: |
| o | Testing the source information underlying the determination of the discount rates and the mathematical accuracy of the calculation. |
| o | Developing a range of independent estimates and comparing those to the discount rates selected by management. |
| • | We evaluated the reasonableness of management’s sensitivity analysis used to “stress” its assumptions. |
/s/ DELOITTE & TOUCHE LLP Honolulu, Hawaii February 27, 202025, 2021 We have served as the Company’s auditor since 2012. FIRST HAWAIIAN, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | Year Ended December 31, | (dollars in thousands, except per share amounts) | | 2019 | | 2018 | | 2017 | | 2020 | | 2019 | | 2018 | Interest income | | | | | | | | | | | | | | | | | | | Loans and lease financing | | $ | 574,013 | | $ | 529,877 | | $ | 462,675 | | $ | 496,523 | | $ | 574,013 | | $ | 529,877 | Available-for-sale securities | | | 92,505 | | | 107,123 | | | 102,272 | | | 81,808 | | | 92,505 | | | 107,123 | Other | | | 12,174 | | | 9,051 | | | 5,821 | | | 4,428 | | | 12,174 | | | 9,051 | Total interest income | | | 678,692 | | | 646,051 | | | 570,768 | | | 582,759 | | | 678,692 | | | 646,051 | Interest expense | | | | | | | | | | | | | | | | | | | Deposits | | | 87,865 | | | 72,976 | | | 41,944 | | | 35,471 | | | 87,865 | | | 72,976 | Short-term and long-term borrowings | | | 17,425 | | | 6,757 | | | 20 | | | 11,554 | | | 17,425 | | | 6,757 | Total interest expense | | | 105,290 | | | 79,733 | | | 41,964 | | | 47,025 | | | 105,290 | | | 79,733 | Net interest income | | | 573,402 | | | 566,318 | | | 528,804 | | | 535,734 | | | 573,402 | | | 566,318 | Provision for loan and lease losses | | | 13,800 | | | 22,180 | | | 18,500 | | | Net interest income after provision for loan and lease losses | | | 559,602 | | | 544,138 | | | 510,304 | | | Provision for credit losses | | | 121,718 | | | 13,800 | | | 22,180 | Net interest income after provision for credit losses | | | 414,016 | | | 559,602 | | | 544,138 | Noninterest income | | | | | | | | | | | | | | | | | | | Service charges on deposit accounts | | | 33,778 | | | 32,036 | | | 35,807 | | | 28,169 | | | 33,778 | | | 32,036 | Credit and debit card fees | | | 66,749 | | | 65,716 | | | 64,049 | | | 55,451 | | | 66,749 | | | 65,716 | Other service charges and fees | | | 36,253 | | | 38,316 | | | 34,063 | | | 33,876 | | | 36,253 | | | 38,316 | Trust and investment services income | | | 35,102 | | | 31,324 | | | 30,485 | | | 35,652 | | | 35,102 | | | 31,324 | Bank-owned life insurance | | | 15,479 | | | 9,217 | | | 13,283 | | | 15,754 | | | 15,479 | | | 9,217 | Investment securities losses, net | | | (2,715) | | | — | | | — | | | (114) | | | (2,715) | | | — | Other-than-temporary impairment (OTTI) losses on available-for-sale debt securities | | | — | | | (24,085) | | | — | | | — | | | — | | | (24,085) | Other | | | 7,887 | | | 26,469 | | | 27,918 | | | 28,592 | | | 7,887 | | | 26,469 | Total noninterest income | | | 192,533 | | | 178,993 | | | 205,605 | | | 197,380 | | | 192,533 | | | 178,993 | Noninterest expense | | | | | | | | | | | | | | | | | | | Salaries and employee benefits | | | 173,098 | | | 167,162 | | | 163,086 | | | 174,221 | | | 173,098 | | | 167,162 | Contracted services and professional fees | | | 56,321 | | | 49,775 | | | 45,011 | | | 60,546 | | | 56,321 | | | 49,775 | Occupancy | | | 28,753 | | | 27,330 | | | 23,485 | | | 28,821 | | | 28,753 | | | 27,330 | Equipment | | | 17,343 | | | 17,714 | | | 17,247 | | | 20,277 | | | 17,343 | | | 17,714 | Regulatory assessment and fees | | | 7,390 | | | 14,217 | | | 14,907 | | | 8,659 | | | 7,390 | | | 14,217 | Advertising and marketing | | | 6,910 | | | 4,813 | | | 6,191 | | | 5,695 | | | 6,910 | | | 4,813 | Card rewards program | | | 29,961 | | | 24,860 | | | 23,363 | | | 22,114 | | | 29,961 | | | 24,860 | Other | | | 50,661 | | | 59,082 | | | 54,264 | | | 47,339 | | | 50,661 | | | 59,082 | Total noninterest expense | | | 370,437 | | | 364,953 | | | 347,554 | | | 367,672 | | | 370,437 | | | 364,953 | Income before provision for income taxes | | | 381,698 | | | 358,178 | | | 368,355 | | | 243,724 | | | 381,698 | | | 358,178 | Provision for income taxes | | | 97,306 | | | 93,784 | | | 184,673 | | | 57,970 | | | 97,306 | | | 93,784 | Net income | | $ | 284,392 | | $ | 264,394 | | $ | 183,682 | | $ | 185,754 | | $ | 284,392 | | $ | 264,394 | Basic earnings per share | | $ | 2.14 | | $ | 1.93 | | $ | 1.32 | | $ | 1.43 | | $ | 2.14 | | $ | 1.93 | Diluted earnings per share | | $ | 2.13 | | $ | 1.93 | | $ | 1.32 | | $ | 1.43 | | $ | 2.13 | | $ | 1.93 | Basic weighted-average outstanding shares | | | 133,076,489 | | | 136,945,134 | | | 139,560,305 | | | 129,890,225 | | | 133,076,489 | | | 136,945,134 | Diluted weighted-average outstanding shares | | | 133,387,157 | | | 137,111,420 | | | 139,656,993 | | | 130,220,077 | | | 133,387,157 | | | 137,111,420 |
The accompanying notes are an integral part of these consolidated financial statements. FIRST HAWAIIAN, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | | | | | | | | | | | | | Year Ended December 31, | | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | Net income | | $ | 284,392 | | $ | 264,394 | | $ | 183,682 | | Other comprehensive income (loss), net of tax: | | | | | | | | | | | Net change in pensions and other benefits | | | 297 | | | 2,960 | | | 4,291 | | Net change in investment securities | | | 100,149 | | | (14,259) | | | (14,159) | | Net change in cash flow derivative hedges | | | — | | | (4,445) | | | 1,496 | | Other comprehensive income (loss) | | | 100,446 | | | (15,744) | | | (8,372) | | Total comprehensive income | | $ | 384,838 | | $ | 248,650 | | $ | 175,310 | |
| | | | | | | | | | | | Year Ended December 31, | (dollars in thousands) | | 2020 | | 2019 | | 2018 | Net income | | $ | 185,754 | | $ | 284,392 | | $ | 264,394 | Other comprehensive income (loss), net of tax: | | | | | | | | | | Net change in pensions and other benefits | | | (3,655) | | | 297 | | | 2,960 | Net change in investment securities | | | 67,008 | | | 100,149 | | | (14,259) | Net change in cash flow derivative hedges | | | — | | | — | | | (4,445) | Other comprehensive income (loss) | | | 63,353 | | | 100,446 | | | (15,744) | Total comprehensive income | | $ | 249,107 | | $ | 384,838 | | $ | 248,650 |
The accompanying notes are an integral part of these consolidated financial statements. FIRST HAWAIIAN, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS | | | | | | | | | December 31, | | December 31, | (dollars in thousands, except share amount) | | 2019 | | 2018 | Assets | | | | | | | Cash and due from banks | | $ | 360,375 | | $ | 396,836 | Interest-bearing deposits in other banks | | | 333,642 | | | 606,801 | Investment securities | | | 4,075,644 | | | 4,498,342 | Loans held for sale | | | 904 | | | 432 | Loans and leases | | | 13,211,650 | | | 13,076,191 | Less: allowance for loan and lease losses | | | 130,530 | | | 141,718 | Net loans and leases | | | 13,081,120 | | | 12,934,473 | | | | | | | | Premises and equipment, net | | | 316,885 | | | 304,996 | Other real estate owned and repossessed personal property | | | 319 | | | 751 | Accrued interest receivable | | | 45,239 | | | 48,920 | Bank-owned life insurance | | | 453,873 | | | 446,076 | Goodwill | | | 995,492 | | | 995,492 | Mortgage servicing rights | | | 12,668 | | | 16,155 | Other assets | | | 490,573 | | | 446,404 | Total assets | | $ | 20,166,734 | | $ | 20,695,678 | Liabilities and Stockholders' Equity | | | | | | | Deposits: | | | | | | | Interest-bearing | | $ | 10,564,922 | | $ | 11,142,127 | Noninterest-bearing | | | 5,880,072 | | | 6,007,941 | Total deposits | | | 16,444,994 | | | 17,150,068 | Short-term borrowings | | | 400,000 | | | — | Long-term borrowings | | | 200,019 | | | 600,026 | Retirement benefits payable | | | 138,222 | | | 127,909 | Other liabilities | | | 343,241 | | | 292,836 | Total liabilities | | | 17,526,476 | | | 18,170,839 | | | | | | | | Commitments and contingent liabilities (Note 18) | | | | | | | | | | | | | | Stockholders' equity | | | | | | | Common stock ($0.01 par value; authorized 300,000,000 shares; issued/outstanding: 139,917,150 / 129,928,479 as of December 31, 2019; issued/outstanding: 139,656,674 / 134,874,302 as of December 31, 2018) | | | 1,399 | | | 1,397 | Additional paid-in capital | | | 2,503,677 | | | 2,495,853 | Retained earnings | | | 437,072 | | | 291,919 | Accumulated other comprehensive loss, net | | | (31,749) | | | (132,195) | Treasury stock (9,988,671 shares as of December 31, 2019 and 4,782,372 shares as of December 31, 2018) | | | (270,141) | | | (132,135) | Total stockholders' equity | | | 2,640,258 | | | 2,524,839 | Total liabilities and stockholders' equity | | $ | 20,166,734 | | $ | 20,695,678 |
| | | | | | | | | December 31, | | December 31, | (dollars in thousands, except share amount) | | 2020 | | 2019 | Assets | | | | | | | Cash and due from banks | | $ | 303,373 | | $ | 360,375 | Interest-bearing deposits in other banks | | | 737,571 | | | 333,642 | Investment securities, at fair value (amortized cost: $5,985,031 as of December 31, 2020 and $4,080,663 as of December 31, 2019) | | | 6,071,415 | | | 4,075,644 | Loans held for sale | | | 11,579 | | | 904 | Loans and leases | | | 13,279,097 | | | 13,211,650 | Less: allowance for credit losses | | | 208,454 | | | 130,530 | Net loans and leases | | | 13,070,643 | | | 13,081,120 | | | | | | | | Premises and equipment, net | | | 322,401 | | | 316,885 | Other real estate owned and repossessed personal property | | | — | | | 319 | Accrued interest receivable | | | 69,626 | | | 45,239 | Bank-owned life insurance | | | 466,537 | | | 453,873 | Goodwill | | | 995,492 | | | 995,492 | Mortgage servicing rights | | | 10,731 | | | 12,668 | Other assets | | | 603,463 | | | 490,573 | Total assets | | $ | 22,662,831 | | $ | 20,166,734 | Liabilities and Stockholders' Equity | | | | | | | Deposits: | | | | | | | Interest-bearing | | $ | 11,705,609 | | $ | 10,564,922 | Noninterest-bearing | | | 7,522,114 | | | 5,880,072 | Total deposits | | | 19,227,723 | | | 16,444,994 | Short-term borrowings | | | — | | | 400,000 | Long-term borrowings | | | 200,010 | | | 200,019 | Retirement benefits payable | | | 143,373 | | | 138,222 | Other liabilities | | | 347,621 | | | 343,241 | Total liabilities | | | 19,918,727 | | | 17,526,476 | | | | | | | | Commitments and contingent liabilities (Note 18) | | | | | | | | | | | | | | Stockholders' equity | | | | | | | Common stock ($0.01 par value; authorized 300,000,000 shares; issued/outstanding: 140,191,133 / 129,912,272 as of December 31, 2020; issued/outstanding: 139,917,150 / 129,928,479 as of December 31, 2019) | | | 1,402 | | | 1,399 | Additional paid-in capital | | | 2,514,014 | | | 2,503,677 | Retained earnings | | | 473,974 | | | 437,072 | Accumulated other comprehensive income (loss), net | | | 31,604 | | | (31,749) | Treasury stock (10,278,861 shares as of December 31, 2020 and 9,988,671 shares as of December 31, 2019) | | | (276,890) | | | (270,141) | Total stockholders' equity | | | 2,744,104 | | | 2,640,258 | Total liabilities and stockholders' equity | | $ | 22,662,831 | | $ | 20,166,734 |
The accompanying notes are an integral part of these consolidated financial statements. FIRST HAWAIIAN, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | Additional | | | | | Other | | | | | | | (dollars in thousands, | | Common Stock | | Paid-In | | Retained | | Comprehensive | | Treasury | | | | except share amounts) | | Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Stock | | Total | Balance as of December 31, 2016 | | 139,530,654 | | $ | 1,395 | | $ | 2,484,251 | | $ | 78,850 | | $ | (88,011) | | $ | — | | $ | 2,476,485 | Net income | | — | | | — | | | — | | | 183,682 | | | — | | | — | | | 183,682 | Cash dividends declared ($0.88 per share) | | — | | | — | | | — | | | (122,810) | | | — | | | — | | | (122,810) | Common stock issued under Employee Stock Purchase Plan | | 15,961 | | | — | | | 528 | | | — | | | — | | | — | | | 528 | Equity-based awards | | 42,167 | | | 1 | | | 5,982 | | | (545) | | | — | | | (282) | | | 5,156 | Distributions | | — | | | — | | | (2,118) | | | — | | | — | | | — | | | (2,118) | Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (8,372) | | | — | | | (8,372) | Balance as of December 31, 2017 | | 139,588,782 | | | 1,396 | | | 2,488,643 | | | 139,177 | | | (96,383) | | | (282) | | | 2,532,551 | Net income | | — | | | — | | | — | | | 264,394 | | | — | | | — | | | 264,394 | Cash dividends declared ($0.96 per share) | | — | | | — | | | — | | | (131,036) | | | — | | | — | | | (131,036) | Common stock issued under Employee Stock Purchase Plan | | 12,341 | | | — | | | 342 | | | — | | | — | | | — | | | 342 | Equity-based awards | | 43,049 | | | 1 | | | 6,868 | | | (684) | | | — | | | (53) | | | 6,132 | Common stock repurchased | | (4,769,870) | | | — | | | — | | | — | | | — | | | (131,800) | | | (131,800) | Adoption of Accounting Standards Update No. 2018-02 | | — | | | — | | | — | | | 20,068 | | | (20,068) | | | — | | | — | Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (15,744) | | | — | | | (15,744) | Balance as of December 31, 2018 | | 134,874,302 | | | 1,397 | | | 2,495,853 | | | 291,919 | | | (132,195) | | | (132,135) | | | 2,524,839 | Net income | | — | | | — | | | — | | | 284,392 | | | — | | | — | | | 284,392 | Cash dividends declared ($1.04 per share) | | — | | | — | | | — | | | (138,246) | | | — | | | — | | | (138,246) | Equity-based awards | | 194,187 | | | 2 | | | 7,824 | | | (993) | | | — | | | (1,764) | | | 5,069 | Common stock repurchased | | (5,140,010) | | | — | | | — | | | — | | | — | | | (136,242) | | | (136,242) | Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 100,446 | | | — | | | 100,446 | Balance as of December 31, 2019 | | 129,928,479 | | $ | 1,399 | | $ | 2,503,677 | | $ | 437,072 | | $ | (31,749) | | $ | (270,141) | | $ | 2,640,258 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | Additional | | | | | Other | | | | | | | (dollars in thousands, | | Common Stock | | Paid-In | | Retained | | Comprehensive | | Treasury | | | | except share amounts) | | Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Stock | | Total | Balance as of December 31, 2017 | | 139,588,782 | | $ | 1,396 | | $ | 2,488,643 | | $ | 139,177 | | $ | (96,383) | | $ | (282) | | $ | 2,532,551 | Net income | | — | | | — | | | — | | | 264,394 | | | — | | | — | | | 264,394 | Cash dividends declared ($0.96 per share) | | — | | | — | | | — | | | (131,036) | | | — | | | — | | | (131,036) | Common stock issued under Employee Stock Purchase Plan | | 12,341 | | | — | | | 342 | | | — | | | — | | | — | | | 342 | Equity-based awards | | 43,049 | | | 1 | | | 6,868 | | | (684) | | | — | | | (53) | | | 6,132 | Common stock repurchased | | (4,769,870) | | | — | | | — | | | — | | | — | | | (131,800) | | | (131,800) | Adoption of Accounting Standards Update No. 2018-02 | | — | | | — | | | — | | | 20,068 | | | (20,068) | | | — | | | — | Other comprehensive loss, net of tax | | — | | | — | | | — | | | — | | | (15,744) | | | — | | | (15,744) | Balance as of December 31, 2018 | | 134,874,302 | | | 1,397 | | | 2,495,853 | | | 291,919 | | | (132,195) | | | (132,135) | | | 2,524,839 | Net income | | — | | | — | | | — | | | 284,392 | | | — | | | — | | | 284,392 | Cash dividends declared ($1.04 per share) | | — | | | — | | | — | | | (138,246) | | | — | | | — | | | (138,246) | Equity-based awards | | 194,187 | | | 2 | | | 7,824 | | | (993) | | | — | | | (1,764) | | | 5,069 | Common stock repurchased | | (5,140,010) | | | — | | | — | | | — | | | — | | | (136,242) | | | (136,242) | Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 100,446 | | | — | | | 100,446 | Balance as of December 31, 2019 | | 129,928,479 | | | 1,399 | | | 2,503,677 | | | 437,072 | | | (31,749) | | | (270,141) | | | 2,640,258 | Cumulative-effect adjustment of a change in accounting principle, net of tax: ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments | | — | | | — | | | — | | | (12,517) | | | — | | | — | | | (12,517) | Net income | | — | | | — | | | — | | | 185,754 | | | — | | | — | | | 185,754 | Cash dividends declared ($1.04 per share) | | — | | | — | | | — | | | (135,099) | | | — | | | — | | | (135,099) | Common stock issued under Employee Stock Purchase Plan | | 19,069 | | | — | | | 312 | | | — | | | — | | | — | | | 312 | Equity-based awards | | 182,483 | | | 3 | | | 10,025 | | | (1,236) | | | — | | | (1,749) | | | 7,043 | Common stock repurchased | | (217,759) | | | — | | | — | | | — | | | — | | | (5,000) | | | (5,000) | Other comprehensive income, net of tax | | — | | | — | | | — | | | — | | | 63,353 | | | — | | | 63,353 | Balance as of December 31, 2020 | | 129,912,272 | | $ | 1,402 | | $ | 2,514,014 | | $ | 473,974 | | $ | 31,604 | | $ | (276,890) | | $ | 2,744,104 |
The accompanying notes are an integral part of these consolidated financial statements. FIRST HAWAIIAN, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | | 2020 | | 2019 | | 2018 | | Cash flows from operating activities | | | | | | | | | | | | | | | | | | | | | Net income | | $ | 284,392 | | $ | 264,394 | | $ | 183,682 | | | $ | 185,754 | | $ | 284,392 | | $ | 264,394 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | | | | | | Provision for loan and lease losses | | | 13,800 | | | 22,180 | | | 18,500 | | | Provision for credit losses | | | | 121,718 | | | 13,800 | | | 22,180 | | Depreciation, amortization and accretion, net | | | 67,824 | | | 54,903 | | | 62,019 | | | | 63,071 | | | 67,824 | | | 54,903 | | Deferred income taxes | | | 17,060 | | | (3,602) | | | 58,916 | | | Deferred income tax (benefit) provision | | | | (19,396) | | | 17,060 | | | (3,602) | | Stock-based compensation | | | 7,826 | | | 6,185 | | | 5,292 | | | | 10,028 | | | 7,826 | | | 6,185 | | Net gains on sale of real estate | | | — | | | — | | | (6,922) | | | Other losses (gains) | | | 19 | | | (1,062) | | | (210) | | | Other (gains) losses | | | | (4) | | | 19 | | | (1,062) | | Originations of loans held for sale | | | (19,164) | | | (29,707) | | | — | | | | (327,076) | | | (19,164) | | | (29,707) | | Proceeds from sales of loans held for sale | | | 18,156 | | | 29,467 | | | — | | | | 326,785 | | | 18,156 | | | 29,467 | | Net losses (gains) on sales of loans originated for investment and held for sale | | | 1,102 | | | (199) | | | (16) | | | Net (gains) losses on sales of loans originated for investment and held for sale | | | | (18,995) | | | 1,102 | | | (199) | | Net losses on investment securities | | | 2,715 | | | — | | | — | | | | 114 | | | 2,715 | | | — | | OTTI losses on available-for-sale debt securities | | | — | | | 24,085 | | | — | | | | — | | | — | | | 24,085 | | Change in assets and liabilities: | | | | | | | | | | | | | | | | | | | | | Net (increase) decrease in other assets | | | (20,923) | | | 11,859 | | | (42,359) | | | | (17,880) | | | (20,923) | | | 11,859 | | Net decrease in other liabilities | | | (76,303) | | | (27,090) | | | (9,128) | | | | (114,613) | | | (76,303) | | | (27,090) | | Net cash provided by operating activities | | | 296,504 | | | 351,413 | | | 269,774 | | | | 209,506 | | | 296,504 | | | 351,413 | | Cash flows from investing activities | | | | | | | | | | | | | | | | | | | | | Available-for-sale securities: | | | | | | | | | | | | | | | | | | | | | Proceeds from maturities and principal repayments | | | 767,892 | | | 810,260 | | | 888,700 | | | | 1,474,587 | | | 767,892 | | | 810,260 | | Proceeds from calls and sales | | | 1,070,715 | | | — | | | — | | | | 644,983 | | | 1,070,715 | | | — | | Purchases | | | (1,301,041) | | | (130,252) | | | (1,088,417) | | | | (4,045,871) | | | (1,301,041) | | | (130,252) | | Other investments: | | | | | | | | | | | | | | | | | | | | | Proceeds from sales | | | 14,292 | | | 12,842 | | | 15,517 | | | | 34,822 | | | 14,292 | | | 12,842 | | Purchases | | | (30,996) | | | (65,239) | | | (20,487) | | | | (77,927) | | | (30,996) | | | (65,239) | | Loans: | | | | | | | | | | | | | | | | | | | | | Net increase in loans and leases resulting from originations and principal repayments | | | (133,702) | | | (572,488) | | | (750,917) | | | | (217,530) | | | (133,702) | | | (572,488) | | Proceeds from sales of loans originated for investment | | | 407,698 | | | 562 | | | 9,711 | | | | 153,647 | | | 407,698 | | | 562 | | Purchases of loans | | | (398,735) | | | (270,272) | | | (26,626) | | | | (41,146) | | | (398,735) | | | (270,272) | | Proceeds from bank-owned life insurance | | | 7,682 | | | 1,151 | | | 4,482 | | | | 3,089 | | | 7,682 | | | 1,151 | | Purchases of premises, equipment and software | | | (29,354) | | | (35,880) | | | (10,068) | | | | (33,390) | | | (29,354) | | | (35,880) | | Proceeds from sales of premises and equipment | | | 2 | | | 65 | | | 8,139 | | | Purchases of mortgage servicing rights | | | — | | | (6,444) | | | — | | | | — | | | — | | | (6,444) | | Proceeds from sales of other real estate owned | | | 759 | | | 718 | | | 929 | | | | 787 | | | 759 | | | 718 | | Other | | | — | | | (2,832) | | | (2,044) | | | | 186 | | | 2 | | | (2,767) | | Net cash provided by (used in) investing activities | | | 375,212 | | | (257,809) | | | (971,081) | | | Net cash (used in) provided by investing activities | | | | (2,103,763) | | | 375,212 | | | (257,809) | | Cash flows from financing activities | | | | | | | | | | | | | | | | | | | | | Net (decrease) increase in deposits | | | (705,074) | | | (462,054) | | | 817,590 | | | Net decrease in short-term borrowings | | | — | | | — | | | (9,151) | | | Net increase (decrease) in deposits | | | | 2,782,729 | | | (705,074) | | | (462,054) | | Repayment of short-term borrowings | | | | (400,000) | | | — | | | — | | Proceeds from long-term borrowings | | | — | | | 600,000 | | | — | | | | — | | | — | | | 600,000 | | Repayment of long-term borrowings | | | (10) | | | (10) | | | (10) | | | | (9) | | | (10) | | | (10) | | Dividends paid | | | (138,246) | | | (131,036) | | | (122,810) | | | | (135,099) | | | (138,246) | | | (131,036) | | Distributions paid | | | — | | | — | | | (2,118) | | | Stock tendered for payment of withholding taxes | | | (1,764) | | | (53) | | | (136) | | | | (1,749) | | | (1,764) | | | (53) | | Proceeds from employee stock purchase plan | | | — | | | 342 | | | 528 | | | | 312 | | | — | | | 342 | | Common stock repurchased | | | (136,242) | | | (131,800) | | | — | | | | (5,000) | | | (136,242) | | | (131,800) | | Net cash (used in) provided by financing activities | | | (981,336) | | | (124,611) | | | 683,893 | | | Net decrease in cash and cash equivalents | | | (309,620) | | | (31,007) | | | (17,414) | | | Net cash provided by (used in) financing activities | | | | 2,241,184 | | | (981,336) | | | (124,611) | | Net increase (decrease) in cash and cash equivalents | | | | 346,927 | | | (309,620) | | | (31,007) | | Cash and cash equivalents at beginning of year | | | 1,003,637 | | | 1,034,644 | | | 1,052,058 | | | | 694,017 | | | 1,003,637 | | | 1,034,644 | | Cash and cash equivalents at end of year | | $ | 694,017 | | $ | 1,003,637 | | $ | 1,034,644 | | | $ | 1,040,944 | | $ | 694,017 | | $ | 1,003,637 | | | | | | | | | | | | | | | | | | | | | | | Supplemental disclosures | | | | | | | | | | | | | | | | | | | | | Interest paid | | $ | 102,457 | | $ | 80,381 | | $ | 36,633 | | | $ | 52,865 | | $ | 102,457 | | $ | 80,381 | | Income taxes paid, net of income tax refunds | | | 70,508 | | | 43,002 | | | 145,072 | | | | 53,272 | | | 70,508 | | | 43,002 | | Noncash investing and financing activities: | | | | | | | | | | | | | | | | | | | | | Transfers from loans and leases to other real estate owned | | | 310 | | | 549 | | | 759 | | | | 437 | | | 310 | | | 549 | | Operating lease right-of-use assets obtained in exchange for new lease obligations | | | 1,401 | | | — | | | — | | | | 3,796 | | | 1,401 | | | — | | Transfers from loans and leases to loans held for sale | | | 408,264 | | | — | | | 10,251 | | | | 145,036 | | | 408,264 | | | — | | Obligation to fund low-income housing partnerships | | | 31,628 | | | 36,044 | | | 34,835 | | | | 13,767 | | | 31,628 | | | 36,044 | |
The accompanying notes are an integral part of these consolidated financial statements. FIRST HAWAIIAN, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Summary of Significant Accounting Policies Basis of Presentation First Hawaiian, Inc. (“FHI” or the “Parent”), a bank holding company, owns 100% of the outstanding common stock of First Hawaiian Bank (“FHB” or the “Bank”). FHB is a state-chartered bank that is not a member of the Federal Reserve System. FHB, the oldest financial institution in Hawaii, was established as Bishop & Company in 1858. As of December 31, 2019,2020, FHB was the largest bank in Hawaii in terms of total assets, loans and leases, deposits, and deposits.net income. FHB has 5854 branches located throughout the State of Hawaii, Guam and Saipan, and offers a comprehensive suite of banking services to consumer and commercial customers including loans, deposit products, wealth management, insurance, trust, retirement planning, credit card and merchant processing services. The accounting and reporting principles of First Hawaiian, Inc. and Subsidiary (the “Company”) conform to U.S. generally accepted accounting principles (“GAAP”) and prevailing practices within the financial services industry. Intercompany accounts and transactions have been eliminated in consolidation. Transition to an Independent Public Company Prior to our initial public offering in August 2016 (“IPO”), we were an indirect wholly owned subsidiary of BNP Paribas (“BNPP”), a global financial institution based in France. On April 1, 2016, BNPP effected a series of transactions (“Reorganization Transactions”) pursuant to which FHI, which was then known as BancWest Corporation (“BancWest”), contributed Bank of the West (“BOW”), its subsidiary at the time, to BancWest Holding Inc. (“BWHI”), a newly formed bank holding company and a wholly owned subsidiary of BancWest. Following the contribution of BOW to BWHI, BancWest distributed its interest in BWHI to BNPP, and BWHI became a wholly owned subsidiary of BNPP. As part of these transactions, we amended our certificate of incorporation to change our name to First Hawaiian, Inc., with First Hawaiian Bank remaining our only direct wholly owned subsidiary. On July 1, 2016, we became an indirect wholly owned subsidiary of BNP Paribas USA, Inc. (“BNP Paribas USA”), BNPP’s U.S. intermediate holding company. As part of that reorganization, we became a direct wholly owned subsidiary of BancWest Corporation (“BWC”), a direct wholly owned subsidiary of BNP Paribas USA. In August 2016, FHI completed its IPO of 24,250,000and shares of common stock sold by BWC. Shares of FHI’s common stock began trading on the NASDAQ Global Select Market (“NASDAQ”) under the ticker symbol “FHB” on August 4, 2016. In connection with FHI’s IPO, BNPP announced its intent to sell its interest in FHI, including FHI’s wholly owned subsidiary, FHB, over time, subject to market conditions and other considerations. In February 2017, 2018 and 2019, BNPP, acting through BWC, sold an additional 28,750,000all of the shares of FHI common stock that it beneficially owned in a secondary offering. In Mayunderwritten public offerings and June 2018, BWC sold an additional 16,830,000 shares of FHI common stock inshare repurchases by the aggregate in a secondary offering. BWC sold 20,000,000 additional shares of FHI common stock in secondary offerings completed in each of August and September 2018, respectively. BWC sold shares of FHI common stock of 2,968,069 and 1,801,801 in May and August 2018, respectively, to the Company pursuant to share repurchase agreements. On February 1, 2019, BNPP, through BWC, completed the sale of its remaining 24,859,750 shares of FHI common stock in a public offering.Company. FHI did not receive any of the proceeds from the sales of shares of FHI common stock in thatany such offering in any of the secondary offerings described above or the IPO. As a result of the completion of the February 1, 2019 public offering, BNPP (through BWC, the selling stockholder) fully exited its ownership interest in FHI common stock. Use of Estimates in the Preparation of Financial Statements The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events, actual results may differ from these estimates. Variable Interest Entities A variable interest entity (“VIE”) is a legal entity that lacks the ability to financially support its activities or whose equity investors lack the ability to control its activities or absorb profits and losses proportionately with their investment in the entity. The primary beneficiary consolidates the VIE. The primary beneficiary is defined as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses or the right to receive benefits that could be significant to the VIE. The Company has a limited partnership interest or is a member in a limited liability company (“LLC”) in several low-income housing partnerships. These partnerships or LLCs provide funds for the construction and operation of apartment complexes that provide affordable housing to that segment of the population with lower family income. If these developments successfully attract a specified percentage of residents falling in that lower income range, state and/or federal income tax credits are made available to the partners or members. The tax credits are generally recognized over 5 or 10 years. In order to continue receiving the tax credits each year over the life of the partnership or LLC, the low-income residency targets must be maintained. The Company generally accounts for its interests in these low-income housing partnerships using the proportional amortization method. Unfunded commitments to fund these investments were $102.8$89.0 million and $36.0$102.8 million as of December 31, 20192020 and 2018,2019, respectively. These unfunded commitments are unconditional and legally binding and are recorded in other liabilities in the consolidated balance sheets. These low-income housing partnership and LLC entities meet the definition of a VIE; however, the Company is not the primary beneficiary of the entities, as the general partner or managing member has both the power to direct the activities that most significantly impact the economic performance of the entities and the obligation to absorb losses or the right to receive benefits that could be significant to the entities. While the partnership or LLC agreements allow the limited partners and members, through a majority vote, to remove the general partner or managing member, this right is not deemed to be substantive as the general partner or managing member can only be removed for cause. Cash and Due from Banks Cash and due from banks include amounts due from other financial institutions as well as in-transit clearings. Because amounts due from other financial institutions often exceed the Federal Deposit Insurance Corporation (“FDIC”) deposit insurance limit, the Company evaluates the credit risk of these institutions through periodic review of their financial condition and regulatory capital position. Under the terms of the Depository Institutions Deregulation and Monetary Control Act, the Company is required to maintain reserves with the Federal Reserve Bank of San Francisco (“FRB”) based on the amount of deposits held. The average amount of cash reserves required was $67.4$18.4 million and $57.6$67.4 million for the years ended December 31, 20192020 and 2018,2019, respectively. Cash and cash equivalents include cash and due from banks and interest-bearing deposits in other banks. All amounts are readily convertible to cash and have maturities of less than 90 days. Interest-bearing Deposits in Other Banks Interest-bearing deposits in other banks include funds held in other financial institutions that are either fixed or variable rate instruments, including certificates of deposits. Interest income is recorded when earned and presented within other interest income in the Company’s consolidated statements of income. Investment Securities As of December 31, 20192020 and 2018,2019, investment securities were primarily comprised of debt, mortgage-backed securities and collateralized mortgage obligations issued by the U.S. Government, its agencies and government-sponsored enterprises. The Company amortizes premiums and accretes discounts using the interest method over the expected lives of the individual securities. Premiums on callable debt securities are amortized to their earliest call date. All investment securities transactions are recorded on a trade-date basis. All of the Company’s investment securities were categorized as available-for-sale as of December 31, 20192020 and 2018.2019. Available-for-sale investment securities are reported at fair value, with unrealized gains and losses reported in accumulated other comprehensive income. Gains and losses realized on sales of investment securities are determined using the specific identification method. Unrealized losses for all investment101
For available-for-sale debt securities are reviewed to determine whether the losses are other than temporary. Investment securities are evaluated for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic and market conditions warrant suchin an evaluation, to determine whether the decline in fair value below amortized cost is other than temporary. For a debt security for which there has been a decline in the fair value below amortized cost,unrealized loss position, the Company will recognize an OTTI write-down in noninterest income if there is an intentfirst assesses whether it intends to sell, the security,or it is more likely than not the Companythat it will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis oris written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, the Company does not expectevaluates at the individual security level whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, management considers the extent to recoverwhich fair value is less than amortized cost and adverse conditions specifically related to the entiresecurity, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. The OTTI write-downIf the present value of cash flows expected to be collected is measured as the entire difference betweenless than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value ofis less than the investment security.amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. Changes in the allowance for credit losses, if any, are recorded as a provision for (or reversal of) credit losses. Losses are charged against the allowance when management believes the uncollectibility of an available-for-sale investment security is confirmed or when either of the criteria regarding intent or requirement to sell is met. As noted above, as of December 31, 2020, the Company’s available-for-sale investment securities were comprised entirely of debt, mortgage-backed securities and collateralized mortgage obligations issued by the U.S. Government, its agencies and government-sponsored enterprises. Management has concluded that the long history with no credit losses from these issuers indicates an expectation that nonpayment of the amortized cost basis is 0. The Company’s available-for-sale investment securities are explicitly or implicitly fully guaranteed by the U.S. government. The U.S. government can print its own currency and its currency is routinely held by central banks and other major financial institutions. The dollar is used in international commerce, and commonly is viewed as a reserve currency, all of which qualitatively indicates that historical credit loss information should be minimally affected by current conditions and reasonable and supportable forecasts. Thus, the Company has not recorded an allowance for credit losses for its available-for-sale debt securities as of December 31, 2020. Accrued interest receivable related to available-for-sale investment securities was $10.6 million as of December 31, 2020 and is recorded separately from the amortized cost basis of investment securities on the Company's consolidated balance sheet. Loans Held for Sale The Company originates certain loans for individual sale or for sale as a pool of loans to government-sponsored enterprises. Loans held for sale are carried, on an aggregate basis, at the lower of cost or fair value. The fair value of loans held for sale is primarily determined based on quoted prices for similar loans in active markets. Net gains and losses on loan sales are recorded as a component of other noninterest income. Direct loan origination costs and fees are deferred at origination of the loan and are recognized in other noninterest income upon sale of the loan. Loans and Leases Loans are reported at amortized cost, which includes the principal amount outstanding net of unearned income including unamortized and unaccreted deferred loan fees and costs, and cumulative net charge-offs. Interest income is recognized on an accrual basis. Loan origination fees, certain direct costs and unearned discounts and premiums, if any, are deferred and are generally accreted or amortized into interest income as yield adjustments using the interest method over the contractual life of the loan. Other credit-related fees are recognized as fee income, a component of noninterest income, when earned. Direct financing leases are carried at the aggregate of lease payments receivable plus the estimated residual value of leased property, less unearned income. Leveraged leases, which are a form of direct financing leases, are carried net of non-recourse debt. Unearned income on direct financing and leveraged leases is amortized over the lease termsterm by methods that approximate the interest method. Residual values on leased assets are periodically reviewed for impairment. Accrued interest receivable related to loans and leases was $59.0 million as of December 31, 2020 and is recorded separately from the amortized cost basis of loans and leases on the Company’s consolidated balance sheet. Non-PerformingNonaccrual Loans and Leases
The Company generally places a loan or lease on nonaccrual status when management believes that collection of principal or interest has become doubtful or when a loan or lease becomes 90 days past due as to principal or interest, unless it is well secured and in the process of collection. A full or partial charge-off is recorded when itin the period in which the loan or lease is probable that a loss has been incurred and when it is possible to determine a reasonable estimate of the loss.deemed uncollectible. When the Company places a loan or lease on nonaccrual status, previously accrued and uncollected interest is concurrently reversed against interest income in the current period.income. When the Company receives an interest payment on a nonaccrual loan or lease, the payment is applied as a reduction of the principal balance. Nonaccrual loans and leases are generally returned to accrual status when they become current as to principal and interest and have demonstrated a sustained period of payment performance or become both well secured and in the process of collection.future payments are reasonably assured. Troubled Debt Restructurings A restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the Company, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The Company offers various types of concessions when modifying a loan, including term extensions, temporary deferral of principal and temporary interest rate reductions. However, forgiveness of principal is rarely granted. Generally, a non-accrual loan that has been modified in a TDR remains on non-accrual status for at least six months to demonstrate that the borrower is able to meet the terms of the modified loan. However, performance prior to the modification, or significant events that coincide with the modification, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of loan modification or after a shorter performance period. However, if the borrower’s ability to meet the revised payment terms is uncertain, the loan remains on non-accrual status. In response to the Coronavirus Disease 2019 (“COVID-19”) pandemic, on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act creates a forbearance program for federally backed mortgage loans, protects borrowers from negative credit reporting due to loan accommodations related to the National Emergency, and provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19. Financial institutions accounting for eligible loans under the CARES Act are not required to report such loans as TDRs in accordance with GAAP. In addition, Interagency Statements were issued on March 22, 2020 and April 7, 2020 to encourage financial institutions to work prudently with borrowers and to describe the agencies’ interpretation of how current accounting rules under GAAP apply to certain COVID-19 related modifications. The agencies confirmed with the FASB that short-term modifications (e.g., six months or less) for payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant and made on a good faith basis in response to borrowers impacted by COVID-19 who were current prior to any relief are not TDRs under GAAP. The agencies also confirmed that these short-term modifications generally should not be reported as being on nonaccrual status and generally should not be considered past due during the period of the deferral. The Company has adopted the provisions of both the CARES Act and Interagency Statements. The Company is first applying the CARES Act guidance in determining if certain loan modifications are not required to be reported as TDRs. If the loan modification does not qualify under the CARES Act, then the Interagency Statement guidance is applied. On December 27, 2020, the Consolidated Appropriations Act – 2021 (the “CAA”) was signed into law, which extends the temporary relief from TDR reporting through the earlier of (1) January 1, 2022, or (2) 60 days after the date on which the national emergency concerning COVID-19 terminates. The disclosures presented within “Note 5. Allowance for Credit Losses” reflects the application of this guidance. Allowance for Credit Losses The allowance for credit losses for loans and leases (the “ACL”) is a valuation account that is deducted from the amortized cost basis of loans and leases to present the net amount expected to be collected from loans and leases. Loans and leases are charged-off against the ACL when management believes the uncollectibility of a loan or lease balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The Company’s ACL and the reserve for unfunded commitments under the Current Expected Credit Losses (“CECL”) approach utilizes both quantitative and qualitative components. The Company’s methodology utilizes a quantitative model based on a single forward-looking macroeconomic forecast. The quantitative estimation is overlaid with qualitative adjustments to account for current conditions and forward-looking events not captured in the quantitative model. Qualitative adjustments that are considered include adjustments for regulatory determinants, model limitations, model maturity, and other current or forecasted events that are not captured in the Company’s historical loss experience. Impaired Loans
A loan is considered impairedThe Company generally evaluates loans and leases on a collective or pool basis when basedsimilar risk characteristics exist. However, loans and leases that do not share similar risk characteristics are evaluated on current informationan individual basis. Such loans and events, it is probable that the Company will not be able to collect all amounts dueleases evaluated individually are excluded from the borrower in accordance with the contractual terms of the loan, including scheduled interest payments. This evaluation is generally based on delinquency information, an assessment of the borrower’s financial condition and the adequacy of collateral, if any. The Company’s impairedcollective evaluation. Individually assessed loans are primarily comprised of commercial and industrial, commercial real estate, residential mortgage and any loans modified in a TDR, whether on accrual or nonaccrual status.
The Company individually measures impairment on commercial and industrial loans and commercial real estate loansmeasured for estimated credit loss (“ECL”) based on the present value of the expected future cash flows discounted at the loan’s effective interest rate or for residential real estate loans and collateral-dependent loans, based on the fair value of the collateral, less disposition costs. On a case-by-case basis,estimated selling costs, if the Company may measure impairment based upon a loan’s observable market price. Impaired loans without a related allowance for loan and lease losses are generally collateralized by assets with fair values in excess of the recorded investment in the loans.is collateral-dependent.
AllowanceManagement reviews relevant available information, from internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts about the future. Historical credit loss experience provides the basis for Loan and Lease Lossesthe estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, delinquency levels, or term as well as for changes in environmental conditions, such as changes in unemployment rates, property values, or other relevant factors.
The Company maintainsutilizes a Probability of Default (“PD”)/Loss Given Default (“LGD”) framework to estimate the allowanceACL and the reserve for loanunfunded commitments. The PD represents the percentage expectation to default, measured by assessing loans and lease losses (the “Allowance”leases that migrate to default status (i.e., nonaccrual status, troubled debt restructurings (“TDRs”), 90 days or more past due, partial or full charge-offs or bankruptcy). LGD is defined as the percentage of the exposure at default (“EAD”) lost at a level which, in management’s judgment, is adequatethe time of default, net of any recoveries, and will be unique to absorb probable credit losses that have been incurred ineach of the collateral types securing the Company’s loanloans. PD and lease portfolio asLGD’s are based on past experience of the balance sheet date. The Company’s methodology for determining an adequateCompany and appropriate levelmanagement’s expectations of the Allowance takes into account many factors, including:
| ● | Trends in the volume and severity of delinquent loans and leases, nonaccrual loans and leases, troubled debt restructurings and other loan and lease modifications; |
| ● | Trends in the quality of risk management and loan administration practices including findings of internal and external reviews of loans and the effectiveness of collection practices; |
| ● | Changes in the quality of the Company’s risk identification process and loan review system; |
| ● | Changes in lending policies and procedures including underwriting standards and collection, charge-off and recovery practices; |
| ● | Changes in the nature and volume of the loan and lease portfolio; |
| ● | Changes in concentrations within the loan and lease portfolio; |
| ● | Changes in national and local economic business conditions, including the condition of various market segments. |
Whilefuture. The ECL on loans and leases is calculated by taking the Company has a formal methodology to determine an adequate and appropriate levelproduct of the Allowance, estimates of inherent loancredit exposure, lifetime default probability (“LDP”) and lease losses involve judgment and assumptions as to various factors, including current economic conditions. Management’s determination of the adequacy of the Allowance is based on quarterly evaluations of the above factors. Accordingly, the provision for credit losses will vary from period to period based on management’s ongoing assessment of the adequacy of the Allowance.LGD.
The Allowance consists of 2 components,ECL model is applied to current credit exposures at the allocatedaccount level, using assumptions calibrated at the portfolio segment level using internal historical loan and the unallocated allowance. The allocated portion of the Allowance includes reserves that are allocated based on impairment analyses of specific loans or pools of loans. A discussion of evaluating specific loans for impairment is noted in the “Impaired Loans” section above.lease level data. The Company collectively evaluates large groups or poolsestimates the default risk of smaller-balance homogeneousa credit exposure over the remaining life of each account using a transition probability matrix approach which captures both the average rate of up/down-grade and default transitions, as well as withdrawal rates which capture the historical rate of exposure decline due to loan and lease amortization and prepayment. To apply the transition matrices, each credit exposure’s remaining life is split into two time segments. The first time segment is for the reasonable and supportable forecast period over which the transition matrices which are applied have been adjusted to incorporate current and forecasted conditions over that period. Management has determined that using a one year time horizon for the reasonable and supportable forecast period for all classes of loans and leases such asis a reasonable forecast horizon given the difficulty in predicting future economic conditions with a high degree of certainty. The second time segment is the reversion period from the end of the reasonable and supportable forecast period to the maturity of the exposure, over which long-run average transition matrices are applied. Management elected to use an immediate reversion to the mean approach. Lifetime loss rates are applied against the amortized cost basis of loans and leases and unfunded commitments to estimate the ACL and the reserve for unfunded commitments, respectively. On at least a quarterly basis, management convenes the Bank’s forecasting team which is responsible for forecasting the economic outlook over the reasonable and supportable forecast period within the context of forecasting credit losses. Management reviews local and national economic forecasts and other pertinent materials to inform the team in establishing their best estimate of the economic outlook over the reasonable and supportable forecast period. The team considers unemployment rates, gross domestic product, personal income per capita, visitor arrivals and expenditures and home prices along with other relevant information. The results from the Bank’s forecasting team dictates the direction of the economic forecast compared to current economic conditions (i.e., better or worse) and the magnitude of the forecast adjustment (e.g., mild, medium or severe). The direction of the economic forecast and magnitude are used to adjust the modifier that is applied to the long-run default rates over the reasonable and supportable forecast period. The Company has identified 3 portfolio segments in estimating the ACL: commercial, residential real estate and consumer lending. The Company’s commercial portfolio segment is comprised of four distinct classes: commercial and industrial loans, commercial real estate loans, construction loans and lease financing. The key risk drivers related to this portfolio segment include risk rating, collateral type, and remaining maturity. The Company’s residential real estate portfolio segment is comprised of two distinct classes: residential real estate loans and small businesshome equity lines of credit. Specific risk characteristics related to this portfolio include the value of the underlying collateral, credit score and remaining maturity. Finally, the Company’s consumer portfolio segment is not further segmented, but consists primarily of automobile loans, credit cards and other installment loans. Automobile loans constitute the majority of this segment and are monitored using credit scores, collateral values and remaining maturity. The risk assessment process includesremainder of the use of estimates to determine the inherent loss in these portfolios. The Company considers a variety of factors including, but not limited to historical loss experience, estimated defaults or foreclosures based onconsumer portfolio trends and delinquencies, and current economic conditions. is predominantly unsecured.
The unallocated component of the Allowance recognizes the imprecision in the loan and lease loss estimation process. While the Company’s allocated reserve methodology strives to reflect all risk factors, there may still be certain unidentified risk elements. The purpose of the unallocated reserve is to capture these factors. The relationship of the unallocated component to the total Allowance may fluctuate from period to period. Management evaluates the adequacy of the total Allowance based on the combined total of the allocated and unallocated components of the Allowance.
The Allowance is increased by provisions for loan and lease losses and reduced by charge-offs, net of recoveries. Consumer loans and leases are generally charged off upon reaching a predetermined delinquency status that ranges from 120 to 180 days and varies by product type. Other loans and leases may be charged off to the extent they are classified as loss. Recoveries of amounts that have previously been charged off are credited to the Allowance and are generally recorded only to the extent that cash is received.
Reserve for Unfunded Commitments The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancellable by the Company. The reserve for unfunded commitments, (the “Unfunded Reserve”)which is a component of other liabilities in the consolidated balance sheets, is adjusted through the provision for credit losses. The estimate includes consideration of the likelihood that funding will occur and represents thean estimate for probableof expected credit losses inherent in unfundedon commitments expected to extend credit. Unfunded commitments to extend credit include loan commitments, and standby and commercial letters of credit. The process used to determine the Unfunded Reserve is consistent with the process for determining the Allowance as adjusted forbe funded over its estimated funding probabilities or loan and lease equivalency factors. The level of the Unfunded Reserve is adjusted by recording an expense or recovery in other noninterest expense.life. Provision for Loan and LeaseCredit Losses The provision for loan and leasecredit losses (the “Provision”) represents the amount charged against current period earnings to achieve an AllowanceACL and reserve for unfunded commitments that in management’s judgment is adequate to absorb probableexpected credit losses that have been incurred inrelated to the Company’s loan and lease portfolio as of the consolidated balanceand off-balance sheet date.credit exposures. Accordingly, the Provision will vary from period to period based on management’s ongoing assessment of the overall adequacy of the Allowance.ACL and reserve for unfunded commitments. Premises and Equipment Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of 107 to 39 years for premises, 43 to 20 years for equipment and the shorter of the lease term or remaining useful life for leasehold improvements. On a periodic basis, long-lived assets are reviewed for impairment. An impairment loss is recognized if the carrying amount of a long-lived asset exceeds its fair value and is not recoverable. An impairment analysis is performed whenever events or changes in circumstances suggest that the carrying value of an asset or group of assets may not be recoverable. Operating lease rental income for leased assets, primarily premises, is recognized on a straight-line basis as an offset to rental expense. Other Real Estate Owned and Repossessed Personal Property Other real estate owned (“OREO”) and repossessed personal property are comprised primarily of properties that the Company acquires through foreclosure proceedings. The Company values these properties at fair value less estimated costs to sell the property upon acquisition, which establishes the new carrying value. The Company charges losses arising upon the acquisition of the property against the Allowance.ACL. If the fair value of the property at the time of acquisition exceeds the carrying amount of the loan, the excess is recorded either as a recovery to the AllowanceACL if a charge-off had previously been recorded, or as a gain on initial transfer in other noninterest income. After acquisition, the Company carries such properties at the lower of cost or fair value less estimated selling costs.costs on a nonrecurring basis. Any write-downs or losses from the subsequent disposition of such properties are included in other noninterest expense. Gains recognized on the sale of such properties are included in other noninterest income. Goodwill Goodwill represents the cost of acquired businesses in excess of the fair value of the net assets acquired. The Company performs impairment testing of goodwill, an infinite-livedindefinite-lived intangible asset, as required under GAAP on an annual basis or when circumstances change that indicate that a potential impairment may have occurred. The Company has assigned goodwill to its operating segments for impairment testing purposes. The goodwill impairment guidance provides the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing further impairment tests is unnecessary. However, if an entity concludes otherwise, or does not elect this option, it is required to perform impairment testing. Step 1 of theThe quantitative impairment test identifies potential impairments at the reporting unit level by comparing the estimated fair value of each identified reporting unit to its carrying amount. If the estimated fair value of a reporting unit exceeds its carrying amount, there is 0no impairment of goodwill. However, if the carrying amount exceeds the estimated fair value, Step 2 is performed to determine the amount of the potential impairment. Step 2 compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined as if the reporting unit were being acquired in a business combination. If the implied fair value of goodwill exceeds the goodwill assigned to the reporting unit, there is 0 impairment. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill,an impairment exists, and an impairment loss is recognized in an amount equal to that excess. Subsequent reversals of goodwill impairment are prohibited. Mortgage Servicing Rights Mortgage servicing rights are recognized as assets when residential mortgage loans are sold and the rights to service those loans are retained. Mortgage servicing rights are initially recorded at fair value by using a discounted cash flow model to calculate the present value of estimated future net servicing income, incorporating assumptions that market participants would use in their estimates of fair value. The Company’s mortgage servicing rights are accounted for under the amortization method and periodically assessed for impairment. The Company amortizes the mortgage servicing rights over the period of estimated net servicing income, taking into account prepayment assumptions. Any such indicated impairment is recognized in earnings during the period in which the impairment occurs. Mortgage servicing income, net of the amortization of mortgage servicing rights, is recorded as a component of other noninterest income in the consolidated statements of income. Non-Marketable Equity Securities The Company is required to own Federal Home Loan Bank (“FHLB”) of Des Moines stock as a condition of membership. These securities are accounted for under the cost method, which equals par value, and are included in other assets in the consolidated balance sheets. These securities do not have a readily determinable fair value as ownership is restricted and there is no market for these securities. The Company reviews these securities periodically for impairment. Management considers these 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. NaN impairment was recognized on non-marketable equity securities for the years ended December 31, 2020, 2019 2018 and 2017.2018. Pension and Other Postretirement Benefit Plans The Company has a qualified noncontributory defined benefit pension plan, an unfunded supplemental executive retirement plan, a directors’ retirement plan, a non-qualified pension plan for eligible directors and a postretirement benefit plan providing life insurance and healthcare benefits that is offered to directors and employees, as applicable. The qualified noncontributory defined benefit pension plan, the unfunded supplemental executive retirement plan and the directors’ retirement plan are all frozen plans to new participants. To calculate annual pension costs, management uses the following key variables: (1) size of the employee population, length of service and estimated compensation increases; (2) actuarial assumptions and estimates; (3) expected long-term rate of return on plan assets; and (4) discount rate. For all pension and postretirement benefit plan calculations, the Company uses a December 31st measurement date. The expected long-term rate of return was based on a calculated rate of return from average rates of return on various asset classes over a 20-year historical time horizon. Using long-term historical data allows the Company to capture multiple economic environments, which management believes is relevant when using historical returns. Net actuarial gains or losses that exceed a 5% corridor of the greater of the projected benefit obligation or the fair value of plan assets as of the beginning of the year are amortized from accumulated other comprehensive income into net periodic pension cost on a straight-line basis over five years. In estimating the projected benefit obligation, an independent actuary bases assumptions on factors such as mortality rate, turnover rate, retirement rate, disability rate and other assumptions related to the population of individuals in the pension plan. If significant actuarial gains or losses occur, the actuary reviews the demographic and economic assumptions with management, at which time the Company considers revising these assumptions based on actual results. The Company recognizes an asset on its consolidated balance sheets for a plan’s overfunded status or a liability for a plan’s underfunded status. The Company also measures the plans’ assets and obligations that determine its funded status as of the end of the year and recognizes those changes in other comprehensive income, net of tax. Periodic pension expense (or income) includes service costs, interest costs based on the assumed discount rate, the expected return on plan assets based on an actuarially derived market-related value and amortization of actuarial gains and losses. Service cost is included in salaries and employee benefits expense, while all other components of net periodic pension cost are included in other noninterest expense in the consolidated statements of income. Income Taxes Current income tax expense is recognized for the amount of income taxes expected to be payable or refundable for the current period, and deferred income taxes are provided to reflect the tax effect of temporary differences between financial statement carrying amounts and the corresponding tax basis of assets and liabilities. Deferred income taxes are calculated by applying enacted statutory tax rates and tax laws to future years in which temporary differences are expected to reverse. The impact on deferred tax assets and liabilities from a change in tax rates is recognized in income in the period that the tax rate change is enacted. A deferred tax valuation allowance is established if it is more likely than not that a deferred tax asset will not be realized. Interest and penalties, if any, expected to be assessed or refunded by taxing authorities relating to an underpayment or overpayment of income taxes are accrued and recorded as part of income tax expense. Excise tax credits relating to premises and equipment are accounted for using the flow-through method, and the benefit is recognized in the year the asset is placed in service. General business and excise tax credits generated from the leasing portfolio, except for credits that are passed on to lessees, are recognized over the term of the lease for book purposes, but in the year placed in service for tax purposes. The Company maintains reserves for unrecognized tax benefits that arise in the normal course of business. As of December 31, 2019,2020, these positions were evaluated based on an assessment of probabilities as to the likelihood of whether a liability had been incurred. Such assessments are reviewed as events occur and adjustments to the reserves are made as appropriate. In evaluating a tax position for recognition, the Company evaluates whether it is more likely than not that a tax position will be sustained upon examination, including resolution of related appeals or litigation processes, based on the technical merits of the position. If the tax position meets the more likely than not recognition threshold, the tax position is measured and recognized in the Company’s consolidated financial statements as the largest amount of tax benefit that, in management’s judgment, is greater than 50% likely of being realized upon ultimate settlement. Derivative Instruments and Hedging Activities Derivatives are recognized on the consolidated balance sheets at fair value. On the date the Company enters into a derivative contract, the Company designates the derivative instrument as: (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”); (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”); or (3) held for trading, customer accommodation or not qualifying for hedge accounting (“free-standing derivative instrument”). For a fair value hedge, changes in the fair value of the derivative instrument and changes in the fair value of the hedged asset or liability or of an unrecognized firm commitment attributable to interest rate risk are recorded in current period earnings. For a cash flow hedge, to the extent that the hedge is considered highly effective, changes in the fair value of the derivative instrument are recorded in other comprehensive income and subsequently reclassified to net income in the same period that the hedged transaction impacts net income. To the extent the derivative instruments are not effective, any changes in the fair value of the derivatives are immediately recognized in noninterest income. For free-standing derivative instruments, changes in fair values are reported in current period earnings. The Company formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivative instruments that are designated as hedges to specific assets or liabilities, unrecognized firm commitments or forecasted transactions. The Company also formally assesses, both at the inception of a hedge and on a quarterly basis, whether the derivative instruments used are highly effective in offsetting changes in fair values of, or cash flows related to, hedged items. Fair Value Measurements Fair value measurements apply whenever GAAP requires or permits assets or liabilities to be measured at fair value either on a recurring or nonrecurring basis. 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. Fair value is based on the assumptions that management believes market participants would use when pricing an asset or liability. Fair value measurement and disclosure guidance established a three-level fair value hierarchy that prioritizes the use of inputs used in valuation methodologies. Management maximizes the use of observable inputs and minimizes the use of unobservable inputs when determining fair value measurements. Stock-Based Compensation The Company grants stock-based awards, including restricted stock, restricted stockshares, performance share units, performance shares and performancerestricted stock units. These awards are issued at no cost to the recipient. The fair value of restricted stock, restricted shares and restricted stock unit awards was based on the closing price of FHI’s common stock on the date of grant. Such awards were recognized in the Company’s consolidated statements of income on a straight-line basis over the vesting period. Recipients of performance stockshares and performance share units are entitled to receive shares of FHI common stock at no cost, subject to the Company’s achievement of specified market or performance conditions. The grant date fair value of the performance stockshare units subject to the Company’s achievement of specified market conditions was estimated using a Monte Carlo simulation model. For purposes of this modeling exercise, historical volatilities of FHI common stock and members of the peer group were used. The risk-free interest rate that was used in the valuation was that of a zero-coupon U.S. Treasury note that was commensurate with the performance period. The grant date fair value of the performance shares subject to the Company’s achievement of performance conditions was based on the closing price of FHI’s common stock on the date of grant. As compensation cost is recognized, a deferred tax asset is established which represents an estimate of the future tax deduction from the release of restrictions or the achievement of performance targets. At the time that restrictions on the stock-based awards are released, the Company may be required to recognize an adjustment to income tax expense, depending on the market price of the Company’s common stock at that time. Treasury Stock Shares of the Parent’s common stock that were repurchased or that are used to satisfy payroll tax withholdings related to stock-based compensation are recorded in treasury stock at cost. On the date of subsequent reissuance, the treasury stock account will be reduced by the cost of such stock on a first-in, first-out basis. Earnings per Share Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted earnings per share are computed by dividing net income by the weighted average number of common shares outstanding for the period, assuming conversion of potentially dilutive common stock equivalents. Advertising and Marketing Costs Advertising and marketing costs are expensed as incurred. Advertising and marketing costs were $5.7 million, $6.9 million $4.8 million and $6.2$4.8 million for the years ended December 31, 2020, 2019 and 2018, and 2017, respectively. Accounting Standards Adopted in 20192020 In FebruaryJune 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases2016-13, Financial Instruments – Credit Losses (Topic 842)326), Measurement of Credit Losses on Financial Instruments. This guidance providedeliminates the probable recognition threshold for credit losses on financial assets measured at amortized cost. For loans and held-to-maturity debt securities, this guidance requires a CECL approach to determine an ACL. CECL requires loss estimates for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. CECL also applies to off-balance sheet (“OBS”) credit exposures (e.g., unfunded loan commitments), except for unconditionally cancellable commitments. In addition, this guidance modifies the other-than-temporary-impairment model for available-for-sale debt securities to require an allowance for credit losses instead of a direct write-down, which allows for a reversal of credit losses in future periods. In April 2019, the FASB also issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. As it relates to CECL, this guidance amended certain provisions contained in ASU No. 2016-13, particularly with regards to the inclusion of accrued interest in the definition of amortized cost, as well as clarifying that lessees wouldextension and renewal options that are not unconditionally cancelable by the entity that are included in the original or modified contract should be requiredconsidered in the entity’s determination of expected credit losses. As permitted by ASU No. 2016-13, the Company elected the practical expedient to recognizeuse the following for all operating leases (with the exception of short-term leases): 1) a lease liability, which is the presentfair value of collateral at the reporting date when recording the net carrying amount of the asset and determining the ACL for a lessee's obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specifiedfinancial asset for which the lease term. Lessorrepayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Company’s assessment as of the reporting date. Furthermore, as permitted by ASU No. 2019-04, the Company made accounting underpolicy elections to not measure an ACL on accrued interest receivable, write-off accrued interest receivable by reversing interest income and present accrued interest receivable separately from the related financial asset on the balance sheet. The implementation of CECL required significant operational changes, particularly in data collection and analysis. The Company formed a working group comprised of teams from different disciplines, including credit, finance and information technology, to evaluate the requirements of the new guidance remains largely unchanged asstandard and the impact it is substantially equivalent towill have on the Company’s existing guidance for sales-type leases, direct financing leasesprocesses. The Company also engaged a software vendor and operating leases.had run several CECL parallel run productions during 2019. The Company adopted the provisions of ASU No. 2016-02 on2016-13 and related amendments by recording a cumulative effect adjustment to retained earnings as of January 1, 2019 and elected several practical expedients made available by the FASB. Specifically,2020. Note that the Company electeddid not opt to delay the transition practical expedientimplementation of CECL requirements as permitted under the CARES Act, which allowed entities to not recast comparative periods upondelay implementation until the adoptionearlier of (1) December 31, 2020, or (2) the new guidance. In addition,date on which the Company elected the package of practical expedients which among other things, required no reassessment of whether existing contracts were or contained leases as well as no reassessment of lease classification for existing leases and the practical expedient which permitted the Company to not separate nonlease components from lease components in determining the consideration in the lease agreement when the Company was a lessee or a lessor. The Company identified the primary lease agreements in scope of this new guidance as those relating to branch premises. As a result, the Company recognized a lease liability of $50.3 million and a related right-of-use asset of $50.6 million on its consolidated balance sheet on January 1, 2019. See “Note 14. Leases” for required disclosures related to this new guidance.national emergency concerning COVID-19 terminates. The following table presents the impact of adopting Accounting Standards Codification (“ASC”) Topic 326 as of January 1, 2020: | | | | | | | | | | | | Prior to the | | Adjustment | | | | | Adoption of | | to Adopt | | After Adoption of | (dollars in thousands) | | ASC Topic 326 | | ASC Topic 326 | | ASC Topic 326 | Assets: | | | | | | | | | | Allowance for Credit Losses - Loans and Leases | | $ | 130,530 | | $ | 770 | | $ | 131,300 | Liabilities: | | | | | | | | | | Reserve for Unfunded Commitments(1) | | | 600 | | | 16,300 | | | 16,900 | Pretax Cumulative Effect Adjustment of a Change in Accounting Principle | | | | | | 17,070 | | | | Less: Income Taxes | | | | | | (4,553) | | | | Cumulative-Effect Adjustment of a Change in Accounting Principle, Net of Tax | | | | | $ | 12,517 | | | |
(1) | The reserve for unfunded commitments is included as a component of other liabilities in the Company's consolidated balance sheets. |
In MarchJanuary 2017, the FASB issued ASU No. 2017-08, Receivables2017-04, Intangibles – Nonrefundable FeesGoodwill and Other Costs (Subtopic 310-20)(Topic 350), Premium Amortization on Purchased Callable Debt Securities. Prior toSimplifying the adoption of ASU No. 2017-08, entities typically amortized the premium as an adjustment of yield over the contractual life of debt securities.Test for Goodwill Impairment. This guidance shortenssimplifies the amortization periodsubsequent measurement of goodwill by eliminating Step 2 from the current two-step goodwill impairment test. This guidance provides that a goodwill impairment test be conducted by comparing the fair value of a reporting unit with its carrying amount. Entities are to recognize an impairment charge for certain callable debt securities held atgoodwill by the amount by which the carrying amount exceeds the reporting unit’s fair value. Entities will continue to have the option to perform the qualitative assessment for a premiumreporting unit to determine if the earliest call date.quantitative impairment test is necessary. The Company adopted the provisions of ASU No. 2017-082017-04 on January 1, 20192020 and it did not have a material impact on the Company’s consolidated financial statements. In August 2017,2018, the FASB issued ASU No. 2017-12, Derivatives and Hedging2018-13, Fair Value Measurement (Topic 815)820), Targeted ImprovementsDisclosure Framework – Changes to Accountingthe Disclosure Requirements for Hedging Activities. The objectivesFair Value Measurement. This guidance is a part of the newFASB’s disclosure framework project to improve disclosure effectiveness. This guidance were to: (1) improveeliminates certain disclosure requirements for fair value measurements: the transparencyamount of and understandabilityreasons for transfers between Level 1 and Level 2 of information conveyed to financial statement users aboutthe fair value hierarchy, an entity’s risk management activities by better aligningpolicy for the entity’s financial reporting for hedging relationships with those risk management activities, and (2) reducetiming of transfers between levels of the complexity of and simplify the application of hedge accounting by preparers. Historically, the Company has participated in limited activities in fair value hierarchy and cash flow hedging relationships. As a result,an entity’s valuation processes for Level 3 fair value measurements. This guidance also adds new disclosure requirements for public entities: changes in unrealized gains and losses for the adoptionperiod included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements, including how the weighted average is calculated. Furthermore, this guidance modifies certain requirements which will involve disclosing: transfers into and out of Level 3 of the fair value hierarchy, purchases and issuances of Level 3 assets and liabilities, and information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date. The Company adopted the provisions of ASU No. 2017-122018-13 on January 1, 20192020 and it did not have a material impact on the Company’s consolidated financial statements. See “Note 17. Derivative Financial Instruments”22. Fair Value” for required disclosures related to this new guidance. In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting2018-14, Compensation – Retirement Benefits – Defined Benefit Plans – General (Subtopic 715-20), Disclosure Framework – Changes to the Disclosure Requirements for Implementation Costs Incurred in a Cloud Computing Arrangement ThatDefined Benefit Plans. This guidance is a Service Contract.part of the FASB’s disclosure framework project to improve disclosure effectiveness. This guidance alignsmakes minor changes to the accountingdisclosure requirements for implementation costs related to a hosting arrangementemployers that is a service contract with the guidance on capitalizing costs associated with developing sponsor defined benefit pension and/or obtaining internal-use software. Common examples of hosting arrangements include software as a service, platform or infrastructure as a service and other similar types of hosting arrangements. While capitalized costs related to internal-use software is generally considered an intangible asset, costs incurred to implement a cloud computing arrangement that is a service contract would typically be characterized in the company’s financial statements in the same manner as other service costs (e.g., other assets).postretirement benefit plans. The new guidance provided that an entity would be required to amortize capitalized implementation costs over the term of the hosting arrangement on a straight-line basis unless another systematic and rational basis was more representative of the pattern in which the entity expected to benefit from access to the hosted software. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with earlier adoption permitted in any annual or interim period for which financial statements have not yet been issued or made available for issuance. The Company early adopted the provisions of ASU No. 2018-15 prospectively on January 1, 2019 due to the Company’s shift towards utilizing more hosting arrangementsremoves certain disclosures that are service contracts. Forno longer considered cost beneficial, clarifies the year ended December 31, 2019, the Company capitalized $10.6 million related to hosting arrangements that are service contracts.
In October 2018,specific requirements of certain disclosures, and adds certain new disclosure requirements the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815), Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Ratehas identified as a Benchmark Interest Rate for Hedge Accounting Purposes. This guidance expands the list of U.S. benchmark interest rates permitted in the application of hedge accounting by adding the OIS rate based on the SOFR. Due to concerns about the sustainability of the London Interbank Offered Rate (“LIBOR”), a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New
York initiated an effort to introduce an alternative reference rate in the U.S. The committee identified SOFR as the preferred alternative reference rate to LIBOR. The OIS rate based on SOFR was added as a U.S. benchmark interest rate to facilitate broader use in the marketplace and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies.relevant. The Company adopted the provisions of ASU No. 2018-162018-14 on January 1, 20192020 and it did not have a material impact on the Company’s consolidated financial statements. See “Note 15. Benefit Plans” for required disclosures related to this new guidance.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The relief provided by this guidance is elective and applies to all entities, subject to meeting certain criteria, that have contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform. The guidance provides that changes in contract terms that are made to effect the reference rate reform transition are considered related to the replacement of a reference rate if they are not the result of a business decision that is separate from or in addition to changes to the terms of a contract to effect that transition. If certain criteria are met, entities can elect to not apply certain modification accounting requirements to contracts affected by reference rate reform. For example, an entity that makes this election would not be required to remeasure the contracts at the modification date or reassess a previous accounting determination. The optional amendments in ASU No. 2020-04 are effective for all entities as of March 12, 2020 through December 31, 2022. As permitted by ASU No. 2020-04, for all contract modifications that meet the stated criteria, as of October 1, 2020, the Company has elected the optional expedients to not apply certain modification accounting requirements to contracts affected by reference rate reform. In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), Scope. The amendments in this guidance refine the scope of Topic 848 and clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting also apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is modified as a result of reference rate reform (commonly referred to as the “discounting transition”). ASU No. 2021-01 expands the scope of Topic 848 to also include certain derivative instruments that do not reference LIBOR or a reference rate that is expected to be discontinued, but that are being modified as a result of the discounting transition. If certain criteria are met, similar to the relief described in ASU No. 2020-04, entities can elect to not apply certain contract modification accounting requirements to derivative instruments that are affected by the discounting transition. For example, an entity that makes this election would not be required to remeasure the contracts at the modification date or reassess a previous accounting determination. The optional expedients in ASU No. 2021-01 are effective for all entities as of March 12, 2020 through December 31, 2022. As permitted by ASU No. 2021-01, for all contract modifications to derivative instruments that meet the stated criteria, as of October 1, 2020, the Company has elected the optional expedients to not apply certain contract modification accounting requirements to derivative instruments affected by the discounting transition. Recent Accounting Pronouncements The following ASUs haveASU has been issued by the FASB and areis applicable to the Company in future reporting periods. In June 2016,October 2020, the FASB issued ASU No. 2016-13, Financial Instruments2020-08, Codification Improvements to Subtopic 310-20, Receivables – Credit Losses (Topic 326), MeasurementNonrefundable Fees and Other Costs. Prior to the adoption of Credit Losses on Financial Instruments. ThisASU No. 2020-08, previous guidance eliminatesshortened the probable recognition thresholdamortization period for credit losses on financial assets measured at amortized cost. For loans and held-to-maturitycertain purchased callable debt securities this guidance requiresheld at a current expected credit loss (“CECL”) approach to determinepremium by requiring that entities amortize the allowance for credit losses (“ACL”). CECL requires loss estimates for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. CECL also applies to off-balance sheet credit exposures, except for unconditionally cancellable commitments. In addition, this guidance modifies the other-than-temporary-impairment model for available-for-salepremium associated with those callable debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for a reversal of credit losses in future periods. Thisthe earliest call date. The guidance requires entities to record a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In April 2019, the FASB also issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. As it relates to CECL, this guidance amended certain provisions contained in ASU No. 2016-13, particularly with regards2020-08 changes the amortization period so that an entity shall amortize the premium to the inclusion of accrued interest in the definition of amortized cost, as well as clarifying that extension and renewal options that are not unconditionally cancelable by the entity that are included in the original or modified contract should be considered in the entity’s determination of expected credit losses. Federal banking regulatory agencies have also provided relief for an initial capital decrease on January 1, 2020 by allowing for an election to phase-in the impact of adopting the CECL standard over a three-year period on a straight-line basis.
The Company will adopt the provisions of ASU No. 2016-13, ASU No. 2019-04 and related amendments on January 1, 2020. The Company elected the practical expedient to use the fair value of the collateral at the reporting date when recording the net carrying amount of the asset and determining the ACL for a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Company’s assessment as of the reporting date. The Company will also make accounting policy elections not to measure an ACL on accrued interest receivable, write-off accrued interest receivable by reversing interest income and to present accrued interest receivable separately from the related financial asset on the balance sheet. The implementation of CECL will require significant operational changes, particularly in data collection and analysis. The Company engaged a software vendor and ran several CECL parallel productions during 2019. In the fourth quarter of 2019, model validation was completed and management approved the model to be placed into production. Furthermore, significant progress was made in the Company’s user acceptance testing and reconciliation processes. Based on the Company’s portfolio balances and forecasted economic conditions as of January 1, 2020, management believes that the adoption of the CECL standard will result in an increase in the ACL of approximately 10% to 15%, as compared to the Company’s reserve levels as of December 31, 2019.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. This guidance simplifies the subsequent measurement of goodwill by eliminating Step 2 from the current two-step goodwill impairment test. This guidance provides that a goodwill impairment test be conducted by comparing the fair value of a reporting unit with its carrying amount. Entities are to recognize an impairment charge for goodwill by the amount by which the carrying amount exceeds the reporting unit’s fair value. Entities will continue to have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This guidance is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. The Company adopted the provisions of ASU No. 2017-04 on January 1, 2020 and it did not have a material impact on the Company’s consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This guidance is a part of the FASB’s disclosure framework project to improve disclosure effectiveness. This guidance eliminates certain disclosure
requirements for fair value measurements: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, an entity’s policy for the timing of transfers between levels of the fair value hierarchy and an entity’s valuation processes for Level 3 fair value measurements. This guidance also adds new disclosure requirements for public entities: changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements, including how the weighted average is calculated. Furthermore, this guidance modifies certain requirements which will involve disclosing: transfers into and out of Level 3 of the fair value hierarchy, purchases and issuances of Level 3 assets and liabilities, and information about the measurement uncertainty of Level 3 fair value measurements as of the reportingnext call date. The Company adopted the provisions of ASU No. 2018-132020-08 on January 1, 20202021 and it did not have a material impact on the Company’s consolidated financial statements.
2. Transactions with Affiliates and Related Parties In the normal course of business, the Company makes loans to executive officers and directors of the Company and its subsidiary and to entities and individuals affiliated with those executive officers and directors. These loans are made on terms no less favorable to the Company than those prevailing at the time for comparable transactions with unrelated persons or, in the case of certain residential real estate loans, on terms that are widely available to employees of the Company who are not directors or executive officers. Changes in the loans to such executive officers, directors and affiliates during 2020, 2019 2018 and 20172018 were as follows: | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | Year Ended December 31, | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2020 | | 2019 | | 2018 | Balance at beginning of year | | $ | 66,088 | | $ | 61,603 | | $ | 94,466 | | $ | 85,280 | | $ | 66,088 | | $ | 61,603 | New loans made | | | 22,682 | | | 6,756 | | | 3,762 | | | 18,133 | | | 22,682 | | | 6,756 | Repayments | | | (3,490) | | | (2,271) | | | (36,625) | | | (12,187) | | | (3,490) | | | (2,271) | Balance at end of year | | $ | 85,280 | | $ | 66,088 | | $ | 61,603 | | $ | 91,226 | | $ | 85,280 | | $ | 66,088 |
The Company hashad participated in various transactions with BWC, BOW, BNPP and its affiliates, in each case while such entities were affiliates and related parties of the Company. These transactions were subject to review by the FRB, FDIC and other regulatory authorities. The transactions were required to be on terms at least as favorable to the Company as those prevailing at the time for similar non-affiliate transactions. These transactions included the provision of services, sales and purchases of assets, foreign exchange activities, financial guarantees, international services, interest rate swaps and intercompany deposits and borrowings. The Company participatesparticipated in forward and spot transactions with BOW (which ceased being an affiliate of the Company in February 2019) as the counterparty. These positions The Company’s transactions with its related parties as of December 31, 2020, 2019 2018 and 20172018 are summarized below along with other transactions with its related parties.below. | | | | | | | | | | | | | | | | | | | | | As of December 31, | | As of December 31, | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2020 | | 2019 | | 2018 | Cash and due from banks | | $ | — | | $ | 55,454 | | $ | 41,874 | | $ | — | | $ | — | | $ | 55,454 | Other assets | | | — | | | 19,358 | | | 23,872 | | | — | | | — | | | 19,358 | Noninterest-bearing demand deposits | | | — | | | (346) | | | (456) | | | — | | | — | | | (346) | Noninterest income from affiliates | | | 382 | | | 5,677 | | | 4,908 | | | — | | | 382 | | | 5,677 | Noninterest expense to affiliates | | | (4) | | | (59) | | | (47) | | | — | | | (4) | | | (59) |
The Company had 0 other liabilities with affiliates and 0 off-balance sheet commitments with affiliates to purchase and sell foreign currencies as of December 31, 2020, 2019 2018 and 2017.2018. The Company did not transact in hedging or trading activities on behalf of BOW or BWC, in each case while such entities were affiliates and related parties of the Company. In 2016, BWC and the Company entered into an Expense Reimbursement Agreement whereby BWC agreed to reimburse the Company for certain expenses incurred by the Company that are provided for the ultimate benefit of BNPP and its subsidiaries. Payments received from BWC amounted to $7.2 million $14.6 million and $21.4$14.6 million for the years ended December 31, 2019 2018 and 2017,2018, respectively. Expenses incurred by the Company after 2019 are not subject to reimbursement by BWC under the Expense Reimbursement Agreement. 3. Investment Securities As of December 31, 20192020 and 2018,2019, investment securities consisted predominantly of the following investment categories: U.S. Treasury and debt securities – includes U.S. Treasury notes and debt securities issued by government-sponsored enterprises. Mortgage-backed securities – includes securities backed by notes or receivables secured by mortgage assets with cash flows based on actual or scheduled payments. Collateralized mortgage obligations – includes securities backed by a pool of mortgages with cash flows distributed based on certain rules rather than pass through payments. Debt securities issued by states and political subdivisions – includes general obligation bonds issued by state and local governments.
As of December 31, 20192020 and 2018,2019, all of the Company’s investment securities were classified as debt securities and available-for-sale. Amortized cost and fair value of securities as of December 31, 20192020 and 20182019 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2020 | | 2019 | | | Amortized | | Unrealized | | Unrealized | | Fair | | Amortized | | Unrealized | | Unrealized | | Fair | | Amortized | | Unrealized | | Unrealized | | Fair | | Amortized | | Unrealized | | Unrealized | | Fair | (dollars in thousands) | | Cost | | Gains | | Losses | | Value | | Cost | | Gains | | Losses | | Value | | Cost | | Gains | | Losses | | Value | | Cost | | Gains | | Losses | | Value | U.S. Treasury securities | | $ | 29,832 | | $ | 56 | | $ | — | | $ | 29,888 | | $ | 389,470 | | $ | — | | $ | — | | $ | 389,470 | | U.S. Treasury and government agency debt securities | | | $ | 170,123 | | $ | 1,359 | | $ | (61) | | $ | 171,421 | | $ | 29,832 | | $ | 56 | | $ | — | | $ | 29,888 | Government-sponsored enterprises debt securities | | 101,697 | | | 19 | | | (277) | | 101,439 | | 248,372 | | | — | | (6,778) | | 241,594 | | — | | | — | | | — | | — | | 101,697 | | | 19 | | | (277) | | 101,439 | Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential - Government agency | | 290,131 | | | 2,224 | | | (1,146) | | 291,209 | | 426,710 | | | — | | (15,174) | | 411,536 | | 155,169 | | | 5,293 | | | — | | 160,462 | | 290,131 | | | 2,224 | | | (1,146) | | 291,209 | Residential - Government-sponsored enterprises | | 395,039 | | | 6,126 | | | (1,673) | | 399,492 | | 156,056 | | | 85 | | (5,294) | | 150,847 | | 434,282 | | | 13,643 | | | (725) | | 447,200 | | 395,039 | | | 6,126 | | | (1,673) | | 399,492 | Commercial - Government agency | | | 583,232 | | | 16,537 | | | (119) | | 599,650 | | — | | | — | | | — | | — | Commercial - Government-sponsored enterprises | | 101,798 | | | 555 | | | (634) | | 101,719 | | — | | | — | | — | | — | | 931,095 | | | 9,045 | | | (7,983) | | 932,157 | | 101,798 | | | 555 | | | (634) | | 101,719 | Collateralized mortgage obligations: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Government agency | | 2,390,143 | | | 7,483 | | | (16,348) | | 2,381,278 | | 2,779,620 | | | — | | (97,171) | | 2,682,449 | | 1,902,326 | | | 32,246 | | | (1,019) | | 1,933,553 | | 2,390,143 | | | 7,483 | | | (16,348) | | 2,381,278 | Government-sponsored enterprises | | 772,023 | | | 2,505 | | | (3,909) | | 770,619 | | 620,337 | | | — | | (17,745) | | 602,592 | | | 1,808,804 | | | 18,991 | | | (823) | | | 1,826,972 | | | 772,023 | | | 2,505 | | | (3,909) | | | 770,619 | Debt securities issued by states and political subdivisions | | | — | | | — | | | — | | | — | | | 19,854 | | | — | | | — | | | 19,854 | | Total available-for-sale securities | | $ | 4,080,663 | | $ | 18,968 | | $ | (23,987) | | $ | 4,075,644 | | $ | 4,640,419 | | $ | 85 | | $ | (142,162) | | $ | 4,498,342 | | $ | 5,985,031 | | $ | 97,114 | | $ | (10,730) | | $ | 6,071,415 | | $ | 4,080,663 | | $ | 18,968 | | $ | (23,987) | | $ | 4,075,644 |
Proceeds from call and sales of investment securities were $102.0 million and $543.0 million, respectively, for the year ended December 31, 2020. Proceeds from call and sales of investment securities were $63.0 million and $1.0 billion, respectively, for the year ended December 31, 2019. Proceeds from both calls and sales of investment securities were nil for both the yearsyear ended December 31, 20182018. The Company recorded gross realized gains of $0.6 million and 2017.gross realized losses of $0.7 million for the year ended December 31, 2020. The Company recorded gross realized gains of $0.5 million and gross realized losses of $3.2 million for the year ended December 31, 2019. The Company recorded 0 gross realized gains and 0 gross realized losses for both the yearsyear ended December 31, 2018 and 2017.2018. The income tax benefit related to the Company’s net realized loss on the sale of investment securities was NaN for the year ended December 31, 2020. The income tax benefit related to the Company’s net realized loss on the sale of investment securities was $0.7 million for the year ended December 31, 2019. The income tax expense related to the Company’s net realized gains on the sale of investment securities was nil during both the yearsyear ended December 31, 2018 and 2017.2018. Gains and losses realized on sales of securities are determined using the specific identification method. Interest income from taxable investment securities was $80.9 million, $92.5 million $106.6 million and $102.3$106.6 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively. Interest income from non-taxable investment securities was nil,$0.9 million, NaN and $0.5 million and $0.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. The amortized cost and 2017, respectively.fair value of debt securities issued by the U.S. Treasury and government agencies as of December 31, 2020, by contractual maturity, are shown below. Mortgage-backed securities and collateralized mortgage obligations are disclosed separately in the table below as remaining expected maturities will differ from contractual maturities as borrowers have the right to prepay obligations. | | | | | | | | | December 31, 2020 | | | Amortized | | Fair | (dollars in thousands) | | Cost | | Value | Due in one year or less | | $ | — | | $ | — | Due after one year through five years | | | 38,244 | | | 38,757 | Due after five years through ten years | | | 83,560 | | | 84,129 | Due after ten years | | | 48,319 | | | 48,535 | | | | 170,123 | | | 171,421 | | | | | | | | Mortgage-backed securities: | | | | | | | Residential - Government agency | | | 155,169 | | | 160,462 | Residential - Government-sponsored enterprises | | | 434,282 | | | 447,200 | Commercial - Government agency | | | 583,232 | | | 599,650 | Commercial - Government-sponsored enterprises | | | 931,095 | | | 932,157 | Total mortgage-backed securities | | | 2,103,778 | | | 2,139,469 | Collateralized mortgage obligations: | | | | | | | Government agency | | | 1,902,326 | | | 1,933,553 | Government-sponsored enterprises | | | 1,808,804 | | | 1,826,972 | Total collateralized mortgage obligations | | | 3,711,130 | | | 3,760,525 | Total available-for-sale securities | | $ | 5,985,031 | | $ | 6,071,415 |
At December 31, 2020, pledged securities totaled $2.4 billion, of which $2.3 billion was pledged to secure public deposits and $186.1 million was pledged to secure other financial transactions. At December 31, 2019, pledged securities totaled $1.8 billion, of which $1.5 billion was pledged to secure public deposits and $242.3 million was pledged to secure other financial transactions. The Company held 0 securities of any single issuer, other than debt securities issued by the U.S. government, government agencies and government-sponsored enterprises, which were in excess of 10% of stockholders’ equity as of December 31, 2020 and 2019. The amortized cost and fair value of debt securities issued by the U.S. Treasury and government-sponsored enterprises as of December 31, 2019, by contractual maturity, are shown below. Mortgage-backed securities and collateralized mortgage obligations are disclosed separately in the table below as remaining expected maturities will differ from contractual maturities as borrowers have the right to prepay obligations.
| | | | | | | | | December 31, 2019 | | | Amortized | | Fair | (dollars in thousands) | | Cost | | Value | Due in one year or less | | $ | 29,832 | | $ | 29,888 | Due after one year through five years | | | 101,697 | | | 101,439 | Due after five years through ten years | | | — | | | — | Due after ten years | | | — | | | — | | | | 131,529 | | | 131,327 | | | | | | | | Mortgage-backed securities: | | | | | | | Residential - Government agency | | | 290,131 | | | 291,209 | Residential - Government-sponsored enterprises | | | 395,039 | | | 399,492 | Commercial - Government-sponsored enterprises | | | 101,798 | | | 101,719 | Total mortgage-backed securities | | | 786,968 | | | 792,420 | Collateralized mortgage obligations: | | | | | | | Government agency | | | 2,390,143 | | | 2,381,278 | Government-sponsored enterprises | | | 772,023 | | | 770,619 | Total collateralized mortgage obligations | | | 3,162,166 | | | 3,151,897 | Total available-for-sale securities | | $ | 4,080,663 | | $ | 4,075,644 |
At December 31, 2019, pledged securities totaled $1.8 billion, of which $1.5 billion was pledged to secure public deposits and $242.3 million was pledged to secure other financial transactions. At December 31, 2018, pledged securities totaled $2.0 billion, of which $1.7 billion was pledged to secure public deposits and $232.7 million was pledged to secure other financial transactions.
The Company held 0 securities of any single issuer, other than debt securities issued by the U.S. government, government agencies and government-sponsored enterprises, which were in excess of 10% of stockholders’ equity as of December 31, 2019 and 2018.
The following table presents the unrealized gross losses and fair values of securities in the available-for-sale portfolio by length of time that the 11850 and 154118 individual securities in each category have been in a continuous loss position as of December 31, 20192020 and 2018,2019, respectively. The unrealized losses on investment securities were attributable to market conditions.
| | | | | | | | | | | | | | | | | | | | | Time in Continuous Loss as of December 31, 2019 | | | Less Than 12 Months | | 12 Months or More | | Total | | | Unrealized | | | | | Unrealized | | | | | Unrealized | | | | (dollars in thousands) | | Losses | | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | Government-sponsored enterprises debt securities | | $ | (277) | | $ | 49,716 | | $ | — | | $ | — | | $ | (277) | | $ | 49,716 | Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | Residential - Government agency | | | — | | | — | | | (1,146) | | | 109,614 | | | (1,146) | | | 109,614 | Residential - Government-sponsored enterprises | | | (115) | | | 76,481 | | | (1,558) | | | 109,025 | | | (1,673) | | | 185,506 | Commercial - Government-sponsored enterprises | | | (634) | | | 38,062 | | | — | | | — | | | (634) | | | 38,062 | Collateralized mortgage obligations: | | | | | | | | | | | | | | | | | | | Government agency | | | (8,049) | | | 969,762 | | | (8,299) | | | 565,764 | | | (16,348) | | | 1,535,526 | Government-sponsored enterprises | | | (583) | | | 180,785 | | | (3,326) | | | 209,752 | | | (3,909) | | | 390,537 | Total available-for-sale securities with unrealized losses | | $ | (9,658) | | $ | 1,314,806 | | $ | (14,329) | | $ | 994,155 | | $ | (23,987) | | $ | 2,308,961 |
| | | | | | | | | | | | | | | | | | | | | Time in Continuous Loss as of December 31, 2018 | | | Less Than 12 Months | | 12 Months or More | | Total | | | Unrealized | | | | | Unrealized | | | | | Unrealized | | | | (dollars in thousands) | | Losses | | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | Government-sponsored enterprises debt securities | | $ | — | | $ | — | | $ | (6,778) | | $ | 157,939 | | $ | (6,778) | | $ | 157,939 | Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | Residential - Government agency | | | — | | | — | | | (15,174) | | | 373,891 | | | (15,174) | | | 373,891 | Residential - Government-sponsored enterprises | | | (1) | | | 172 | | | (5,293) | | | 125,869 | | | (5,294) | | | 126,041 | Collateralized mortgage obligations: | | | | | | | | | | | | | | | | | | | Government agency | | | — | | | — | | | (97,171) | | | 2,475,532 | | | (97,171) | | | 2,475,532 | Government-sponsored enterprises | | | — | | | — | | | (17,745) | | | 486,175 | | | (17,745) | | | 486,175 | Total available-for-sale securities with unrealized losses | | $ | (1) | | $ | 172 | | $ | (142,161) | | $ | 3,619,406 | | $ | (142,162) | | $ | 3,619,578 |
Other-Than-Temporary Impairment
At December 31, 2020 and 2019, the Company did not have any securities with the intent to sell and determined it was more likely than not that the Company would not be required to sell the securities prior to recovery of the amortized cost basis. At December 31, 2018, the Company had the intent to sell 48 securities with an aggregate amortized cost basis of $898.2 million. As a result, the Company recorded an OTTI write-down of $24.1 million for the year ended December 31, 2018. The OTTI write-down represented the entire difference between the amortized cost basis and fair value of the securities as of December 31, 2018. In January 2019, the Company completed its sale of the 48 securities and recorded an additional loss of $2.6 million.
As the Company had the intent and ability to hold the remaining securities in an unrealized loss position as of December 31, 20192020 and 2018,2019, each security with an unrealized loss position in the abovebelow tables has been further assessed to determine if a credit loss exists. If it is probable that the Company will not collect all amounts due according to the contractual terms of an investment security, an OTTI is considered to have occurred. In determining whether a credit loss exists, the Company estimates the present value of future cash flows expected to be collected from the investment security. If the present value of future cash flows is less than the amortized cost basis of the security, an OTTI exists. As of December 31, 20192020 and 2018,2019, the Company did not expect any credit losses in its debt securities and 0 OTTI related tono credit losses were recognized on securities during the years ended December 31, 20192020 and 2018. As noted above, the only OTTI losses recognized for the year ended December 31, 2018 were due to non-credit related factors.2019. The following table provides a detail of the OTTI write-downs included in earnings for the year ended December 31, 2018:
| | | | | | | | | | | | | | | | | | | | | Time in Continuous Loss as of December 31, 2020 | | | Less Than 12 Months | | 12 Months or More | | Total | | | Unrealized | | | | | Unrealized | | | | | Unrealized | | | | (dollars in thousands) | | Losses | | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | U.S. Treasury and government agency debt securities | | $ | (61) | | $ | 38,507 | | $ | — | | $ | — | | $ | (61) | | $ | 38,507 | Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | Residential - Government-sponsored enterprises | | | (725) | | | 64,987 | | | — | | | — | | | (725) | | | 64,987 | Commercial - Government agency | | | (119) | | | 32,346 | | | — | | | — | | | (119) | | | 32,346 | Commercial - Government-sponsored enterprises | | | (7,983) | | | 427,759 | | | — | | | — | | | (7,983) | | | 427,759 | Collateralized mortgage obligations: | | | | | | | | | | | | | | | | | | | Government agency | | | (994) | | | 209,124 | | | (25) | | | 6,190 | | | (1,019) | | | 215,314 | Government-sponsored enterprises | | | (823) | | | 296,160 | | | — | | | — | | | (823) | | | 296,160 | Total available-for-sale securities with unrealized losses | | $ | (10,705) | | $ | 1,068,883 | | $ | (25) | | $ | 6,190 | | $ | (10,730) | | $ | 1,075,073 |
|
|
|
|
|
| Year Ended
| (dollars in thousands)
| | December 31, 2018
| U.S. Treasury securities
|
| $
| (13,634)
| Government-sponsored enterprises debt securities
|
|
| (1,344)
| Mortgage-backed securities:
|
|
|
| Residential - Government agency
|
|
| (146)
| Residential - Government-sponsored enterprises
|
|
| (763)
| Collateralized mortgage obligations:
|
|
|
| Government agency
|
|
| (5,064)
| Government-sponsored enterprises
|
|
| (2,711)
| Debt securities issued by states and political subdivisions
|
|
| (423)
| Total OTTI write-downs included in earnings
|
| $
| (24,085)
|
| | | | | | | | | | | | | | | | | | | | | Time in Continuous Loss as of December 31, 2019 | | | Less Than 12 Months | | 12 Months or More | | Total | | | Unrealized | | | | | Unrealized | | | | | Unrealized | | | | (dollars in thousands) | | Losses | | Fair Value | | Losses | | Fair Value | | Losses | | Fair Value | Government-sponsored enterprises debt securities | | $ | (277) | | $ | 49,716 | | $ | — | | $ | — | | $ | (277) | | $ | 49,716 | Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | Residential - Government agency | | | — | | | — | | | (1,146) | | | 109,614 | | | (1,146) | | | 109,614 | Residential - Government-sponsored enterprises | | | (115) | | | 76,481 | | | (1,558) | | | 109,025 | | | (1,673) | | | 185,506 | Commercial - Government-sponsored enterprises | | | (634) | | | 38,062 | | | — | | | — | | | (634) | | | 38,062 | Collateralized mortgage obligations: | | | | | | | | | | | | | | | | | | | Government agency | | | (8,049) | | | 969,762 | | | (8,299) | | | 565,764 | | | (16,348) | | | 1,535,526 | Government-sponsored enterprises | | | (583) | | | 180,785 | | | (3,326) | | | 209,752 | | | (3,909) | | | 390,537 | Total available-for-sale securities with unrealized losses | | $ | (9,658) | | $ | 1,314,806 | | $ | (14,329) | | $ | 994,155 | | $ | (23,987) | | $ | 2,308,961 |
Visa Class B Restricted Shares In 2008, the Company received 394,000 Visa Class B restricted shares as part of Visa’s initial public offering. Visa Class B restricted shares are not currently convertible to publicly traded Visa Class A common shares, and only transferable in limited circumstances, until the settlement of certain litigation which are indemnified by Visa members, including the Company. As there are existing transfer restrictions and the outcome of the aforementioned litigation is uncertain, these shares were included in the consolidated balance sheets at their historical cost of $0. In 2016, the Company recorded a $22.7 million net realized gain related to the sale of 274,000 Visa Class B restricted shares. Concurrent with the sale of the Visa Class B restricted shares, the Company entered into an agreement with the buyer that requires payment to the buyer in the event Visa reduces each member bank’s Class B conversion rate to unrestricted Class A common shares. On June 28, 2018, Visa additionally funded its litigation escrow account, thereby reducing each member bank’s Class B conversion rate to unrestricted Class A common shares. Accordingly, on July 5, 2018, Visa announced a decrease in conversion rate from 1.6483 to 1.6298 effective June 28, 2018. In July 2018, the Company made a payment of approximately $0.7 million to the buyer as a result of the reduction in the Visa Class B conversion rate. On September 27, 2019, Visa additionally funded its litigation escrow account, thereby further reducing each member bank’s Class B conversion rate to unrestricted Class A common shares. Accordingly, on September 30, 2019, Visa announced a decrease in conversion rate from 1.6298 to 1.6228, effective September 27, 2019. In October 2019, the Company made a payment of approximately $0.3 million to the buyer as a result of the reduction in the Visa Class B conversion rate. See “Note 17. Derivative Financial Instruments” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information. The Company held approximately 120,000 Visa Class B restricted shares as of both December 31, 20192020 and 2018.2019. These shares continued to be carried at $0 cost basis during each of the respective periods. 4. Loans and Leases As of December 31, 20192020 and 2018,2019, loans and leases were comprised of the following: | | | | | | | | | | | | | | | December 31, | | December 31, | (dollars in thousands) | | 2019 | | 2018 | | 2020 | | 2019 | Commercial and industrial | | $ | 2,743,242 | | $ | 3,208,760 | | $ | 3,019,507 | | $ | 2,743,242 | Commercial real estate | | | 3,463,953 | | | 2,990,783 | | | 3,392,676 | | | 3,463,953 | Construction | | | 519,241 | | | 626,757 | | | 735,819 | | | 519,241 | Residential: | | | | | | | | | | | | | Residential mortgage | | | 3,768,936 | | | 3,527,101 | | | 3,690,218 | | | 3,768,936 | Home equity line | | | 893,239 | | | 912,517 | | | 841,624 | | | 893,239 | Total residential | | | 4,662,175 | | | 4,439,618 | | | 4,531,842 | | | 4,662,175 | Consumer | | | 1,620,556 | | | 1,662,504 | | | 1,353,842 | | | 1,620,556 | Lease financing | | | 202,483 | | | 147,769 | | | 245,411 | | | 202,483 | Total loans and leases | | $ | 13,211,650 | | $ | 13,076,191 | | $ | 13,279,097 | | $ | 13,211,650 |
Outstanding loan balances are reported net of deferred loan costs and fees of $41.0$26.1 million and $36.3$41.0 million at December 31, 20192020 and 2018,2019, respectively. As of December 31, 2020, residential real estate loans totaling $2.9 billion were pledged to collateralize the Company’s borrowing capacity at the FHLB, and consumer, commercial and industrial, commercial real estate and residential mortgage loans totaling $1.9 billion were pledged to collateralize the borrowing capacity at the FRB. As of December 31, 2019, residential real estate loans totaling $2.9 billion were pledged to collateralize the Company’s borrowing capacity at the FHLB, and consumer, commercial and industrial and commercial real estate loans totaling $953.2 million were pledged to collateralize the borrowing capacity at the FRB. As of December 31, 2018, residential real estate loans totaling $2.5 billion were pledged to collateralize the Company’s borrowing capacity at the FHLB, and consumer and commercial and industrial loans totaling $957.0 million were pledged to collateralize the borrowing capacity at the FRB. Residential real estate loans collateralized by properties that were in the process of foreclosure totaled $2.3 million and $4.1 million at December 31, 2020 and $4.62019, respectively. Net gains related to the sales of loans, recorded as a component of other noninterest income, were $14.5 million atfor the year ended December 31, 2020. Net losses related to the sales of loans, recorded as a component of other noninterest income, were $1.3 million and $0.2 million for the years ended December 31, 2019 and 2018, respectively. In the course of evaluating the credit risk presented by a customer and the pricing that will adequately compensate the Company for assuming that risk, management may require a certain amount of collateral support. The type of collateral held varies, but may include accounts receivable, inventory, land, buildings, equipment, income-producing commercial properties and residential real estate. The Company applies the same collateral policy for loans whether they are funded immediately or on a delayed basis. The loan and lease portfolio is principally located in Hawaii and, to a lesser extent, on the U.S. Mainland, Guam and Saipan. The risk inherent in the portfolio depends upon both the economic stability of the state or territories, which affects property values, and the financial strength and creditworthiness of the borrowers. At December 31, 2019 and 2018, remaining loan and lease commitments were comprised of the following:
| | | | | | | | | December 31, | (dollars in thousands) | | 2019 | | 2018 | Commercial and industrial | | $ | 2,451,362 | | $ | 2,484,857 | Commercial real estate | | | 130,597 | | | 114,186 | Construction | | | 718,121 | | | 526,938 | Residential: | | | | | | | Residential mortgage | | | 842 | | | 121 | Home equity line | | | 1,052,739 | | | 913,636 | Total residential | | | 1,053,581 | | | 913,757 | Consumer | | | 1,554,029 | | | 1,509,853 | Total loan and lease commitments | | $ | 5,907,690 | | $ | 5,549,591 |
5. Allowance for Loan and LeaseCredit Losses The Company must maintainmaintains an allowance for loan and lease losses (the “Allowance”)ACL that is adequate to absorb estimated probable credit losses associated with its loan and lease portfolio. The Allowance consists of an allocated portion, which covers estimated credit losses for specifically identified loans and poolsdeducted from the amortized cost basis of loans and leases to present the net carrying value of loans and an unallocated portion.leases expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount of loans and leases. Segmentation
Management has identified 3 primary portfolio segments in estimating the Allowance: commercial lending, residential real estate lending and consumer lending. Commercial lending is further segmented into 4 distinct portfolios based on characteristics relating to the borrower, transaction, and collateral. These portfolio segments are: commercial and industrial, commercial real estate, construction, and lease financing. Residential real estate is not further segmented, but consists of residential mortgages including real estate secured installment loans and home equity lines of credit. Consumer lending is not further segmented, but consists primarily of automobile loans, credit cards, and other installment loans. Management has developed a methodology for each segment taking into consideration portfolio segment-specific factors such as product type, loan portfolio characteristics, management information systems, and other risk factors.
Specific Allocation
Commercial
A specific allocation is determined for individually impaired commercial loans. A loan is considered impaired when it is probable that theThe Company will be unable to collect the full amount of principal and interest according to the contractual terms of the loan agreement.
Management identifies material impaired loans based on their size in relation to the Company’s total loan and lease portfolio. Each impaired loan equal to or exceeding a specified threshold requiresalso maintains an analysis to determine the appropriate level ofestimated reserve for that specific loan. Impaired loans belowunfunded commitments on the specified threshold are treated as a pool, with specific allocations established based on qualitative factors such as asset quality trends, risk identification, lending policies, portfolio growth, and portfolio concentrations.
Residential
A specific allocation is determined for residential real estate loans based on delinquency status. In addition, each impaired loan equal to or exceeding a specified threshold requires analysis to determine the appropriate level ofconsolidated balance sheets. The reserve for that specific loan, generally based onunfunded commitments is reduced in the value of the underlying collateral less estimated costs to sell. The specific allocation will be 0 for impaired loansperiod in which the value of the underlying collateral, less estimated costs to sell, exceeds the unpaid principal balance of the loan.off-balance sheet financial instruments expire, loan funding occurs, or is otherwise settled.
Consumer
A specific allocation is determined for the consumer loan portfolio using delinquency-based formula allocations. The Company uses a formula approach in determining the consumer loan specific allocation and recognizes the statistical validity of measuring losses predicated on past due status.
Pooled Allocation
Commercial
Pooled allocation for pass, special mention, substandard and doubtful grade commercial loans and leases that share common risk characteristics and properties is determined using a historical loss rate analysis and qualitative factor considerations. Loan grade categories are discussed under “Credit Quality”.
Residential and Consumer
Pooled allocation for non-delinquent consumer and residential real estate loans is determined using a historical loss rate analysis and qualitative factor considerations.
Qualitative Adjustments
Qualitative adjustments to historical loss rates or other static sources may be necessary since these rates may not be an accurate indicator of losses inherent in the current portfolio. To estimate the level of adjustments, management considers factors including global, national and local economic conditions; levels and trends in problem loans; the effect of credit concentrations; collateral value trends; changes in risk due to changes in lending policies and practices; management expertise; industry and regulatory trends; and volume of loans.
Unallocated Allowance
The Company’s Allowance incorporates an unallocated portion to cover risk factors and events that may have occurred as of the evaluation date that have not been reflected in the risk measures utilized due to inherent limitations in the precision of the estimation process. These risk factors, in addition to past and current events based on facts at the consolidated balance sheets date and realistic courses of action that management expects to take, are assessed in determining the level of unallocated allowance.
The Allowance was comprised of the following for the years indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2019 | | | Commercial Lending | | | | | | | | | | | | | | | Commercial | | Commercial | | | | | | | | | | | | | | | | | | | and | | Real | | | | Lease | | | | | | | | | | | | | (dollars in thousands) | | Industrial | | Estate | | Construction | | Financing | | Residential | | Consumer | | Unallocated | | Total | Allowance for loan and lease losses: | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning of year | | $ | 34,501 | | $ | 19,725 | | $ | 5,813 | | $ | 432 | | $ | 44,906 | | $ | 35,813 | | $ | 528 | | $ | 141,718 | Charge-offs | | | (2,718) | | | — | | | — | | | (24) | | | (438) | | | (32,807) | | | — | | | (35,987) | Recoveries | | | 410 | | | 263 | | | — | | | — | | | 967 | | | 9,359 | | | — | | | 10,999 | Increase (decrease) in Provision | | | (3,218) | | | 2,337 | | | (969) | | | 16 | | | (6,256) | | | 22,279 | | | (389) | | | 13,800 | Balance at end of year | | $ | 28,975 | | $ | 22,325 | | $ | 4,844 | | $ | 424 | | $ | 39,179 | | $ | 34,644 | | $ | 139 | | $ | 130,530 | Individually evaluated for impairment | | | 46 | | | 27 | | | — | | | — | | | 130 | | | — | | | — | | | 203 | Collectively evaluated for impairment | | | 28,929 | | | 22,298 | | | 4,844 | | | 424 | | | 39,049 | | | 34,644 | | | 139 | | | 130,327 | Loans and leases: | | | | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | 4,951 | | $ | 723 | | $ | — | | $ | — | | $ | 14,964 | | $ | — | | $ | — | | $ | 20,638 | Collectively evaluated for impairment | | | 2,738,291 | | | 3,463,230 | | | 519,241 | | | 202,483 | | | 4,647,211 | | | 1,620,556 | | | — | | | 13,191,012 | Balance at end of year | | $ | 2,743,242 | | $ | 3,463,953 | | $ | 519,241 | | $ | 202,483 | | $ | 4,662,175 | | $ | 1,620,556 | | $ | — | | $ | 13,211,650 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2018 | | | Commercial Lending | | | | | | | | | | | | | | | Commercial | | Commercial | | | | | | | | | | | | | | | | | | | and | | Real | | | | Lease | | | | | | | | | | | | | (dollars in thousands) | | Industrial | | Estate | | Construction | | Financing | | Residential | | Consumer | | Unallocated | | Total | Allowance for loan and lease losses: | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning of year | | $ | 34,006 | | $ | 18,044 | | $ | 6,817 | | $ | 611 | | $ | 42,852 | | $ | 31,249 | | $ | 3,674 | | $ | 137,253 | Charge-offs | | | (778) | | | — | | | — | | | — | | | (165) | | | (26,630) | | | — | | | (27,573) | Recoveries | | | 232 | | | 216 | | | — | | | — | | | 940 | | | 8,470 | | | — | | | 9,858 | Increase (decrease) in Provision | | | 1,041 | | | 1,465 | | | (1,004) | | | (179) | | | 1,279 | | | 22,724 | | | (3,146) | | | 22,180 | Balance at end of year | | $ | 34,501 | | $ | 19,725 | | $ | 5,813 | | $ | 432 | | $ | 44,906 | | $ | 35,813 | | $ | 528 | | $ | 141,718 | Individually evaluated for impairment | | | 108 | | | 32 | | | — | | | — | | | 396 | | | — | | | — | | | 536 | Collectively evaluated for impairment | | | 34,393 | | | 19,693 | | | 5,813 | | | 432 | | | 44,510 | | | 35,813 | | | 528 | | | 141,182 | Loans and leases: | | | | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | 8,719 | | $ | 5,743 | | $ | — | | $ | — | | $ | 16,114 | | $ | — | | $ | — | | $ | 30,576 | Collectively evaluated for impairment | | | 3,200,041 | | | 2,985,040 | | | 626,757 | | | 147,769 | | | 4,423,504 | | | 1,662,504 | | | — | | | 13,045,615 | Balance at end of year | | $ | 3,208,760 | | $ | 2,990,783 | | $ | 626,757 | | $ | 147,769 | | $ | 4,439,618 | | $ | 1,662,504 | | $ | — | | $ | 13,076,191 |
Rollforward of the Allowance for Credit Losses | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2017 | | | Commercial Lending | | | | | | | | | | | | | | | Commercial | | Commercial | | | | | | | | | | | | | | | | | | | and | | Real | | | | Lease | | | | | | | | | | | | | (dollars in thousands) | | Industrial | | Estate | | Construction | | Financing | | Residential | | Consumer | | Unallocated | | Total | Allowance for loan and lease losses: | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning of year | | $ | 33,129 | | $ | 18,448 | | $ | 4,513 | | $ | 847 | | $ | 43,436 | | $ | 28,388 | | $ | 6,733 | | $ | 135,494 | Charge-offs | | | (1,519) | | | — | | | — | | | (147) | | | (408) | | | (23,851) | | | — | | | (25,925) | Recoveries | | | 844 | | | 596 | | | — | | | — | | | 687 | | | 7,057 | | | — | | | 9,184 | Increase (decrease) in Provision | | | 1,552 | | | (1,000) | | | 2,304 | | | (89) | | | (863) | | | 19,655 | | | (3,059) | | | 18,500 | Balance at end of year | | $ | 34,006 | | $ | 18,044 | | $ | 6,817 | | $ | 611 | | $ | 42,852 | | $ | 31,249 | | $ | 3,674 | | $ | 137,253 | Individually evaluated for impairment | | | 4 | | | 6 | | | — | | | — | | | 484 | | | — | | | — | | | 494 | Collectively evaluated for impairment | | | 34,002 | | | 18,038 | | | 6,817 | | | 611 | | | 42,368 | | | 31,249 | | | 3,674 | | | 136,759 | Loans and leases: | | | | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | 18,183 | | $ | 10,636 | | $ | — | | $ | — | | $ | 16,530 | | $ | — | | $ | — | | $ | 45,349 | Collectively evaluated for impairment | | | 3,117,083 | | | 2,656,961 | | | 632,911 | | | 165,066 | | | 4,073,523 | | | 1,586,476 | | | — | | | 12,232,020 | Balance at end of year | | $ | 3,135,266 | | $ | 2,667,597 | | $ | 632,911 | | $ | 165,066 | | $ | 4,090,053 | | $ | 1,586,476 | | $ | — | | $ | 12,277,369 |
The following presents the activity in the ACL by class of loans and leases for the year ended December 31, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2020 | | | Commercial Lending | | Residential Lending | | | | | | | | | | | | Commercial | | Commercial | | | | | | | | Home | | | | | | | | | | | | and | | Real | | | | Lease | | Residential | | Equity | | | | | | | | | | (dollars in thousands) | | Industrial | | Estate | | Construction | | Financing | | Mortgage | | Line | | Consumer | | Unallocated | | Total | Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning of year | | $ | 28,975 | | $ | 22,325 | | $ | 4,844 | | $ | 424 | | $ | 29,303 | | $ | 9,876 | | $ | 34,644 | | $ | 139 | | $ | 130,530 | Adoption of ASU No. 2016-13 | | | (16,105) | | | 10,559 | | | (1,803) | | | 207 | | | (2,793) | | | (4,731) | | | 15,575 | | | (139) | | | 770 | Charge-offs | | | (15,572) | | | (2,753) | | | (379) | | | — | | | (14) | | | (54) | | | (28,791) | | | — | | | (47,563) | Recoveries | | | 5,005 | | | 615 | | | 200 | | | — | | | 216 | | | 167 | | | 10,499 | | | — | | | 16,702 | Increase in Provision | | | 22,408 | | | 27,377 | | | 7,177 | | | 2,667 | | | 13,749 | | | 1,905 | | | 32,732 | | | — | | | 108,015 | Balance at end of year | | $ | 24,711 | | $ | 58,123 | | $ | 10,039 | | $ | 3,298 | | $ | 40,461 | | $ | 7,163 | | $ | 64,659 | | $ | — | | $ | 208,454 |
The following presents the activity in the ACL by class of loans and leases and the disaggregation of the ACL and recorded investment in loans by impairment methodology for the years ended December 31, 2019 and 2018, presented in accordance with Topic 310, Receivables: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2019 | | | Commercial Lending | | | | | | | | | | | | | | | Commercial | | Commercial | | | | | | | | | | | | | | | | | | | and | | Real | | | | Lease | | | | | | | | | | | | | (dollars in thousands) | | Industrial | | Estate | | Construction | | Financing | | Residential | | Consumer | | Unallocated | | Total | Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning of year | | $ | 34,501 | | $ | 19,725 | | $ | 5,813 | | $ | 432 | | $ | 44,906 | | $ | 35,813 | | $ | 528 | | $ | 141,718 | Charge-offs | | | (2,718) | | | — | | | — | | | (24) | | | (438) | | | (32,807) | | | — | | | (35,987) | Recoveries | | | 410 | | | 263 | | | — | | | — | | | 967 | | | 9,359 | | | — | | | 10,999 | Increase (decrease) in Provision | | | (3,218) | | | 2,337 | | | (969) | | | 16 | | | (6,256) | | | 22,279 | | | (389) | | | 13,800 | Balance at end of year | | $ | 28,975 | | $ | 22,325 | | $ | 4,844 | | $ | 424 | | $ | 39,179 | | $ | 34,644 | | $ | 139 | | $ | 130,530 | Individually evaluated for impairment | | | 46 | | | 27 | | | — | | | — | | | 130 | | | — | | | — | | | 203 | Collectively evaluated for impairment | | | 28,929 | | | 22,298 | | | 4,844 | | | 424 | | | 39,049 | | | 34,644 | | | 139 | | | 130,327 | Loans and leases: | | | | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | 4,951 | | $ | 723 | | $ | — | | $ | — | | $ | 14,964 | | $ | — | | $ | — | | $ | 20,638 | Collectively evaluated for impairment | | | 2,738,291 | | | 3,463,230 | | | 519,241 | | | 202,483 | | | 4,647,211 | | | 1,620,556 | | | — | | | 13,191,012 | Balance at end of year | | $ | 2,743,242 | | $ | 3,463,953 | | $ | 519,241 | | $ | 202,483 | | $ | 4,662,175 | | $ | 1,620,556 | | $ | — | | $ | 13,211,650 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2018 | | | | Commercial Lending | | | | | | | | | | | | | | | | Commercial | | Commercial | | | | | | | | | | | | | | | | | | | | and | | Real | | | | Lease | | | | | | | | | | | | | | (dollars in thousands) | | Industrial | | Estate | | Construction | | Financing | | Residential | | Consumer | | Unallocated | | Total | | Allowance for credit losses: | | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning of year | | $ | 34,006 | | $ | 18,044 | | $ | 6,817 | | $ | 611 | | $ | 42,852 | | $ | 31,249 | | $ | 3,674 | | $ | 137,253 | | Charge-offs | | | (778) | | | — | | | — | | | — | | | (165) | | | (26,630) | | | — | | | (27,573) | | Recoveries | | | 232 | | | 216 | | | — | | | — | | | 940 | | | 8,470 | | | — | | | 9,858 | | Increase (decrease) in Provision | | | 1,041 | | | 1,465 | | | (1,004) | | | (179) | | | 1,279 | | | 22,724 | | | (3,146) | | | 22,180 | | Balance at end of year | | $ | 34,501 | | $ | 19,725 | | $ | 5,813 | | $ | 432 | | $ | 44,906 | | $ | 35,813 | | $ | 528 | | $ | 141,718 | | Individually evaluated for impairment | | | 108 | | | 32 | | | — | | | — | | | 396 | | | — | | | — | | | 536 | | Collectively evaluated for impairment | | | 34,393 | | | 19,693 | | | 5,813 | | | 432 | | | 44,510 | | | 35,813 | | | 528 | | | 141,182 | | Loans and leases: | | | | | | | | | | | | | | | | | | | | | | | | | | Individually evaluated for impairment | | $ | 8,719 | | $ | 5,743 | | $ | — | | $ | — | | $ | 16,114 | | $ | — | | $ | — | | $ | 30,576 | | Collectively evaluated for impairment | | | 3,200,041 | | | 2,985,040 | | | 626,757 | | | 147,769 | | | 4,423,504 | | | 1,662,504 | | | — | | | 13,045,615 | | Balance at end of year | | $ | 3,208,760 | | $ | 2,990,783 | | $ | 626,757 | | $ | 147,769 | | $ | 4,439,618 | | $ | 1,662,504 | | $ | — | | $ | 13,076,191 | |
Rollforward of the Reserve for Unfunded Commitments The following presents the activity in the Reserve for Unfunded Commitments for the year ended December 31, 2020: | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2020 | | | Commercial Lending | | Residential Lending | | | | | | | | | Commercial | | Commercial | | | | | | | | Home | | | | | | | | | and | | Real | | | | Lease | | Residential | | Equity | | | | | | | (dollars in thousands) | | Industrial | | Estate | | Construction | | Financing | | Mortgage | | Line | | Consumer | | Total | Reserve for unfunded commitments: | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning of year | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 600 | | $ | 600 | Adoption of ASU No. 2016-13 | | | 5,390 | | | 778 | | | 4,119 | | | — | | | 7 | | | 6,587 | | | (581) | | | 16,300 | Increase (decrease) in Provision | | | 6,329 | | | 550 | | | 4,918 | | | — | | | (5) | | | 1,865 | | | 46 | | | 13,703 | Balance at end of year | | $ | 11,719 | | $ | 1,328 | | $ | 9,037 | | $ | — | | $ | 2 | | $ | 8,452 | | $ | 65 | | $ | 30,603 |
Credit Quality Information The Company performs an internal loan review and grading or scoring procedures on an ongoing basis. The review provides management with periodic information as to the quality of the loan portfolio and effectiveness of itsthe Company’s lending policies and procedures. The objective of the loan review and grading or scoring procedures is to identify, in a timely manner, existing or emerging credit quality problemsissues so that appropriate steps can be initiated to avoid or minimize future losses. Loans and leases subject to grading primarily include: commercial and industrial loans, commercial real estate loans, construction loans and standby letters of credit,lease financing. Other loans subject to grading include installment loans to businesses or individuals for business and commercial purposes, commercial real estate loans, overdraft lines of credit, commercial credit cards, and other credits as may be determined. Loans whichCredit quality indicators for internally graded loans and leases are not subjectgenerally updated on an annual basis or on a quarterly basis for those loans and leases deemed to grading include loans that are 100% sold with no recourse to the Company, consumer installment loans, indirect automobile loans, credit cards, home equity linesbe of credit and residential mortgage loans.potentially higher risk. Residential real estate and consumer loans are underwritten primarily on the basis of credit bureau scores, debt-service-to-income ratios, and collateral quality and loan to value ratios.
AAn internal credit risk rating system is used to determine loan grade and is based on borrower credit risk and transactional risk. The loan grading process is a mechanism used to determine the risk of a particular borrower and is based on the following 8 factors of a borrower: character, earnings and operating cash flow, asset and liability structure, debt capacity, financial reporting, management and controls, borrowing entity, and industry and operating environment.
Pass – “Pass” (uncriticized) loans and leases are not considered to carry greater than normal risk. The borrower has the apparent ability to satisfy obligations to the Company, and therefore no loss in ultimate collection is anticipated. Special Mention – Loans and leases that have potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for assets or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Substandard – Loans and leases that are inadequately protected by the current financial condition and paying capacity of the obligor or by any collateral pledged. Loans and leases so classified must have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the distinct possibility that the bank may sustain some loss if the deficiencies are not corrected. Doubtful – Loans and leases that have weaknesses found in substandard borrowers with the added provision that the weaknesses make collection of debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loss – Loans and leases classified as loss are considered uncollectible and of such little value that their continuance as an asset is not warranted. This classification does not mean that the loan or lease has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future. Loans that are primarily monitored for credit quality using FICO scores include: residential mortgage loans, home equity lines and consumer loans. FICO scores are calculated primarily based on a consideration of payment history, the current amount of debt, the length of credit history available, a recent history of new sources of credit and the mix of credit type. FICO scores are updated on a monthly, quarterly or bi-annual basis, depending on the product type. The amortized cost basis by year of origination and credit risk profiles by internally assigned grade forquality indicator of the Company's loans and leases as of December 31, 2019 and 2018 were2020 was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Revolving | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Converted | | | | | | December 31, 2019 | | Term Loans | | Revolving | | to Term | | | | | | Commercial | | Commercial | | | | | | | | Amortized Cost Basis by Origination Year | | Loans | | Loans | | | | | | and | | Real | | | | Lease | | | | | | | | | | | | | | | | | | | | | | Amortized | | Amortized | | | | (dollars in thousands) | | Industrial | | Estate | | Construction | | Financing | | Total | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Cost Basis | | Cost Basis | | Total | Grade: | | | | | | | | | | | | | | | | Commercial Lending | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial and Industrial | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk rating: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | $ | 2,585,908 | | $ | 3,327,659 | | $ | 515,993 | | $ | 201,461 | | $ | 6,631,021 | | $ | 873,639 | | $ | 324,030 | | $ | 183,329 | | $ | 73,000 | | $ | 49,886 | | $ | 94,360 | | $ | 1,058,786 | | $ | 28,853 | | $ | 2,685,883 | Special mention | | | 91,365 | | | 106,331 | | | 127 | | | 1,022 | | 198,845 | | Special Mention | | | | 20,937 | | | 10,370 | | | 20,164 | | | 2,099 | | | 279 | | | 8,316 | | | 101,183 | | | 1,549 | | | 164,897 | Substandard | | | 65,969 | | | 29,963 | | | 3,121 | | | — | | | 99,053 | | | 23,804 | | | 2,023 | | | 2,568 | | | 677 | | | 4,063 | | | 8,113 | | | 33,775 | | | 250 | | | 75,273 | Total | | $ | 2,743,242 | | $ | 3,463,953 | | $ | 519,241 | | $ | 202,483 | | $ | 6,928,919 | | Other (1) | | | | 13,142 | | | 13,426 | | | 9,246 | | | 5,337 | | | 1,867 | | | 280 | | | 50,156 | | | — | | | 93,454 | Total Commercial and Industrial | | | | 931,522 | | | 349,849 | | | 215,307 | | | 81,113 | | | 56,095 | | | 111,069 | | | 1,243,900 | | | 30,652 | | | 3,019,507 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial Real Estate | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk rating: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | | | 342,845 | | | 611,243 | | | 541,104 | | | 447,366 | | | 295,426 | | | 814,398 | | | 47,604 | | | 323 | | | 3,100,309 | Special Mention | | | | 1,500 | | | 63,617 | | | 26,187 | | | 33,482 | | | 37,841 | | | 61,279 | | | 2,999 | | | — | | | 226,905 | Substandard | | | | 29 | | | 3,964 | | | 18,983 | | | 3,779 | | | 10,615 | | | 18,083 | | | 9,511 | | | — | | | 64,964 | Other (1) | | | | — | | | — | | | — | | | — | | | — | | | 498 | | | — | | | — | | | 498 | Total Commercial Real Estate | | | | 344,374 | | | 678,824 | | | 586,274 | | | 484,627 | | | 343,882 | | | 894,258 | | | 60,114 | | | 323 | | | 3,392,676 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Construction | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk rating: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | | | 53,931 | | | 233,730 | | | 202,808 | | | 83,792 | | | 23,171 | | | 41,536 | | | 28,386 | | | — | | | 667,354 | Special Mention | | | | — | | | 508 | | | 707 | | | 4,717 | | | — | | | 9,172 | | | — | | | — | | | 15,104 | Substandard | | | | — | | | — | | | 541 | | | 1,840 | | | 521 | | | 989 | | | — | | | — | | | 3,891 | Other (1) | | | | 16,578 | | | 16,393 | | | 7,775 | | | 3,685 | | | 1,800 | | | 2,656 | | | 583 | | | — | | | 49,470 | Total Construction | | | | 70,509 | | | 250,631 | | | 211,831 | | | 94,034 | | | 25,492 | | | 54,353 | | | 28,969 | | | — | | | 735,819 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Lease Financing | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Risk rating: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pass | | | | 79,064 | | | 60,717 | | | 13,669 | | | 17,207 | | | 3,010 | | | 61,266 | | | — | | | — | | | 234,933 | Special Mention | | | | 950 | | | 892 | | | 311 | | | 1,300 | | | 351 | | | 295 | | | — | | | — | | | 4,099 | Substandard | | | | 2,708 | | | 1,677 | | | 327 | | | 1,141 | | | — | | | 526 | | | — | | | — | | | 6,379 | Total Lease Financing | | | | 82,722 | | | 63,286 | | | 14,307 | | | 19,648 | | | 3,361 | | | 62,087 | | | — | | | — | | | 245,411 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Commercial Lending | | | $ | 1,429,127 | | $ | 1,342,590 | | $ | 1,027,719 | | $ | 679,422 | | $ | 428,830 | | $ | 1,121,767 | | $ | 1,332,983 | | $ | 30,975 | | $ | 7,393,413 |
| | | | | | | | | | | | | | | | | | December 31, 2018 | | | Commercial | | Commercial | | | | | | | | | | and | | Real | | | | Lease | | | | (dollars in thousands) | | Industrial | | Estate | | Construction | | Financing | | Total | Grade: | | | | | | | | | | | | | | | | Pass | | $ | 3,069,546 | | $ | 2,876,907 | | $ | 625,607 | | $ | 146,356 | | $ | 6,718,416 | Special mention | | | 57,012 | | | 91,298 | | | 200 | | | 1,223 | | | 149,733 | Substandard | | | 82,010 | | | 22,578 | | | 950 | | | 190 | | | 105,728 | Doubtful | | | 192 | | | — | | | — | | | — | | | 192 | Total | | $ | 3,208,760 | | $ | 2,990,783 | | $ | 626,757 | | $ | 147,769 | | $ | 6,974,069 |
There were 0 loans and leases graded as Loss as of December 31, 2019 and 2018.(continued)
The credit risk profiles based on payment activity for loans and leases that were not subject to loan grading as of December 31, 2019 and 2018 were as follows:
| | | | | | | | | | | | | | | | | | | | | December 31, 2019 | (dollars in thousands) | | Residential Mortgage | | Home Equity Line | | Consumer | | Consumer - Auto | | Credit Cards | | Total | Performing | | $ | 3,759,799 | | $ | 886,879 | | $ | 219,046 | | $ | 1,016,142 | | $ | 347,264 | | $ | 6,229,130 | Non-performing and delinquent | | | 9,137 | | | 6,360 | | | 7,258 | | | 24,326 | | | 6,520 | | | 53,601 | Total | | $ | 3,768,936 | | $ | 893,239 | | $ | 226,304 | | $ | 1,040,468 | | $ | 353,784 | | $ | 6,282,731 |
| | | | | | | | | | | | | | | | | | | | | December 31, 2018 | (dollars in thousands) | | Residential Mortgage | | Home Equity Line | | Consumer | | Consumer - Auto | | Credit Cards | | Total | Performing | | $ | 3,519,172 | | $ | 903,284 | | $ | 234,458 | | $ | 1,044,393 | | $ | 339,162 | | $ | 6,040,469 | Non-performing and delinquent | | | 7,929 | | | 9,233 | | | 5,448 | | | 33,739 | | | 5,304 | | | 61,653 | Total | | $ | 3,527,101 | | $ | 912,517 | | $ | 239,906 | | $ | 1,078,132 | | $ | 344,466 | | $ | 6,102,122 |
Impaired and Nonaccrual Loans and Leases
The Company evaluates certain loans and leases individually for impairment. A loan or lease is considered to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan or lease. An allowance for impaired commercial loans, including commercial real estate and construction loans, 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. An allowance for impaired residential
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Revolving | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans | | | | | | | | | | | | | | | | | | | | | | | | | | | Converted | | | | | | Term Loans | | Revolving | | to Term | | | | | | Amortized Cost Basis by Origination Year | | Loans | | Loans | | | | (continued) | | | | | | | | | | | | | | | | | | | | Amortized | | Amortized | | | | (dollars in thousands) | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Cost Basis | | Cost Basis | | Total | Residential Lending | | | | | | | | | | | | | | | | | | | | | | | | | | | | Residential Mortgage | | | | | | | | | | | | | | | | | | | | | | | | | | | | FICO: | | | | | | | | | | | | | | | | | | | | | | | | | | | | 740 and greater | | $ | 728,807 | | $ | 384,248 | | $ | 290,484 | | $ | 361,297 | | $ | 314,971 | | $ | 830,795 | | $ | — | | $ | — | | $ | 2,910,602 | 680 - 739 | | | 85,151 | | | 53,090 | | | 44,616 | | | 50,703 | | | 39,230 | | | 144,537 | | | — | | | — | | | 417,327 | 620 - 679 | | | 15,767 | | | 7,604 | | | 11,460 | | | 9,628 | | | 7,982 | | | 43,393 | | | — | | | — | | | 95,834 | 550 - 619 | | | — | | | 1,971 | | | 2,818 | | | 2,920 | | | 4,474 | | | 10,144 | | | — | | | — | | | 22,327 | Less than 550 | | | — | | | 861 | | | 593 | | | 2,916 | | | 594 | | | 2,138 | | | — | | | — | | | 7,102 | No Score (3) | | | 13,823 | | | 18,861 | | | 21,214 | | | 21,821 | | | 14,355 | | | 45,147 | | | — | | | — | | | 135,221 | Other (2) | | | 21,011 | | | 15,860 | | | 18,540 | | | 22,677 | | | 9,550 | | | 13,426 | | | 578 | | | 163 | | | 101,805 | Total Residential Mortgage | | | 864,559 | | | 482,495 | | | 389,725 | | | 471,962 | | | 391,156 | | | 1,089,580 | | | 578 | | | 163 | | | 3,690,218 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Home Equity Line | | | | | | | | | | | | | | | | | | | | | | | | | | | | FICO: | | | | | | | | | | | | | | | | | | | | | | | | | | | | 740 and greater | | | — | | | — | | | — | | | — | | | — | | | — | | | 608,282 | | | 2,163 | | | 610,445 | 680 - 739 | | | — | | | — | | | — | | | — | | | — | | | — | | | 159,886 | | | 3,155 | | | 163,041 | 620 - 679 | | | — | | | — | | | — | | | — | | | — | | | — | | | 44,005 | | | 1,571 | | | 45,576 | 550 - 619 | | | — | | | — | | | — | | | — | | | — | | | — | | | 11,644 | | | 884 | | | 12,528 | Less than 550 | | | — | | | — | | | — | | | — | | | — | | | — | | | 5,159 | | | 330 | | | 5,489 | No Score (3) | | | — | | | — | | | — | | | — | | | — | | | — | | | 4,545 | | | — | | | 4,545 | Total Home Equity Line | | | — | | | — | | | — | | | — | | | — | | | — | | | 833,521 | | | 8,103 | | | 841,624 | Total Residential Lending | | | 864,559 | | | 482,495 | | | 389,725 | | | 471,962 | | | 391,156 | | | 1,089,580 | | | 834,099 | | | 8,266 | | | 4,531,842 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Consumer Lending | | | | | | | | | | | | | | | | | | | | | | | | | | | | FICO: | | | | | | | | | | | | | | | | | | | | | | | | | | | | 740 and greater | | | 113,373 | | | 122,965 | | | 99,678 | | | 54,691 | | | 24,029 | | | 6,034 | | | 114,748 | | | 275 | | | 535,793 | 680 - 739 | | | 83,316 | | | 90,853 | | | 66,143 | | | 36,426 | | | 16,358 | | | 4,985 | | | 76,391 | | | 773 | | | 375,245 | 620 - 679 | | | 40,469 | | | 48,904 | | | 33,917 | | | 24,705 | | | 11,144 | | | 3,788 | | | 36,622 | | | 1,221 | | | 200,770 | 550 - 619 | | | 9,125 | | | 20,274 | | | 17,693 | | | 15,126 | | | 7,825 | | | 2,883 | | | 12,980 | | | 1,458 | | | 87,364 | Less than 550 | | | 3,017 | | | 10,139 | | | 9,189 | | | 6,517 | | | 3,123 | | | 1,118 | | | 5,261 | | | 799 | | | 39,163 | No Score (3) | | | 339 | | | 103 | | | 64 | | | 109 | | | 10 | | | — | | | 33,854 | | | 356 | | | 34,835 | Other (2) | | | 380 | | | 1,890 | | | 73 | | | 2,214 | | | 45 | | | 6,768 | | | 69,302 | | | — | | | 80,672 | Total Consumer Lending | | | 250,019 | | | 295,128 | | | 226,757 | | | 139,788 | | | 62,534 | | | 25,576 | | | 349,158 | | | 4,882 | | | 1,353,842 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total Loans and Leases | | $ | 2,543,705 | | $ | 2,120,213 | | $ | 1,644,201 | | $ | 1,291,172 | | $ | 882,520 | | $ | 2,236,923 | | $ | 2,516,240 | | $ | 44,123 | | $ | 13,279,097 |
(1) | Other credit quality indicators used for monitoring purposes are primarily FICO scores. The majority of the loans in this population were originated to borrowers with a prime FICO score. |
(2) | Other credit quality indicators used for monitoring purposes are primarily internal risk ratings. The majority of the loans in this population were graded with a “Pass” rating. |
(3) | No FICO scores are primarily related to loans and leases extended to non-residents. Loans and leases of this nature are primarily secured by collateral and/or are closely monitored for performance. |
There were 0 loans is measured based on the estimated fair valueand leases graded as Loss as of the collateral, less any selling costs. Management exercises significant judgment in developing these estimates.December 31, 2020. The Company generally places a loan on nonaccrual status when management believesamortized cost basis of revolving loans that collection of principal or interest has become doubtful or when a loan or lease becomes 90 days past due aswere converted to principal or interest, unless it is well secured and interm loans during the process of collection.
It is the Company’s policy to charge off a loan when the facts indicate that the loan is considered uncollectible.
The aging analyses of past due loans and leases as ofyear ended December 31, 2019 and 2018 were2020 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | | Accruing Loans and Leases | | | | | | | | | | | | | Greater | | | | | | | | Total Non | | | | | | | | | Than or | | | | | | Total | | Accruing | | | | | 30-59 | | 60-89 | | Equal to | | Total | | | | Accruing | | Loans | | | | | Days | | Days | | 90 Days | | Past | | | | Loans and | | and | | Total | (dollars in thousands) | | Past Due | | Past Due | | Past Due | | Due | | Current | | Leases | | Leases | | Outstanding | Commercial and industrial | | $ | 1,525 | | $ | 808 | | $ | 1,429 | | $ | 3,762 | | $ | 2,739,448 | | $ | 2,743,210 | | $ | 32 | | $ | 2,743,242 | Commercial real estate | | | 1,664 | | | 1,125 | | | 1,013 | | | 3,802 | | | 3,460,121 | | | 3,463,923 | | | 30 | | | 3,463,953 | Construction | | | — | | | — | | | 2,367 | | | 2,367 | | | 516,874 | | | 519,241 | | | — | | | 519,241 | Lease financing | | | — | | | — | | | — | | | — | | | 202,483 | | | 202,483 | | | — | | | 202,483 | Residential mortgage | | | 3,258 | | | 399 | | | 74 | | | 3,731 | | | 3,759,799 | | | 3,763,530 | | | 5,406 | | | 3,768,936 | Home equity line | | | 2,971 | | | 394 | | | 2,995 | | | 6,360 | | | 886,879 | | | 893,239 | | | — | | | 893,239 | Consumer | | | 26,810 | | | 7,022 | | | 4,272 | | | 38,104 | | | 1,582,452 | | | 1,620,556 | | | — | | | 1,620,556 | Total | | $ | 36,228 | | $ | 9,748 | | $ | 12,150 | | $ | 58,126 | | $ | 13,148,056 | | $ | 13,206,182 | | $ | 5,468 | | $ | 13,211,650 |
| | | | | | | | | | | | | | | | | | | | | | December 31, 2018 | | | | Accruing Loans and Leases | | | | | | | | | | | | | Greater | | | | | | | | Total Non | | | | | | | | | | Than or | | | | | | Total | | Accruing | | | | | | 30-59 | | 60-89 | | Equal to | | Total | | | | Accruing | | Loans | | | | | | | | Days | | Days | | 90 Days | | Past | | | | Loans and | | and | | Total | | Year Ended | (dollars in thousands) | | Past Due | | Past Due | | Past Due | | Due | | Current | | Leases | | Leases | | Outstanding | | December 31, 2020 | Commercial and industrial | | $ | 1,293 | | $ | — | | $ | 141 | | $ | 1,434 | | $ | 3,207,052 | | $ | 3,208,486 | | $ | 274 | | $ | 3,208,760 | | $ | 35,760 | Commercial real estate | | — | | — | | | — | | — | | 2,989,125 | | 2,989,125 | | | 1,658 | | 2,990,783 | | | 310 | Construction | | 91 | | — | | | — | | 91 | | 626,666 | | 626,757 | | | — | | 626,757 | | Lease financing | | 47 | | — | | | — | | 47 | | 147,722 | | 147,769 | | | — | | 147,769 | | Residential mortgage | | 2,274 | | 1,012 | | | 32 | | 3,318 | | 3,519,172 | | 3,522,490 | | | 4,611 | | 3,527,101 | | | 296 | Home equity line | | 5,616 | | 775 | | | 2,842 | | 9,233 | | 903,284 | | 912,517 | | | — | | 912,517 | | | 13,569 | Consumer | | | 32,406 | | | 8,712 | | | 3,373 | | | 44,491 | | | 1,618,013 | | | 1,662,504 | | | — | | | 1,662,504 | | | 4,882 | Total | | $ | 41,727 | | $ | 10,499 | | $ | 6,388 | | $ | 58,614 | | $ | 13,011,034 | | $ | 13,069,648 | | $ | 6,543 | | $ | 13,076,191 | | Total Revolving Loans Converted to Term Loans During the Year | | | $ | 54,817 |
The credit risk profiles by internally assigned grade for loans and leases as of December 31, 2019, presented in accordance with Topic 310, Receivables, were as follows: | | | | | | | | | | | | | | | | | | December 31, 2019 | | | Commercial | | Commercial | | | | | | | | | | and | | Real | | | | Lease | | | | (dollars in thousands) | | Industrial | | Estate | | Construction | | Financing | | Total | Grade: | | | | | | | | | | | | | | | | Pass | | $ | 2,585,908 | | $ | 3,327,659 | | $ | 515,993 | | $ | 201,461 | | $ | 6,631,021 | Special mention | | | 91,365 | | | 106,331 | | | 127 | | | 1,022 | | | 198,845 | Substandard | | | 65,969 | | | 29,963 | | | 3,121 | | | — | | | 99,053 | Total | | $ | 2,743,242 | | $ | 3,463,953 | | $ | 519,241 | | $ | 202,483 | | $ | 6,928,919 |
There were 0 loans and leases graded as Loss as of December 31, 2019. The credit risk profiles based on payment activity for loans and leases that were not subject to loan grading as of December 31, 2019 presented in accordance with Topic 310, Receivables, were as follows: | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | (dollars in thousands) | | Residential Mortgage | | Home Equity Line | | Consumer | | Consumer - Auto | | Credit Cards | | Total | Performing | | $ | 3,759,799 | | $ | 886,879 | | $ | 219,046 | | $ | 1,016,142 | | $ | 347,264 | | $ | 6,229,130 | Non-performing and delinquent | | | 9,137 | | | 6,360 | | | 7,258 | | | 24,326 | | | 6,520 | | | 53,601 | Total | | $ | 3,768,936 | | $ | 893,239 | | $ | 226,304 | | $ | 1,040,468 | | $ | 353,784 | | $ | 6,282,731 |
Past-Due Status The Company continually updates its aging analysis for loans and leases to monitor the migration of loans and leases into past due categories. The Company considers loans and leases that are delinquent for 30 days or more to be past due. As of December 31, 2020, the aging analysis of the amortized cost basis of the Company’s past due loans and leases was as follows: | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | | Past Due | | | | | | Loans and | | | | | | | Greater | | | | | | | | Leases Past | | | | | | | Than or | | | | | | | | Due 90 Days | | | 30-59 | | 60-89 | | Equal to | | | | | | | | or More and | | | Days | | Days | | 90 Days | | Total | | | | Total Loans | | Still Accruing | (dollars in thousands) | | Past Due | | Past Due | | Past Due | | Past Due | | Current | | and Leases | | Interest | Commercial and industrial | | $ | 2,585 | | $ | 604 | | $ | 2,626 | | $ | 5,815 | | $ | 3,013,692 | | $ | 3,019,507 | | $ | 2,108 | Commercial real estate | | | 75 | | | 2,568 | | | 963 | | | 3,606 | | | 3,389,070 | | | 3,392,676 | | | 882 | Construction | | | 779 | | | 376 | | | 2,137 | | | 3,292 | | | 732,527 | | | 735,819 | | | 93 | Lease financing | | | — | | | — | | | — | | | — | | | 245,411 | | | 245,411 | | | — | Residential mortgage | | | 3,382 | | | 4,125 | | | 3,372 | | | 10,879 | | | 3,679,339 | | | 3,690,218 | | | — | Home equity line | | | 1,375 | | | 743 | | | 4,818 | | | 6,936 | | | 834,688 | | | 841,624 | | | 4,818 | Consumer | | | 18,492 | | | 5,205 | | | 3,266 | | | 26,963 | | | 1,326,879 | | | 1,353,842 | | | 3,266 | Total | | $ | 26,688 | | $ | 13,621 | | $ | 17,182 | | $ | 57,491 | | $ | 13,221,606 | | $ | 13,279,097 | | $ | 11,167 |
As of December 31, 2019, the aging analysis of the Company’s past due loans and leases, presented in accordance with Topic 310, Receivables, was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | | Accruing Loans and Leases | | | | | | | | | | | | | Greater | | | | | | | | Total Non | | | | | | | | | Than or | | | | | | Total | | Accruing | | | | | 30-59 | | 60-89 | | Equal to | | Total | | | | Accruing | | Loans | | | | | Days | | Days | | 90 Days | | Past | | | | Loans and | | and | | Total | (dollars in thousands) | | Past Due | | Past Due | | Past Due | | Due | | Current | | Leases | | Leases | | Outstanding | Commercial and industrial | | $ | 1,525 | | $ | 808 | | $ | 1,429 | | $ | 3,762 | | $ | 2,739,448 | | $ | 2,743,210 | | $ | 32 | | $ | 2,743,242 | Commercial real estate | | | 1,664 | | | 1,125 | | | 1,013 | | | 3,802 | | | 3,460,121 | | | 3,463,923 | | | 30 | | | 3,463,953 | Construction | | | — | | | — | | | 2,367 | | | 2,367 | | | 516,874 | | | 519,241 | | | — | | | 519,241 | Lease financing | | | — | | | — | | | — | | | — | | | 202,483 | | | 202,483 | | | — | | | 202,483 | Residential mortgage | | | 3,258 | | | 399 | | | 74 | | | 3,731 | | | 3,759,799 | | | 3,763,530 | | | 5,406 | | | 3,768,936 | Home equity line | | | 2,971 | | | 394 | | | 2,995 | | | 6,360 | | | 886,879 | | | 893,239 | | | — | | | 893,239 | Consumer | | | 26,810 | | | 7,022 | | | 4,272 | | | 38,104 | | | 1,582,452 | | | 1,620,556 | | | — | | | 1,620,556 | Total | | $ | 36,228 | | $ | 9,748 | | $ | 12,150 | | $ | 58,126 | | $ | 13,148,056 | | $ | 13,206,182 | | $ | 5,468 | | $ | 13,211,650 |
Nonaccrual Loans and Leases The Company generally places a loan or lease on nonaccrual status when management believes that collection of principal or interest has become doubtful or when a loan or lease becomes 90 days past due as to principal or interest, unless it is well secured and in the process of collection. The Company charges off a loan or lease when facts indicate that the loan or lease is considered uncollectible. The amortized cost basis of loans and leases on nonaccrual status as of December 31, 2020 and January 1, 2020 and the amortized cost basis of loans and leases on nonaccrual status with no allowance for credit losses as of December 31, 2020 were as follows: | | | | | | | | | | | | December 31, 2020 | | January 1, 2020 | | | Nonaccrual | | | | | | | | | Loans | | | | | | | | | and Leases | | | | | | | | | With No | | Nonaccrual | | Nonaccrual | | | Allowance | | Loans | | Loans | (dollars in thousands) | | for Credit Losses | | and Leases | | and Leases | Commercial and industrial | | $ | — | | $ | 518 | | $ | 32 | Commercial real estate | | | — | | | 80 | | | 30 | Construction | | | 1,840 | | | 2,043 | | | — | Residential mortgage | | | 1,316 | | | 6,441 | | | 5,406 | Total Nonaccrual Loans and Leases | | $ | 3,156 | | $ | 9,082 | | $ | 5,468 |
For the year ended December 31, 2020, the Company recognized interest income of $0.2 million on nonaccrual loans and leases. Furthermore, for the year ended December 31, 2020, the amount of accrued interest receivables written off by reversing interest income was $1.4 million. Collateral-Dependent Loans and Leases Collateral-dependent loans and leases are those for which repayment (on the basis of the Company’s assessment as of the reporting date) is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. As of December 31, 2020, the amortized cost basis of collateral-dependent loans was $21.0 million. These loans were primarily collateralized by residential real estate property and borrower assets. As of December 31, 2020, the fair value of collateral on substantially all collateral-dependent loans were significantly in excess of their amortized cost basis. Impaired Loans The total carrying amounts and the total unpaid principal balances of impaired loans and leases as of December 31, 2019, and 2018presented in accordance with Topic 310, Receivables, were as follows: | | | | | | | | | | | | December 31, 2019 | | | | | Unpaid | | | | | Recorded | | Principal | | Related | (dollars in thousands) | | Investment | | Balance | | Allowance | Impaired loans with no related allowance recorded: | | | | | | | | | | Commercial and industrial | | $ | 3,825 | | $ | 3,841 | | $ | — | Commercial real estate | | | 30 | | | 30 | | | — | Residential mortgage | | | 10,425 | | | 10,718 | | | — | Total | | $ | 14,280 | | $ | 14,589 | | $ | — | Impaired loans with a related allowance recorded: | | | | | | | | | | Commercial and industrial | | $ | 1,126 | | $ | 1,126 | | $ | 46 | Commercial real estate | | | 693 | | | 693 | | | 27 | Residential mortgage | | | 4,539 | | | 4,819 | | | 130 | Total | | $ | 6,358 | | $ | 6,638 | | $ | 203 | Total impaired loans: | | | | | | | | | | Commercial and industrial | | $ | 4,951 | | $ | 4,967 | | $ | 46 | Commercial real estate | | | 723 | | | 723 | | | 27 | Residential mortgage | | | 14,964 | | | 15,537 | | | 130 | Total | | $ | 20,638 | | $ | 21,227 | | $ | 203 |
| | | | | | | | | | | | | | | | | | | | | December 31, 2018 | | December 31, 2019 | | | | | Unpaid | | | | | | Unpaid | | | | | Recorded | | Principal | | Related | | Recorded | | Principal | | Related | (dollars in thousands) | | Investment | | Balance | | Allowance | | Investment | | Balance | | ACL | Impaired loans with no related allowance recorded: | | | | | | | | | | | Impaired loans with no related ACL recorded: | | | | | | | | | | | Commercial and industrial | | $ | 4,449 | | $ | 4,498 | | $ | — | | $ | 3,825 | | $ | 3,841 | | $ | — | Commercial real estate | | | 5,016 | | | 5,016 | | | — | | | 30 | | | 30 | | | — | Residential mortgage | | | 9,112 | | | 9,426 | | | — | | | 10,425 | | | 10,718 | | | — | Total | | $ | 18,577 | | $ | 18,940 | | $ | — | | $ | 14,280 | | $ | 14,589 | | $ | — | Impaired loans with a related allowance recorded: | | | | | | | | | | | Impaired loans with a related ACL recorded: | | | | | | | | | | | Commercial and industrial | | $ | 4,270 | | $ | 4,270 | | $ | 108 | | $ | 1,126 | | $ | 1,126 | | $ | 46 | Commercial real estate | | | 727 | | | 727 | | | 32 | | | 693 | | | 693 | | | 27 | Residential mortgage | | | 7,002 | | | 7,387 | | | 396 | | | 4,539 | | | 4,819 | | | 130 | Total | | $ | 11,999 | | $ | 12,384 | | $ | 536 | | $ | 6,358 | | $ | 6,638 | | $ | 203 | Total impaired loans: | | | | | | | | | | | | | | | | | | | Commercial and industrial | | $ | 8,719 | | $ | 8,768 | | $ | 108 | | $ | 4,951 | | $ | 4,967 | | $ | 46 | Commercial real estate | | | 5,743 | | | 5,743 | | | 32 | | | 723 | | | 723 | | | 27 | Residential mortgage | | | 16,114 | | | 16,813 | | | 396 | | | 14,964 | | | 15,537 | | | 130 | Total | | $ | 30,576 | | $ | 31,324 | | $ | 536 | | $ | 20,638 | | $ | 21,227 | | $ | 203 |
The following tables providetable provides information with respect to the Company’s average balances, and of interest income recognized from, impaired loans for the years ended December 31, 2019 and 2018, and 2017:presented in accordance with Topic 310, Receivables: | | | | | | | | | | | | | | | Year Ended | | Year Ended | | | December 31, 2019 | | December 31, 2019 | | | Average | | Interest | | Average | | Interest | | | Recorded | | Income | | Recorded | | Income | (dollars in thousands) | | Investment | | Recognized | | Investment | | Recognized | Impaired loans with no related allowance recorded: | | | | | | | | Impaired loans with no related ACL recorded: | | | | | | | | Commercial and industrial | | $ | 3,687 | | $ | 431 | | $ | 3,687 | | $ | 431 | Commercial real estate | | | 2,825 | | | 481 | | | 2,825 | | | 481 | Residential mortgage | | | 8,777 | | | 440 | | | 8,777 | | | 440 | Consumer | | | 40 | | | — | | | 40 | | | — | Total | | $ | 15,329 | | $ | 1,352 | | $ | 15,329 | | $ | 1,352 | Impaired loans with a related allowance recorded: | | | | | | | | Impaired loans with a related ACL recorded: | | | | | | | | Commercial and industrial | | $ | 4,485 | | $ | 85 | | $ | 4,485 | | $ | 85 | Commercial real estate | | | 710 | | | 40 | | | 710 | | | 40 | Residential mortgage | | | 6,413 | | | 339 | | | 6,413 | | | 339 | Total | | $ | 11,608 | | $ | 464 | | $ | 11,608 | | $ | 464 | Total impaired loans: | | | | | | | | | | | | | Commercial and industrial | | $ | 8,172 | | $ | 516 | | $ | 8,172 | | $ | 516 | Commercial real estate | | | 3,535 | | | 521 | | | 3,535 | | | 521 | Residential mortgage | | | 15,190 | | | 779 | | | 15,190 | | | 779 | Consumer | | | 40 | | | — | | | 40 | | | — | Total | | $ | 26,937 | | $ | 1,816 | | $ | 26,937 | | $ | 1,816 |
| | | | | | | | | | | | | | | Year Ended | | Year Ended | | | December 31, 2018 | | December 31, 2018 | | | Average | | Interest | | Average | | Interest | | | Recorded | | Income | | Recorded | | Income | (dollars in thousands) | | Investment | | Recognized | | Investment | | Recognized | Impaired loans with no related allowance recorded: | | | | | | | | Impaired loans with no related ACL recorded: | | | | | | | | Commercial and industrial | | $ | 11,409 | | $ | 408 | | $ | 11,409 | | $ | 408 | Commercial real estate | | | 7,873 | | | 231 | | | 7,873 | | | 231 | Construction | | | 1,248 | | | 91 | | | 1,248 | | | 91 | Residential mortgage | | | 9,356 | | | 529 | | | 9,356 | | | 529 | Total | | $ | 29,886 | | $ | 1,259 | | $ | 29,886 | | $ | 1,259 | Impaired loans with a related allowance recorded: | | | | | | | | Impaired loans with a related ACL recorded: | | | | | | | | Commercial and industrial | | $ | 3,154 | | $ | 273 | | $ | 3,154 | | $ | 273 | Commercial real estate | | | 942 | | | 67 | | | 942 | | | 67 | Residential mortgage | | | 7,369 | | | 335 | | | 7,369 | | | 335 | Total | | $ | 11,465 | | $ | 675 | | $ | 11,465 | | $ | 675 | Total impaired loans: | | | | | | | | | | | | | Commercial and industrial | | $ | 14,563 | | $ | 681 | | $ | 14,563 | | $ | 681 | Commercial real estate | | | 8,815 | | | 298 | | | 8,815 | | | 298 | Construction | | | 1,248 | | | 91 | | | 1,248 | | | 91 | Residential mortgage | | | 16,725 | | | 864 | | | 16,725 | | | 864 | Total | | $ | 41,351 | | $ | 1,934 | | $ | 41,351 | | $ | 1,934 |
| | | | | | | | | Year Ended | | | December 31, 2017 | | | Average | | Interest | | | Recorded | | Income | (dollars in thousands) | | Investment | | Recognized | Impaired loans with no related allowance recorded: | | | | | | | Commercial and industrial | | $ | 19,929 | | $ | 890 | Commercial real estate | | | 9,846 | | | 417 | Lease financing | | | 61 | | | — | Residential mortgage | | | 8,582 | | | 567 | Total | | $ | 38,418 | | $ | 1,874 | Impaired loans with a related allowance recorded: | | | | | | | Commercial and industrial | | $ | 2,572 | | $ | 10 | Commercial real estate | | | 918 | | | 42 | Residential mortgage | | | 8,897 | | | 344 | Total | | $ | 12,387 | | $ | 396 | Total impaired loans: | | | | | | | Commercial and industrial | | $ | 22,501 | | $ | 900 | Commercial real estate | | | 10,764 | | | 459 | Lease financing | | | 61 | | | — | Residential mortgage | | | 17,479 | | | 911 | Total | | $ | 50,805 | | $ | 2,270 |
Modifications Commercial and industrial loans modified in a troubled debt restructuring (“TDR”) oftenTDR may involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. CommercialModifications of commercial real estate and construction loans modified in a TDR oftenmay involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. ConstructionModifications of construction loans modified in a TDR may also involve extending the interest-only payment period. Lease financing modifications generally involve a short-term forbearance period, usually about three months, after which the missed payments are added to the end of the lease term, thereby extending the maturity date. Interest continues to accrue on the missed payments and as a result, the effective yield on the leaseloan remains unchanged. As the forbearance period usually involves an insignificant payment delay, lease financing modifications typically do not meet the reporting criteria for a TDR. Residential real estate loans modified in a TDR are primarilymay be comprised of loans where monthly payments are lowered to accommodate the borrowers' financial needs for a period of time, normally two years. During that time, the borrower's entire monthly payment is applied to principal. After the lowered monthly payment period ends, the borrower reverts to paying principal and interest per the original terms with the maturity date adjusted accordingly. Generally, consumer loans are not classified as a TDR as they are normally charged off upon reaching a predetermined delinquency status that ranges from 120 to 180 days and varies by product type. Loans modified in a TDR may already be on nonaccrual status and in some cases, partial charge-offs may have already been taken against the outstanding loan balance. Loans modified in a TDR are evaluated for impairment. As a result, this may have a financial effect of increasing the specific AllowanceACL associated with the loan. An AllowanceACL for impaired commercial loans, including commercial real estate and construction 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 or if the loan's observable market price, orloan is collateral-dependent, the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent.costs. An AllowanceACL for impaired residential real estate loans that have been modified in a TDR is measured based on the estimated fair value of the collateral, less any selling costs. Management exercises significant judgment in developing these estimates. The following presents, by class, information related to loans modified in a TDR during the years ended December 31, 2020, 2019 2018 and 2017:2018: | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2019 | | Year Ended December 31, 2020 | | | Number of | | Recorded | | Related | | Number of | | Recorded | | Related | (dollars in thousands) | | Contracts(1) | | Investment(2) | | Allowance | | Contracts(1) | | Investment(2) | | ACL | Commercial and industrial | | 2 | | $ | 571 | | $ | 25 | | 1 | | $ | 500 | | $ | 30 | Commercial real estate | | | 3 | | | 6,470 | | | 470 | Residential mortgage | | 1 | | | 609 | | | — | | 1 | | | 825 | | | 90 | Total | | 3 | | $ | 1,180 | | $ | 25 | | 5 | | $ | 7,795 | | $ | 590 |
| | | | | | | | | | | | | | | | | | | Year Ended December 31, 2018 | | Year Ended December 31, 2019 | | | Number of | | Recorded | | Related | | Number of | | Recorded | | Related | (dollars in thousands) | | Contracts(1) | | Investment(2) | | Allowance | | Contracts(1) | | Investment(2) | | ACL | Commercial and industrial | | 1 | | $ | 369 | | $ | 10 | | 2 | | $ | 571 | | $ | 25 | Residential mortgage | | 3 | | | 875 | | | 29 | | 1 | | | 609 | | | — | Total | | 4 | | $ | 1,244 | | $ | 39 | | 3 | | $ | 1,180 | | $ | 25 |
| | | | | | | | | | | | | | | | | | | Year Ended December 31, 2017 | | Year Ended December 31, 2018 | | | Number of | | Recorded | | Related | | Number of | | Recorded | | Related | (dollars in thousands) | | Contracts(1) | | Investment(2) | | Allowance | | Contracts(1) | | Investment(2) | | ACL | Commercial and industrial | | 1 | | $ | 1,075 | | $ | — | | 1 | | $ | 369 | | $ | 10 | Residential mortgage | | 2 | | | 659 | | | 23 | | 3 | | | 875 | | | 29 | Total | | 3 | | $ | 1,734 | | $ | 23 | | 4 | | $ | 1,244 | | $ | 39 |
(1) | The number of contracts does not include TDRs that have been fully paid off, charged off or foreclosed upon by the end of the period. |
(2) | The recorded investment balances reflect all partial paydowns and charge-offs since the modification date and do not include TDRs that have been fully paid off, charged off or foreclosed upon by the end of the period. |
The above loans were modified in a TDR through an extension of maturity dates, temporary interest-only payments, reduced payments or below-market interest rates. The Company had commitments to extend credit, standby letters of credit and commercial letters of credit totaling $6.1 billion and $5.8 billion as of both December 31, 20192020 and 2018, respectively.2019. Of the $6.1 billion at December 31, 2020, there were commitments of $0.2 million related to borrowers who had loan terms modified in a TDR. Of the $6.1 billion at December 31, 2019, there were commitments of $4.5 million related to borrowers who had loan terms modified in a TDR. Of the $5.8 billion at December 31, 2018, there were commitments of $1.8 million related to borrowers who had loan terms modified in a TDR. The following table presents, by class, loans modified in TDRs that have defaulted in the current period within 12 months of their permanent modification date for the periods indicated. The Company is reporting these defaulted TDRs based on a payment default definition of 30 days past due: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | 2019 | | 2018 | | 2017 | | | 2020 | | 2019 | | 2018 | | | Number of | | Recorded | | Number of | | Recorded | | Number of | | Recorded | | | Number of | | Recorded | | Number of | | Recorded | | Number of | | Recorded | (dollars in thousands) | | Contracts(1) | | Investment(2) | | Contracts(1) | | Investment(2) | | Contracts(1) | | Investment(2) | | | Contracts(1) | | Investment(2) | | Contracts(1) | | Investment(2) | | Contracts(1) | | Investment(2) | Commercial and industrial(3) | | 2 | | $ | 571 | | — | | $ | — | | 1 | | $ | 2,480 | | | 1 | | $ | 500 | | 2 | | $ | 571 | | — | | $ | — | Commercial real estate(4) | | — | | | — | | — | | | — | | 1 | | | 1,393 | | | Total | | 2 | | $ | 571 | | — | | $ | — | | 2 | | $ | 3,873 | | | 1 | | $ | 500 | | 2 | | $ | 571 | | — | | $ | — |
(1) | The number of contracts does not include TDRs that have been fully paid off, charged off or foreclosed upon by the end of the period. |
(2) | The recorded investment balances reflect all partial paydowns and charge-offs since the modification date and do not include TDRs that have been fully paid off, charged off or foreclosed upon by the end of the period. |
(3) | In 2019, the commercial and industrial loans that subsequent defaulted were temporarily modified to interest-only payments. In 2017,2020, the maturity date for the commercial and industrial loan that subsequently defaulted was extended. |
(4) | In 2017,2019, the commercial real estate loanand industrial loans that subsequently defaulted was extended.were temporarily modified to interest-only payments. |
Foreclosure Proceedings ThereAs of December 31, 2020, there were 0 residential mortgage loans collateralized by real estate property that was modified in a TDR that was in process of foreclosure. As of December 31, 2019, there was 1 residential mortgage loan collateralized by real estate property of $0.3 million that was modified in a TDR that was in process of foreclosure as of both December 31, 2019 and December 31, 2018.foreclosure.
Foreclosed Property As of December 31, 2020, there were 0 residential real estate properties held from foreclosed residential real estate loans. Residential real estate properties held from 2 foreclosed residential mortgage loans included in other real estate owned and repossessed personal property shown in the consolidated balance sheets were $0.3 million as of December 31, 2019. Residential real estate properties held from 1 foreclosed residential mortgage loan and 1 foreclosed home equity line included in other real estate owned and repossessed personal property shown in the consolidated balance sheets were $0.8 million as of December 31, 2018. 6. Premises and Equipment At December 31, 20192020 and 2018,2019, premises and equipment were comprised of the following: | | | | | | | | | | | | | | | December 31, | | December 31, | (dollars in thousands) | | 2019 | | 2018 | | 2020 | | 2019 | Buildings | | $ | 289,271 | | $ | 280,853 | | $ | 296,107 | | $ | 289,271 | Furniture and equipment | | | 86,485 | | | 81,342 | | | 98,800 | | | 86,485 | Land | | | 106,487 | | | 105,302 | | | 114,852 | | | 106,487 | Leasehold improvements | | | 64,828 | | | 55,316 | | | 57,063 | | | 64,828 | Total premises and equipment | | | 547,071 | | | 522,813 | | | 566,822 | | | 547,071 | Less: Accumulated depreciation and amortization | | | 230,186 | | | 217,817 | | | 244,421 | | | 230,186 | Net book value | | $ | 316,885 | | $ | 304,996 | | $ | 322,401 | | $ | 316,885 |
Depreciation and amortization expenses included in occupancy and equipment expenses for 2020, 2019 2018 and 20172018 were as follows: | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | | 2020 | | 2019 | | 2018 | Occupancy | | $ | 9,037 | | $ | 8,815 | | $ | 8,852 | | | $ | 9,231 | | $ | 9,037 | | $ | 8,815 | Equipment | | | 5,485 | | | 6,488 | | | 6,426 | | | | 6,721 | | | 5,485 | | | 6,488 | Total | | $ | 14,522 | | $ | 15,303 | | $ | 15,278 | | | $ | 15,952 | | $ | 14,522 | | $ | 15,303 |
The Company, as a lessor, leases certain properties that it owns. See “Note 14. Leases” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information. 7. Other Assets Goodwill Goodwill originated from the acquisition of BancWest by BNPP in December 2001. Goodwill generated in that acquisition was recorded on the Company’s consolidated balance sheets as a result of push-down accounting treatment. The carrying amount of goodwill reported in 2 of the Company’s reporting segments as of December 31, 20192020 and 20182019 were as shown below. The Treasury and Other segment is not assigned goodwill. | | | | | | | | | | | | | | | | | | | | | Retail | | Commercial | | | | | Retail | | Commercial | | | | (in thousands) | | Banking | | Banking | | Total | | Banking | | Banking | | Total | December 31, 2020 | | | $ | 687,492 | | $ | 308,000 | | $ | 995,492 | December 31, 2019 | | $ | 687,492 | | $ | 308,000 | | $ | 995,492 | | | 687,492 | | | 308,000 | | | 995,492 | December 31, 2018 | | | 687,492 | | | 308,000 | | | 995,492 | |
There was 0 impairment of the Company’s goodwill for the years ended December 31, 2020, 2019 2018 and 2017.2018. Mortgage Servicing Rights (“MSRs”) Mortgage servicing activities include collecting principal, interest, tax and insurance payments from borrowers while accounting for and remitting payments to investors, taxing authorities and insurance companies. The Company also monitors delinquencies and administers foreclosure proceedings. Mortgage loan servicing income is recorded in noninterest income as a part of other service charges and fees and amortization of the servicing assets is recorded in noninterest income as part of other income. The unpaid principal amount of residential real estate loans serviced for others was $2.2 billion and $2.3 billion as of December 31, 2020 and 2019, respectively. Servicing fees include contractually specified fees, late charges and ancillary fees and were $5.7 million, $6.3 million and $7.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. Amortization of MSRs was $6.3 million, $3.6 million and $3.8 million for the years ended December 31, 2020, 2019 and 2018, respectively. The estimated future amortization expenses for MSRs over the next five years are as follows: | | | | | | Estimated | (dollars in thousands) | | Amortization | Year ending December 31: | | | | 2021 | | $ | 2,462 | 2022 | | | 1,879 | 2023 | | | 1,477 | 2024 | | | 1,188 | 2025 | | | 971 |
The details of the Company’s MSRs are presented below: | | | | | | | | | December 31, | (dollars in thousands) | | 2020 | | 2019 | Gross carrying amount | | $ | 67,856 | | $ | 63,480 | Less: accumulated amortization | | | 57,125 | | | 50,812 | Net carrying value | | $ | 10,731 | | $ | 12,668 |
Mortgage loan servicing income is recorded in noninterest income as a part of other service charges and fees and amortization of the servicing assets is recorded in noninterest income as part of other income. The unpaid principal amount of residential real estate loans serviced for others was $2.3 billion and $2.7 billion as of December 31, 2019 and 2018, respectively. Servicing fees include contractually specified fees, late charges and ancillary fees and were $6.3 million, $7.0 million and $6.5 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Amortization of MSRs was $3.6 million, $3.8 million and $3.6 million for the years ended December 31, 2019, 2018 and 2017, respectively. The estimated future amortization expenses for MSRs over the next five years are as follows:
| | | | | | Estimated | (dollars in thousands) | | Amortization | Year ending December 31: | | | | 2020 | | $ | 2,129 | 2021 | | | 1,808 | 2022 | | | 1,530 | 2023 | | | 1,295 | 2024 | | | 1,101 |
The details of the Company’s MSRs are presented below:
| | | | | | | | | December 31, | (dollars in thousands) | | 2019 | | 2018 | Gross carrying amount | | $ | 63,480 | | $ | 63,342 | Less: accumulated amortization | | | 50,812 | | | 47,187 | Net carrying value | | $ | 12,668 | | $ | 16,155 |
The following table presents changes in amortized MSRs for the years indicated: | | | | | | | | | | | | | | | Year Ended December 31, | | Year Ended December 31, | (dollars in thousands) | | 2019 | | 2018 | | 2020 | | 2019 | Balance at beginning of year | | $ | 16,155 | | $ | 13,196 | | $ | 12,668 | | $ | 16,155 | Originations | | | 138 | | | 328 | | | 4,376 | | | 138 | Purchases | | | — | | | 6,444 | | Amortization | | | (3,625) | | | (3,813) | | | (6,313) | | | (3,625) | Balance at end of year | | $ | 12,668 | | $ | 16,155 | | $ | 10,731 | | $ | 12,668 | Fair value of amortized MSRs at beginning of year | | $ | 27,662 | | $ | 21,697 | | $ | 20,329 | | $ | 27,662 | Fair value of amortized MSRs at end of year | | $ | 20,329 | | $ | 27,662 | | $ | 14,029 | | $ | 20,329 | Balance of loans serviced for others | | $ | 2,344,899 | | $ | 2,664,860 | | $ | 2,189,027 | | $ | 2,344,899 |
MSRs are evaluated for impairment if events and circumstances indicate a possible impairment. NaN impairment of MSRs was recorded for the years ended December 31, 2020, 2019 2018 and 2017.2018. The quantitative assumptions used in determining the lower of cost or fair value of the Company’s MSRs were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | December 31, 2018 | | | December 31, 2020 | | December 31, 2019 | | | | | | | | | Weighted | | | | | | | Weighted | | | | | | | | Weighted | | | | | | | Weighted | | | | Range | | Average | | Range | | Average | | | Range | | Average | | Range | | Average | | Conditional prepayment rate | | 10.74 | % | - | 23.39 | % | 11.10 | % | 7.86 | % | - | 19.26 | % | 8.31 | % | | 11.86 | % | - | 26.52 | % | 16.90 | % | 10.74 | % | - | 23.39 | % | 11.10 | % | Life in years (of the MSR) | | 2.04 | | - | 6.33 | | 5.99 | | 3.43 | | - | 7.68 | | 7.19 | | | 1.83 | | - | 6.68 | | 4.45 | | 2.04 | | - | 6.33 | | 5.99 | | Weighted-average coupon rate | | 3.96 | % | - | 7.26 | % | 4.01 | % | 3.97 | % | - | 6.70 | % | 4.02 | % | | 3.24 | % | - | 6.98 | % | 3.84 | % | 3.96 | % | - | 7.26 | % | 4.01 | % | Discount rate | | 10.00 | % | - | 10.01 | % | 10.00 | % | 10.00 | % | - | 10.02 | % | 10.00 | % | | 10.00 | % | - | 10.00 | % | 10.00 | % | 10.00 | % | - | 10.01 | % | 10.00 | % |
The sensitivities surrounding MSRs are expected to have an immaterial impact on fair value. Other The Company had $145.6$170.2 million and $111.5$145.6 million in affordable housing and other tax credit investment partnership interest as of December 31, 20192020 and 2018,2019, respectively, included in other assets on the consolidated balance sheets. The amount of amortization of such investments reported in the provision for income taxes was $10.5 million, $11.3 million $5.2 million and $3.5$5.2 million during the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively. The affordable housing tax credits and other benefits recognized during the years ended December 31, 2020, 2019 and 2018 and 2017 were $15.8 million, $10.6 million $6.3 million and $4.5$6.3 million, respectively. Nonmarketable equity securities include FHLB stock, which the Company holds to meet regulatory requirements. As a member of the FHLB system, the Company is required to maintain a minimum level of investment in FHLB non-publicly traded stock based on specific percentages of the Company’s total assets and outstanding advances in accordance with the FHLB’s capital plan which may be amended or revised periodically. Amounts in excess of the required minimum may be transferred at par to another member institution subject to prior approval of the FHLB. Excess stock may also be sold to the FHLB subject to a five-year redemption notice period and at the sole discretion of the FHLB. These securities are accounted for under the cost method. These investments are considered long-term investments by management and accordingly, the ultimate recoverability of its par value is considered rather than considering temporary declines in value. The investment in FHLB stock was included in other assets on the consolidated balance sheets and was $18.1 million and $34.1 million as of both December 31, 2020 and 2019, and 2018.respectively. 8. Transfers of Financial Assets The Company’s transfers of financial assets with continuing interest may include pledges of collateral to secure public deposits and repurchase agreements, FHLB and FRB borrowing capacity, automated clearing house (“ACH”) transactions and interest rate swaps. For public deposits and repurchase agreements, the Company enters into bilateral agreements with the entity to pledge investment securities as collateral in the event of default. The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase agreement should the Company be in default. The counterparty has the right to sell or repledge the investment securities. The Company is required by the counterparty to maintain adequate collateral levels. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional investment securities. For transfers of assets with the FHLB and the FRB, the Company enters into bilateral agreements to pledge loans as collateral to secure borrowing capacity. For ACH transactions, the Company enters into bilateral agreements to collateralize possible daylight overdrafts. For interest rate swaps, the Company enters into bilateral agreements to pledge collateral when either party is in a negative fair value position to mitigate counterparty credit risk. Counterparties to ACH transactions, certain interest rate swaps, the FHLB and the FRB do not have the right to sell or repledge the collateral. The carrying amounts of the assets pledged as collateral to secure public deposits, borrowing arrangements and other transactions as of December 31, 20192020 and 20182019 were as follows: | | | | | | | | | | | | | (dollars in thousands) | | 2019 | | 2018 | | 2020 | | 2019 | Public deposits | | $ | 1,543,492 | | $ | 1,749,726 | | $ | 2,251,508 | | $ | 1,543,492 | Federal Home Loan Bank | | | 2,928,581 | | | 2,497,030 | | | 2,917,317 | | | 2,928,581 | Federal Reserve Bank | | | 953,169 | | | 957,017 | | | 1,919,744 | | | 953,169 | ACH transactions | | | 155,360 | | | 150,903 | | | 111,347 | | | 155,360 | Interest rate swaps | | | 43,296 | | | 28,843 | | | 56,004 | | | 43,296 | Total | | $ | 5,623,898 | | $ | 5,383,519 | | $ | 7,255,920 | | $ | 5,623,898 |
As the Company did not enter into reverse repurchase agreements, 0 collateral was accepted as of December 31, 20192020 and 2018.2019. In addition, 0 debt was extinguished by in-substance defeasance. 9. Deposits As of December 31, 20192020 and 2018,2019, deposits were categorized as interest-bearing or noninterest-bearing as follows: | | | | | | | | | | | | | (dollars in thousands) | | 2019 | | 2018 | | 2020 | | 2019 | U.S.: | | | | | | | | | | | | | Interest-bearing | | $ | 9,782,957 | | $ | 10,393,449 | | $ | 10,928,712 | | $ | 9,782,957 | Noninterest-bearing | | | 5,188,696 | | | 5,368,729 | | | 6,674,352 | | | 5,188,696 | Foreign: | | | | | | | | | | | | | Interest-bearing | | | 781,965 | | | 748,678 | | | 776,897 | | | 781,965 | Noninterest-bearing | | | 691,376 | | | 639,212 | | | 847,762 | | | 691,376 | Total deposits | | $ | 16,444,994 | | $ | 17,150,068 | | $ | 19,227,723 | | $ | 16,444,994 |
The following table presents the maturity distribution of time certificates of deposit as of December 31, 2019:2020: | | | | | | | | | | | | | | | | | | | | | Under | | $250,000 | | | | | Under | | $250,000 | | | | (dollars in thousands) | | $250,000 | | or More | | Total | | $250,000 | | or More | | Total | Three months or less | | $ | 260,198 | | $ | 772,794 | | $ | 1,032,992 | | $ | 244,324 | | $ | 451,982 | | $ | 696,306 | Over three through six months | | | 215,191 | | | 242,008 | | | 457,199 | | | 206,181 | | | 342,044 | | | 548,225 | Over six through twelve months | | | 321,555 | | | 215,211 | | | 536,766 | | | 298,884 | | | 346,560 | | | 645,444 | 2021 | | | 98,344 | | | 55,118 | | | 153,462 | | 2022 | | | 128,845 | | | 59,185 | | | 188,030 | | | 136,478 | | | 83,842 | | | 220,320 | 2023 | | | 59,069 | | | 12,167 | | | 71,236 | | | 76,014 | | | 31,140 | | | 107,154 | 2024 | | | 59,547 | | | 10,893 | | | 70,440 | | | 64,369 | | | 6,249 | | | 70,618 | 2025 | | | | 38,112 | | | 21,858 | | | 59,970 | Thereafter | | | 32 | | | — | | | 32 | | | 261 | | | — | | | 261 | Total | | $ | 1,142,781 | | $ | 1,367,376 | | $ | 2,510,157 | | $ | 1,064,623 | | $ | 1,283,675 | | $ | 2,348,298 |
Time certificates of deposit in denominations of $250,000 or more, in the aggregate, were $1.4$1.3 billion and $1.9$1.4 billion as of December 31, 20192020 and 2018,2019, respectively. Overdrawn deposit accounts are classified as loans and totaled $3.6$2.6 million and $2.4$3.6 million at December 31, 2020 and 2019, and 2018, respectively.
10. Short-Term Borrowings
As of December 31, 2019 and 2018, short-term borrowings were comprised of the following:
| | | | | | | | | December 31, | (dollars in thousands) | | 2019 | | 2018 | Short-term FHLB fixed-rate advances(1) | | $ | 400,000 | | $ | — | Total short-term borrowings | | $ | 400,000 | | $ | — |
(1) | Interest is payable monthly. |
10. Short-Term Borrowings As of December 31, 2020 and 2019, short-term borrowings were comprised of the following: | | | | | | | | | December 31, | (dollars in thousands) | | 2020 | | 2019 | Short-term FHLB fixed-rate advances(1) | | $ | 0 | | $ | 400,000 | Total short-term borrowings | | $ | 0 | | $ | 400,000 |
(1) | Interest is payable monthly. |
As of December 31, 2020, the Company had 0 short-term borrowings as the short-term FHLB fixed-rate advances matured in 2020. As of December 31, 2019, the Company’s short-term borrowings included $400.0 million in short-term FHLB fixed-rate advances with a weighted average interest rate of 2.84% and maturity dates in 2020.. The short-term FHLB fixed-rate advances requirerequired monthly interest-only payments with the principal amount due on the maturity date. At December 31, 2020 and 2019, the Company had a remaining line of credit of $2.0 billion and $1.7 billion available from the FHLB, respectively. The FHLB fixed-rate advances and remaining borrowing capacity were secured by residential real estate loan collateral as of December 31, 2020 and 2019. As of December 31, 2020 and 2019, the Company had an undrawn line of credit of $1.1 billion and $596.8 million available from the FRB, respectively. The borrowing capacity with the FRB was secured by consumer, commercial and industrial, commercial real estate and residential mortgage loans as of December 31, 2020 and 2019. See “Note 8. Transfers of Financial Assets” for more information. The table below provides selected information for short-term borrowings during the years ended December 31, 2020, 2019 2018 and 2017:2018: | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | | 2020 | | 2019 | | 2018 | | Federal funds purchased: | | | | | | | | | | | | | | | | | | | | | Weighted-average interest rate at December 31, | | | — | % | | — | % | | — | % | | Highest month-end balance | | $ | 110,000 | | $ | 374,875 | | $ | 6,000 | | | Average outstanding balance | | $ | 16,410 | | $ | 32,987 | | $ | 1,280 | | | Weighted-average interest rate paid | | | 2.44 | % | | 2.18 | % | | 0.97 | % | | Securities sold under agreements to repurchase: | | | | | | | | | | | | Weighted-average interest rate at December 31, | | | — | % | | — | % | | — | % | | | — | % | | — | % | | — | % | Highest month-end balance | | $ | — | | $ | — | | $ | 5,951 | | | $ | — | | $ | 110,000 | | $ | 374,875 | | Average outstanding balance | | $ | — | | $ | — | | $ | 893 | | | $ | 1,366 | | $ | 16,410 | | $ | 32,987 | | Weighted-average interest rate paid | | | — | % | | — | % | | 0.55 | % | | | 0.43 | % | | 2.44 | % | | 2.18 | % | Short-term FHLB fixed-rate advance: | | | | | | | | | | | | | | | | | | | | | Weighted-average interest rate at December 31, | | | 2.84 | % | | — | % | | — | % | | | — | % | | 2.84 | % | | — | % | Highest month-end balance | | $ | 400,000 | | $ | 81,800 | | $ | — | | | $ | 400,000 | | $ | 400,000 | | $ | 81,800 | | Average outstanding balance | | $ | 193,425 | | $ | 6,929 | | $ | — | | | $ | 208,197 | | $ | 193,425 | | $ | 6,929 | | Weighted-average interest rate paid | | | 2.85 | % | | 1.90 | % | | — | % | | | 2.88 | % | | 2.85 | % | | 1.90 | % |
The Company treats securities sold under agreements to repurchase as collateralized financings. The Company reflects the obligations to repurchase the same or similar securities sold as liabilities, with the dollar amount of securities underlying the agreements remaining in the asset accounts. Generally, for these types of agreements, there is a requirement that collateral be maintained with a market value equal to or in excess of the principal amount borrowed. As such, the collateral pledged may be increased or decreased over time to meet contractual obligations. The securities underlying the agreements to repurchase are held in collateral accounts with a third-party custodian. The Company did not enter into any repurchase agreements in 20192020 and 2018.2019. At December 31, 2019 and 2018, the Company had a remaining line of credit of $1.7 billion and $1.3 billion available from the FHLB, respectively, and an undrawn line of credit of $596.8 million and $671.8 million available from the FRB, respectively.
11. Long-Term Borrowings Long-term borrowings consisted of the following at December 31, 20192020 and 2018:2019: | | | | | | | | | | | | | | | | | December 31, | (dollars in thousands) | | 2019 | | 2018 | | 2020 | | 2019 | Finance lease | | $ | 19 | | $ | 26 | | $ | 10 | | $ | 19 | FHLB fixed-rate advances(1) | | | 200,000 | | | 600,000 | | | 200,000 | | | 200,000 | Total long-term borrowings | | $ | 200,019 | | $ | 600,026 | | $ | 200,010 | | $ | 200,019 |
(1) | Interest is payable monthly. |
As of December 31, 2020 and 2019, the Company’s long-term borrowings included $200.0 million in FHLB fixed-rate advances with a weighted average interest rate of 2.73% and maturity dates ranging from 2023 to 2024. The FHLB fixed-rate advances require monthly interest-only payments with the principal amount due on the maturity date. The FHLB fixed-rate advances and remaining borrowing capacity were secured by residential real estate loan collateral as of December 31, 2019 and 2018. See “Note 8. Transfers of Financial Assets” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information. At December 31, 2020 and 2019, and 2018, the Company���sCompany’s long-term borrowings included a finance lease obligation with a 6.78%annual interest rate that matures in 2022. At December 31, 2019,2020, future contractual principal payments and maturities on long-term borrowings were as follows: | | | | | | | | | Principal | | Principal | (dollars in thousands) | | Payments | | Payments | Year ending December 31: | | | | | | | 2020 | | $ | 9 | | 2021 | | | 10 | | $ | 10 | 2022 | | | — | | | — | 2023(1) | | | 100,000 | | | 100,000 | 2024(2) | | | 100,000 | | | 100,000 | 2025 | | | | — | Total | | $ | 200,019 | | $ | 200,010 |
(1) | FHLB fixed-rate advance callable on December 4, 2020March 3, 2021 with an interest rate of 2.80% |
(2) | FHLB fixed-rate advance callable on JanuaryApril 15, 2021 with an interest rate of 2.65% |
12. Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss) is defined as the revenues, expenses, gains and losses that are included in comprehensive income, but excluded from net income. The Company’s significant items of accumulated other comprehensive income (loss) are pension and other benefits, investment securities and cash flow derivative hedges. Changes in accumulated other comprehensive income (loss) for the years ended December 31, 2020, 2019 2018 and 20172018 are presented below: | | | | | | | | | | | | | | | | | | | | | | | | Income | | | | | | | | Income | | | | | | | | | Tax | | | | | | | | Tax | | | | | | Pre-tax | | Benefit | | Net of | | Pre-tax | | Benefit | | Net of | (dollars in thousands) | | Amount | | (Expense) | | Tax | | Amount | | (Expense) | | Tax | Accumulated other comprehensive loss at December 31, 2018 | | $ | (180,915) | | $ | 48,720 | | $ | (132,195) | | Year ended December 31, 2019 | | | | | | | | | | | Accumulated other comprehensive loss at December 31, 2019 | | | $ | (43,450) | | $ | 11,701 | | $ | (31,749) | Year ended December 31, 2020 | | | | | | | | | | | Pension and other benefits: | | | | | | | | | | | | | | | | | | | Net actuarial losses arising during the year | | | (5,774) | | | 1,555 | | | (4,219) | | | (10,399) | | | 2,774 | | | (7,625) | Prior service credit | | | (429) | | | 115 | | | (314) | | | (51) | | | 14 | | | (37) | Amortization of net loss included in net income | | | 6,610 | | | (1,780) | | | 4,830 | | | 5,595 | | | (1,492) | | | 4,103 | Change in Company tax rate | | | | — | | | (96) | | | (96) | Net change in pension and other benefits | | | 407 | | | (110) | | | 297 | | | (4,855) | | | 1,200 | | | (3,655) | Investment securities: | | | | | | | | | | | | | | | | | | | Unrealized net gains arising during the year | | | 134,343 | | | (36,178) | | | 98,165 | | | 91,289 | | | (24,365) | | | 66,924 | Reclassification of net losses to net income: | | | | | | | | | | | | | | | | | | | Investment securities losses, net | | | 2,715 | | | (731) | | | 1,984 | | | 114 | | | (30) | | | 84 | Net change in investment securities | | | 137,058 | | | (36,909) | | | 100,149 | | | 91,403 | | | (24,395) | | | 67,008 | Other comprehensive income | | | 137,465 | | | (37,019) | | | 100,446 | | | 86,548 | | | (23,195) | | | 63,353 | Accumulated other comprehensive loss at December 31, 2019 | | $ | (43,450) | | $ | 11,701 | | $ | (31,749) | | Accumulated other comprehensive income at December 31, 2020 | | | $ | 43,098 | | $ | (11,494) | | $ | 31,604 |
| | | | | | | | | | | | | | | | | | | | | | | | Income | | | | | | | | Income | | | | | | | | | Tax | | | | | | | | Tax | | | | | | Pre-tax | | Benefit | | Net of | | Pre-tax | | Benefit | | Net of | (dollars in thousands) | | Amount | | (Expense) | | Tax | | Amount | | (Expense) | | Tax | Accumulated other comprehensive loss at December 31, 2017 | | $ | (159,423) | | $ | 63,040 | | $ | (96,383) | | Year ended December 31, 2018 | | | | | | | | | | | Early adoption of ASU No. 2018-02 | | | — | | | (20,068) | | | (20,068) | | Accumulated other comprehensive loss at December 31, 2018 | | | $ | (180,915) | | $ | 48,720 | | $ | (132,195) | Year ended December 31, 2019 | | | | | | | | | | | Pension and other benefits: | | | | | | | | | | | | | | | | | | | Net actuarial losses arising during the year | | | (2,835) | | | 763 | | | (2,072) | | | (5,774) | | | 1,555 | | | (4,219) | Prior service credit | | | (429) | | | 116 | | | (313) | | | (429) | | | 115 | | | (314) | Amortization of net loss included in net income | | | 7,315 | | | (1,970) | | | 5,345 | | | 6,610 | | | (1,780) | | | 4,830 | Net change in pension and other benefits | | | 4,051 | | | (1,091) | | | 2,960 | | | 407 | | | (110) | | | 297 | Investment securities: | | | | | | | | | | | | | | | | | | | Unrealized net losses arising during the year | | | (43,545) | | | 11,686 | | | (31,859) | | Reclassification of net gains to net income: | | | | | | | | | | | OTTI losses on available-for-sale debt securities, net | | | 24,085 | | | (6,485) | | | 17,600 | | Unrealized net gains arising during the period | | | | 134,343 | | | (36,178) | | | 98,165 | Reclassification of net losses to net income: | | | | | | | | | | | Investment securities losses, net | | | | 2,715 | | | (731) | | | 1,984 | Net change in investment securities | | | (19,460) | | | 5,201 | | | (14,259) | | | 137,058 | | | (36,909) | | | 100,149 | Cash flow derivative hedges: | | | | | | | | | | | Unrealized net gains on cash flow derivative hedges arising during the year | | | 1,475 | | | (397) | | | 1,078 | | Reclassification of net gains to net income: | | | | | | | | | | | Other noninterest expense | | | (7,558) | | | 2,035 | | | (5,523) | | Net change in cash flow derivative hedges | | | (6,083) | | | 1,638 | | | (4,445) | | Other comprehensive loss | | | (21,492) | | | 5,748 | | | (15,744) | | Accumulated other comprehensive loss at December 31, 2018 | | $ | (180,915) | | $ | 48,720 | | $ | (132,195) | | Other comprehensive income | | | | 137,465 | | | (37,019) | | | 100,446 | Accumulated other comprehensive loss at December 31, 2019 | | | $ | (43,450) | | $ | 11,701 | | $ | (31,749) |
| | | | | | | | | | | | | | | | | | | | | | | | Income | | | | | | | | Income | | | | | | | | | Tax | | | | | | | | Tax | | | | | | Pre-tax | | Benefit | | Net of | | Pre-tax | | Benefit | | Net of | (dollars in thousands) | | Amount | | (Expense) | | Tax | | Amount | | (Expense) | | Tax | Accumulated other comprehensive loss at December 31, 2016 | | $ | (145,472) | | $ | 57,461 | | $ | (88,011) | | Year ended December 31, 2017 | | | | | | | | | | | Accumulated other comprehensive loss at December 31, 2017 | | | $ | (159,423) | | $ | 63,040 | | $ | (96,383) | Year ended December 31, 2018 | | | | | | | | | | | Early adoption of ASU No. 2018-02 | | | | — | | | (20,068) | | | (20,068) | Pension and other benefits: | | | | | | | | | | | | | | | | | | | Net actuarial losses arising during the year | | | (1,104) | | | 436 | | | (668) | | | (2,835) | | | 763 | | | (2,072) | Prior service credit | | | (429) | | | 170 | | | (259) | | | (429) | | | 116 | | | (313) | Amortization of net loss included in net income | | | 8,625 | | | (3,407) | | | 5,218 | | | 7,315 | | | (1,970) | | | 5,345 | Net change in pension and other benefits | | | 7,092 | | | (2,801) | | | 4,291 | | | 4,051 | | | (1,091) | | | 2,960 | Investment securities: | | | | | | | | | | | | | | | | | | | Unrealized net losses arising during the year | | | (23,516) | | | 9,357 | | | (14,159) | | | (43,545) | | | 11,686 | | | (31,859) | Reclassification of net gains to net income: | | | | | | | | | | | OTTI losses on available-for-sale debt securities, net | | | | 24,085 | | | (6,485) | | | 17,600 | Net change in investment securities | | | (23,516) | | | 9,357 | | | (14,159) | | | (19,460) | | | 5,201 | | | (14,259) | Cash flow derivative hedges: | | | | | | | | | | | | | | | | | | | Unrealized net gains on cash flow derivative hedges arising during the year | | | 2,473 | | | (977) | | | 1,496 | | | 1,475 | | | (397) | | | 1,078 | Reclassification of net gains to net income: | | | | | | | | | | | Other noninterest expense | | | | (7,558) | | | 2,035 | | | (5,523) | Net change in cash flow derivative hedges | | | 2,473 | | | (977) | | | 1,496 | | | (6,083) | | | 1,638 | | | (4,445) | Other comprehensive loss | | | (13,951) | | | 5,579 | | | (8,372) | | | (21,492) | | | 5,748 | | | (15,744) | Accumulated other comprehensive loss at December 31, 2017 | | $ | (159,423) | | $ | 63,040 | | $ | (96,383) | | Accumulated other comprehensive loss at December 31, 2018 | | | $ | (180,915) | | $ | 48,720 | | $ | (132,195) |
The following table summarizes changes in accumulated other comprehensive loss, net of tax, for the years indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pensions | | | | | | Accumulated | | Pensions | | | | | | Accumulated | | | and | | | | Cash Flow | | Other | | and | | | | Cash Flow | | Other | | | Other | | Investment | | Derivative | | Comprehensive | | Other | | Investment | | Derivative | | Comprehensive | (dollars in thousands) | | Benefits | | Securities | | Hedges | | Income (Loss) | | Benefits | | Securities | | Hedges | | Income (Loss) | Year Ended December 31, 2020 | | | | | | | | | | | | | | Balance at beginning of year | | | $ | (28,082) | | $ | (3,667) | | $ | — | | $ | (31,749) | Other comprehensive (loss) income | | | | (3,655) | | | 67,008 | | | — | | | 63,353 | Balance at end of year | | | $ | (31,737) | | $ | 63,341 | | $ | — | | $ | 31,604 | | | | | | | | | | | | | | | Year Ended December 31, 2019 | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning of year | | $ | (28,379) | | $ | (103,816) | | $ | — | | $ | (132,195) | | $ | (28,379) | | $ | (103,816) | | $ | — | | $ | (132,195) | Other comprehensive income | | | 297 | | | 100,149 | | | — | | | 100,446 | | | 297 | | | 100,149 | | | — | | | 100,446 | Balance at end of year | | $ | (28,082) | | $ | (3,667) | | $ | — | | $ | (31,749) | | $ | (28,082) | | $ | (3,667) | | $ | — | | $ | (31,749) | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, 2018 | | | | | | | | | | | | | | | | | | | | | | | | | Balance at beginning of year | | $ | (25,946) | | $ | (74,117) | | $ | 3,680 | | $ | (96,383) | | $ | (25,946) | | $ | (74,117) | | $ | 3,680 | | $ | (96,383) | Early adoption of ASU No. 2018-02 | | | (5,393) | | | (15,440) | | | 765 | | | (20,068) | | | (5,393) | | | (15,440) | | | 765 | | | (20,068) | Other comprehensive income (loss) | | | 2,960 | | | (14,259) | | | (4,445) | | | (15,744) | | | 2,960 | | | (14,259) | | | (4,445) | | | (15,744) | Balance at end of year | | $ | (28,379) | | $ | (103,816) | | $ | — | | $ | (132,195) | | $ | (28,379) | | $ | (103,816) | | $ | — | | $ | (132,195) | | | | | | | | | | | | | | | Year Ended December 31, 2017 | | | | | | | | | | | | | | Balance at beginning of year | | $ | (30,237) | | $ | (59,958) | | $ | 2,184 | | $ | (88,011) | | Other comprehensive income (loss) | | | 4,291 | | | (14,159) | | | 1,496 | | | (8,372) | | Balance at end of year | | $ | (25,946) | | $ | (74,117) | | $ | 3,680 | | $ | (96,383) | |
As of December 31, 2020 and 2019, the Company did not have any available-for-sale debt securities in an unrealized loss position with the intent to sell and determined it was not more likely than not that the Company would be required to sell the securities prior to recovery of the amortized cost basis. Thus, for the year ended December 31, 2020, there was 0 incremental non-credit-related impairment loss recognized in earnings on these securities, and for the year ended December 31, 2019, there was 0 non-credit OTTI loss on securities available for sale. Anthese securities. For the year ended December 31, 2018, an OTTI loss on available-for-sale debt securities of $24.1 million was recorded due to the Company’s intent to sell as of December 31, 2018. 13. Regulatory Capital Requirements Federal and state laws and regulations limit the amount of dividends the Company may declare or pay. The Company depends primarily on dividends from FHB as the source of funds for the Company’s payment of dividends. The Company and the Bank are subject to various regulatory capital requirements imposed by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s operating activities and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of its assets and certain off-balance-sheet items. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of Common Equity Tier 1 (“CET1”) capital, Tier 1 capital and total capital to risk-weighted assets, as well as a minimum leverage ratio. The following provides definitions for the regulatory risk-based capital ratios and leverage ratio, which are calculated as per standard regulatory guidance: Risk-Weighted Assets — Assets are weighted for risk according to a formula used by the Federal Reserve to conform to capital adequacy guidelines. On- and off-balance sheet items are weighted for risk, with off-balance sheet items converted to balance sheet equivalents, using risk conversion factors, before being allocated a risk-adjusted weight. The off-balance sheet items comprise a minimal part of the overall calculation. Common Equity Tier 1 Risk-Based Capital Ratio — The CET1 risk-based capital ratio is calculated as CET1 capital, divided by risk-weighted assets. CET1 is the sum of equity, adjusted for ineligible goodwill as well as certain other comprehensive income items as follows: net unrealized gains/losses on securities and derivatives, and net unrealized pension and other benefit losses.
Common Equity Tier 1 Risk-Based Capital Ratio — The CET1 risk-based capital ratio is calculated as CET1 capital, divided by risk-weighted assets. CET1 is the sum of equity, adjusted for ineligible goodwill as well as certain other comprehensive income items as follows: net unrealized gains/losses on securities and derivatives, and net unrealized pension and other benefit losses. Tier 1 Risk-Based Capital Ratio — The Tier 1 capital ratio is calculated as Tier 1 capital divided by risk-weighted assets. Total Risk-Based Capital Ratio — The total risk-based capital ratio is calculated as the sum of Tier 1 capital and an allowable amount of the reserve for credit losses (limited to 1.25 percent of risk-weighted assets), divided by risk-weighted assets. Tier 1 Leverage Ratio — The Tier 1 leverage ratio is calculated by dividing Tier 1 capital by adjusted quarterly average total assets. The table below sets forth those ratios at December 31, 20192020 and 2018:2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | First Hawaiian | | Minimum | | Well- | | | | | First Hawaiian | | Minimum | | Well- | | | | First Hawaiian, Inc. | | Bank | | Capital | | Capitalized | | | First Hawaiian, Inc. | | Bank | | Capital | | Capitalized | | (dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Ratio(1) | | Ratio(1) | | | Amount | | Ratio | | Amount | | Ratio | | Ratio(1) | | Ratio(1) | | December 31, 2020: | | | | | | | | | | | | | | | | | Common equity tier 1 capital to risk-weighted assets | | | $ | 1,717,008 | | 12.47 | % | $ | 1,699,485 | | 12.34 | % | 4.50 | % | 6.50 | % | Tier 1 capital to risk-weighted assets | | | | 1,717,008 | | 12.47 | % | | 1,699,485 | | 12.34 | % | 6.00 | % | 8.00 | % | Total capital to risk-weighted assets | | | | 1,889,958 | | 13.73 | % | | 1,872,427 | | 13.60 | % | 8.00 | % | 10.00 | % | Tier 1 capital to average assets (leverage ratio) | | | | 1,717,008 | | 8.00 | % | | 1,699,485 | | 7.92 | % | 4.00 | % | 5.00 | % | | | | | | | | | | | | | | | | | | December 31, 2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common equity tier 1 capital to risk-weighted assets | | $ | 1,676,515 | | 11.88 | % | $ | 1,654,304 | | 11.72 | % | 4.50 | % | 6.50 | % | | $ | 1,676,515 | | 11.88 | % | $ | 1,654,304 | | 11.72 | % | 4.50 | % | 6.50 | % | Tier 1 capital to risk-weighted assets | | | 1,676,515 | | 11.88 | % | | 1,654,304 | | 11.72 | % | 6.00 | % | 8.00 | % | | | 1,676,515 | | 11.88 | % | | 1,654,304 | | 11.72 | % | 6.00 | % | 8.00 | % | Total capital to risk-weighted assets | | | 1,807,645 | | 12.81 | % | | 1,785,434 | | 12.65 | % | 8.00 | % | 10.00 | % | | | 1,807,645 | | 12.81 | % | | 1,785,434 | | 12.65 | % | 8.00 | % | 10.00 | % | Tier 1 capital to average assets (leverage ratio) | | | 1,676,515 | | 8.79 | % | | 1,654,304 | | 8.67 | % | 4.00 | % | 5.00 | % | | | 1,676,515 | | 8.79 | % | | 1,654,304 | | 8.67 | % | 4.00 | % | 5.00 | % | | | | | | | | | | | | | | | | | | December 31, 2018: | | | | | | | | | | | | | | | | | Common equity tier 1 capital to risk-weighted assets | | $ | 1,661,542 | | 11.97 | % | $ | 1,658,172 | | 11.94 | % | 4.50 | % | 6.50 | % | | Tier 1 capital to risk-weighted assets | | | 1,661,542 | | 11.97 | % | | 1,658,172 | | 11.94 | % | 6.00 | % | 8.00 | % | | Total capital to risk-weighted assets | | | 1,803,860 | | 12.99 | % | | 1,800,490 | | 12.97 | % | 8.00 | % | 10.00 | % | | Tier 1 capital to average assets (leverage ratio) | | | 1,661,542 | | 8.72 | % | | 1,658,172 | | 8.70 | % | 4.00 | % | 5.00 | % | |
(1) | As defined by the regulations issued by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the FDIC. |
A new capital conservation buffer, comprised of CET1 capital, was established above the regulatory minimum capital requirements. This capital conservation buffer was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increased each subsequent year by an additional 0.625% until reaching its final level of 2.5% on January 1, 2019. As of December 31, 2019,2020, under the bank regulatory capital guidelines, the Company and Bank were both classified as well-capitalized.well-capitalized and exceeded the aforementioned capital conservation buffer. Management is not aware of any conditions or events that have occurred since December 31, 2019,2020, to change the capital adequacy category of the Company or the Bank. 14. Leases The Company, as lessee, is obligated under a number of noncancelable operating leases primarily for branch premises and related real estate. Terms of such leases extend for periods up to 4443 years, many of which provide for periodic adjustment of rent payments based on changes in various economic indicators. Renewal options are included in the Company’s lease liabilities and related right-of-use assets to the extent that the Company is reasonably certain to exercise such options. For all of the Company’s short-term leases (i.e., leases with an initial term of 12 months or less), the Company recognizes lease expense on a straight-line basis over the lease term. Variable lease payments are recognized in the period in which the obligation for those payments is incurred. The Company’s branch premises leases typically require that the Company is responsible to pay for variable lease expense, primarily maintenance expense, as well as real property taxes, property insurance and sales taxes. Maintenance expense is paid to maintain common areas and covers costs including landscaping, cleaning and general maintenance. Such variable costs are typically re-evaluated by the landlord on an annual basis and are charged to the Company based on the portion of the total building premises that is occupied by the Company. The Company subleases certain premises and real estate to third parties. The sublease portfolio consists of operating leases for space connected with 3 of the Company’s branch properties. The components of the Company’s net lease expense for the years ended December 31, 2020 and 2019 were as follows: | | | | | | | | | Year Ended December 31, | (dollars in thousands) | | 2020 | | 2019 | Operating lease expense | | $ | 9,169 | | $ | 9,158 | Short-term lease expense | | | 397 | | | 487 | Variable lease expense | | | 2,353 | | | 2,152 | Finance lease expense: | | | | | | | Amortization of right-of-use assets | | | 3 | | | 3 | Interest on lease liabilities | | | 1 | | | 2 | Total finance lease expense | | | 4 | | | 5 | Less: Sublease income | | | (1,222) | | | (1,073) | Net lease expense | | $ | 10,701 | | $ | 10,729 |
For the year ended December 31, 2018, rental expense, net of sublease income, presented in accordance with Topic 840, Leases was as follows: | | | | | | Year Ended | (dollars in thousands) | | December 31, 2018 | Rental expense charged to occupancy | | $ | 9,947 | Less: Sublease income | | | 903 | Net rental expense charged to occupancy | | | 9,044 | Rental expense charged to equipment expense | | | 3,679 | Total | | $ | 12,723 |
Other information related to the Company’s lease liabilities as of and for the years ended December 31, 2020 and 2019 were as follows: | | | | | | | | | | Year Ended December 31, | | (dollars in thousands) | | 2020 | | 2019 | | Supplemental Cash Flows Information | | | | | | | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | Operating cash flows paid for operating leases | | $ | 8,848 | | $ | 8,802 | | Operating cash flows paid for finance leases | | $ | — | | $ | 10 | | Financing cash flows paid for finance leases | | $ | 10 | | $ | 10 | | Right-of-use assets obtained in exchange for new lease obligations: | | | | | | | | Operating leases | | $ | 3,796 | | $ | 1,401 | | Weighted Average Remaining Lease Term | | | | | | | | Operating leases (years) | | | 16.1 | | | 15.7 | | Finance leases (years) | | | 1.5 | | | 2.5 | | Weighted Average Discount Rate | | | | | | | | Operating leases | | | 3.17 | % | | 3.36 | % | Finance leases | | | 6.78 | % | | 6.78 | % |
The Company subleases certain premises and real estate to third parties. The sublease portfolio consists of operating leases for space connected with 3 of the Company’s branch properties.
The components of the Company’s net lease expense for the year ended December 31, 2019 were as follows:
| | | | | | | Year Ended | | (dollars in thousands) | | December 31, 2019 | | Operating lease expense | | $ | 9,158 | | Short-term lease expense | | | 487 | | Variable lease expense | | | 2,152 | | Finance lease expense: | | | | | Amortization of right-of-use assets | | | 3 | | Interest on lease liabilities | | | 2 | | Total finance lease expense | | | 5 | | Less: Sublease income | | | (1,073) | | Net lease expense | | $ | 10,729 | |
For the years ended December 31, 2018 and 2017, rental expense, net of sublease income, presented in accordance with Topic 840, Leases was as follows:
| | | | | | | | | Year Ended December 31, | (dollars in thousands) | | 2018 | | 2017 | Rental expense charged to occupancy | | $ | 9,947 | | $ | 8,620 | Less: Sublease income | | | 903 | | | 1,342 | Net rental expense charged to occupancy | | | 9,044 | | | 7,278 | Rental expense charged to equipment expense | | | 3,679 | | | 285 | Total | | $ | 12,723 | | $ | 7,563 |
Other information related to the Company’s lease liabilities as of and for the year ended December 31, 2019 was as follows:
| | | | | | | Year Ended | | (dollars in thousands) | | December 31, 2019 | | Supplemental Cash Flows Information | | | | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | Operating cash flows paid for operating leases | | $ | 8,802 | | Operating cash flows paid for finance leases | | $ | 10 | | Financing cash flows paid for finance leases | | $ | 10 | | Right-of-use assets obtained in exchange for new lease obligations: | | | | | Operating leases | | $ | 1,401 | | Weighted Average Remaining Lease Term | | | | | Operating leases (years) | | | 15.7 | | Finance leases (years) | | | 2.5 | | Weighted Average Discount Rate | | | | | Operating leases | | | 3.36 | % | Finance leases | | | 6.78 | % |
Operating lease right-of-use assets were $40.2 million and $44.3 million as of December 31, 2020 and 2019, respectively, and finance lease right-of-use assets were not material as of both December 31, 2020 and 2019. Operating lease right-of-use assets and finance lease right-of use assets were recorded as a component of other assets and premises and equipment,, respectively, as of December 31, 2020 and 2019. Operating lease liabilities were $40.6 million and $44.4 million as of December 31, 2020 and 2019, respectively, and finance lease liabilities were not material as of both December 31, 2020 and 2019. Operating lease liabilities and finance lease liabilities were recorded as a component of other liabilities and long-term borrowings,, respectively, as of December 31, 2020 and 2019. The most significant assumption related to the Company’s application of Topic 842 was the discount rate assumption. As most of the Company’s lease agreements do not provide for an implicit interest rate, the Company used the collateralized interest rate that the Company would have to pay to borrow over a similar term to estimate the Company’s lease liability as of January 1, 2019.liabilities. The following table sets forth future minimum rental payments under noncancelable operating leases with terms in excess of one year as of December 31, 2019:2020: | | | | | | | | | Net Operating | | Net Operating | | | Lease | | Lease | (dollars in thousands) | | Payments | | Payments | Year ending December 31: | | | | | | | 2020 | | $ | 8,776 | | 2021 | | | 8,084 | | $ | 8,928 | 2022 | | | 5,453 | | | 6,334 | 2023 | | | 2,964 | | | 3,833 | 2024 | | | 2,721 | | | 3,601 | 2025 | | | | 2,937 | Thereafter | | | 32,227 | | | 42,746 | Total future minimum lease payments | | | 60,225 | | | 68,379 | Less: Imputed interest | | | (15,934) | | | (20,792) | Total | | $ | 44,291 | | $ | 47,587 |
The following table presents future minimum rental payments under operating leases with terms in excess of one year as of December 31, 2018 presented in accordance with Topic 840, “Leases”:
| | | | | | | | | | | | Operating | | Less | | Net Operating | | | Lease | | Sublease | | Lease | (dollars in thousands) | | Payments | | Income | | Payments | Year ending December 31: | | | | | | | | | | 2019 | | $ | 8,780 | | $ | 903 | | $ | 7,877 | 2020 | | | 8,668 | | | 903 | | | 7,765 | 2021 | | | 7,961 | | | 892 | | | 7,069 | 2022 | | | 5,101 | | | — | | | 5,101 | 2023 | | | 2,632 | | | — | | | 2,632 | Thereafter | | | 34,638 | | | — | | | 34,638 | Total future minimum lease payments | | $ | 67,780 | | $ | 2,698 | | $ | 65,082 |
The Company has several operating leases with related parties associated with its branch premises. The lease payments to related parties were NaN and $0.3 million for the yearyears ended December 31, 2019. The future minimum rental payments due to related parties are $0.3 million (2020), $0.3 million (2021), $0.2 million (2022), $0.2 million (2023), $0.2 million (2024),2020 and $7.3 million thereafter.2019, respectively. The Company, as lessor, rents office space in its headquarters office building as well as office space located primarily in Hawaii to third party lessees. The cost and accumulated depreciation related to leased properties were $304.3 million and $150.0 million, respectively, as of December 31, 2020, and $288.8 million and $141.3 million, respectively, as of December 31, 2019, and $289.2 million and $133.7 million, respectively, as of December 31, 2018.2019. Terms of such leases, including renewal options, may be extended for up to ten years, many of which provide for periodic adjustment of rent payments based on changes in consumer or other price indices. The Company recognizes lease income on a straight-line basis over the lease term. Non-lease components, primarily consisting of costs incurred by the Company for maintenance and utilities, are recognized as income in the period in which the payments are due. The Company recognized operating lease income related to lease payments of $6.3 million and $5.9 million for the yearyears ended December 31, 2019.2020 and 2019, respectively. In addition, the Company recognized $5.6 million and $5.3 million of lease income related to variable lease payments for the yearyears ended December 31, 2019.2020 and 2019, respectively. Certain of the Company’s leases are with related parties for the use of space at the Company’s headquarters office building. The rental income paid by the related parties for both the yearyears ended December 31, 2020 and 2019 was $0.4 million. The future minimum rental income from related parties are $0.4 million (2020), $0.4 million (2021), $0.4 million (2022), $0.4 million (2023), $0.4 million (2024), $0.4 million (2025), and $0.8$0.4 million thereafter. The following table sets forth future minimum rental income under noncancelable operating leases with terms in excess of one year as of December 31, 2019:2020: | | | | | | | | | Minimum | | Minimum | | | Rental | | Rental | (dollars in thousands) | | Income | | Income | Year ending December 31: | | | | | | | 2020 | | $ | 6,164 | | 2021 | | | 6,152 | | $ | 6,454 | 2022 | | | 4,431 | | | 4,724 | 2023 | | | 3,506 | | | 3,800 | 2024 | | | 2,680 | | | 2,973 | 2025 | | | | 2,404 | Thereafter | | | 6,511 | | | 5,932 | Total | | $ | 29,444 | | $ | 26,287 |
15. Benefit Plans Qualified Pension Plan The Company’s employees participate in the Employees’ Retirement Plan of First Hawaiian, Inc. (the “FHI ERP”). The FHI ERP is a frozen plan whereby there are 0 further benefit accruals for the Company’s employees. However, employees retain rights to participant benefits accrued as of the date of the plan freeze. NaN contributions to the pension trust are expected to be made during 20202021 for the Company’s participants in the FHI ERP. However, should contributions be required in accordance with the funding rules under the Employee Retirement Income Security Act of 1974 (“ERISA”), including the impact of the Pension Protection Act of 2006, the Company would make those required contributions. Nonqualified Pension and Other Postretirement Benefit Plans The Company also sponsors an unfunded supplemental executive retirement plan for certain key executives (“SERP”). In addition, the Company sponsors a directors’ retirement plan (“Directors’ Plan”), a non-qualified pension plan for eligible FHI and FHB directors that qualify for retirement benefits based on their years of service as a director. Both the SERP and the Directors’ Plan were frozen as of January 1, 2005 to new participants. In March 2019, the Company’s board of directors approved an amendment to the SERP to freeze the SERP, which became effective on July 1, 2019. As a result of the amendment, since the effective date, there have not been any, and there will be 0, new accruals of benefits, including service accruals. Existing benefits under the SERP, as of the effective date of the amendment described above, will otherwise continue in accordance with the terms of the SERP. NaN contributions to the SERP are expected to be made in 2020.2021. A postretirement benefit plan is also offered to eligible employees that provides life insurance and healthcare benefits upon retirement. The Company provides access to medical coverage for eligible retirees under age 65 at active employee premium rates and a monthly stipend to both retiree and retiree’s spouse after age 62. The Company expects to contribute $0.2 million to its Directors’ Plan and $1.2 million to its postretirement medical and life insurance plans in 2020.2021. These contributions reflect the estimated benefit payments for the unfunded plans and may vary depending on retirements during 2020.2021. Defined Contribution Plans 401(k) Savings Plan and Money Purchase Pension Plan The Company matched employee contributions to the First Hawaiian, Inc. 401(k) Savings Plan, a qualified defined contribution plan, up to 5%of the employee’s pay in 2020, 2019 and 2018. The Company also contributed 2.5% of employee pay to the First Hawaiian, Inc. Future Plan, a money purchase pension plan. The plans cover all employees who satisfy eligibility requirements. A select group of key executives who participate in an unqualified grandfathered supplemental executive retirement plan may participate in the 401(k) plan but are not eligible to receive the matching contribution. The employer contributions to the above-mentioned plans for the years ended December 31, 2020, 2019 and 2018 and 2017 were $8.6 million, $7.5 million $7.8 million and $7.3$7.8 million, respectively, and are included in salaries and employee benefits within the consolidated statements of income. Annual Incentive Awards for Key Executives The Company makes cash-based annual incentive awards under the First Hawaiian, Inc. Bonus Plan (the “Bonus Plan”). The Bonus Plan limits the aggregate and individual value of the awards that could be issued in any one fiscal year. The Bonus Plan expenses totaled $15.2 million, $15.6 million $14.3 million and $13.3$14.3 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively, and are included in salaries and employee benefits within the consolidated statements of income. The following table details the amounts recognized in other comprehensive income during the years presented. Pension benefits include benefits from the qualified and non-qualified plans. Other benefits include life insurance and healthcare benefits from the postretirement benefit plan. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | Other Benefits | | | Pension Benefits | | Other Benefits | | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 | | Amounts arising during the year: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net (gain) loss on pension assets | | $ | (16,278) | | $ | 12,209 | | $ | (8,619) | | $ | — | | $ | — | | $ | — | | | $ | (4,839) | | $ | (16,278) | | $ | 12,209 | | $ | — | | $ | — | | $ | — | | Net loss (gain) on pension obligations | | | 21,512 | | | (6,619) | | | 9,757 | | | 540 | | | (2,755) | | | (34) | | | | 14,935 | | | 21,512 | | | (6,619) | | | 303 | | | 540 | | | (2,755) | | Reclassification adjustments recognized as components of net periodic benefit cost during the year: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net (gain) loss | | | (6,995) | | | (7,315) | | | (8,625) | | | 385 | | | — | | | — | | | | (5,806) | | | (6,995) | | | (7,315) | | | 211 | | | 385 | | | — | | Prior service credit | | | — | | | — | | | — | | | 429 | | | 429 | | | 429 | | | | — | | | — | | | — | | | 51 | | | 429 | | | 429 | | Amount recognized in other comprehensive income | | $ | (1,761) | | $ | (1,725) | | $ | (7,487) | | $ | 1,354 | | $ | (2,326) | | $ | 395 | | | $ | 4,290 | | $ | (1,761) | | $ | (1,725) | | $ | 565 | | $ | 1,354 | | $ | (2,326) | |
The following table shows the amounts within accumulated other comprehensive loss that had not yet been recognized as components of net periodic benefit cost as of December 31, 20192020 and 2018:2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits | (dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 | Net actuarial loss (gain) | | $ | 40,061 | | $ | 41,822 | | $ | (1,582) | | $ | (2,507) | | $ | 44,351 | | $ | 40,061 | | $ | (1,068) | | $ | (1,582) | Prior service credit | | | — | | | — | | | (51) | | | (480) | | | — | | | — | | | — | | | (51) | Total, pretax effect | | | 40,061 | | | 41,822 | | | (1,633) | | | (2,987) | | | 44,351 | | | 40,061 | | | (1,068) | | | (1,633) | Tax impact | | | (10,786) | | | (11,260) | | | 440 | | | 804 | | | (11,831) | | | (10,786) | | | 285 | | | 440 | Ending balance in accumulated other comprehensive loss | | $ | 29,275 | | $ | 30,562 | | $ | (1,193) | | $ | (2,183) | | $ | 32,520 | | $ | 29,275 | | $ | (783) | | $ | (1,193) |
The following table provides the amounts within accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost during 2020:
| | | | | | | | | Pension | | Other | (dollars in thousands) | | Benefits | | Benefits | Amortization of prior service credit | | $ | — | | $ | (51) | Amortization of net actuarial loss (gain) | | | 5,753 | | | (103) | Total to be recognized in 2020 | | $ | 5,753 | | $ | (154) |
The following tables summarize the changes to the projected benefit obligation (“PBO”) and fair value of plan assets for pension benefits and the accumulated postretirement benefit obligation and fair value of plan assets for other benefits: | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits | (dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 | Benefit obligation at beginning of year | | $ | 199,072 | | $ | 212,981 | | $ | 19,716 | | $ | 21,449 | | $ | 213,285 | | $ | 199,072 | | $ | 21,305 | | $ | 19,716 | Service cost | | | 14 | | | 696 | | | 710 | | | 750 | | | — | | | 14 | | | 768 | | | 710 | Interest cost | | | 8,261 | | | 7,362 | | | 808 | | | 739 | | | 6,519 | | | 8,261 | | | 640 | | | 808 | Actuarial loss (gain) | | | 22,573 | | | (6,619) | | | 540 | | | (2,755) | | Actuarial loss | | | | 14,935 | | | 22,573 | | | 303 | | | 540 | Curtailment gain | | | (1,061) | | | — | | | — | | | — | | | — | | | (1,061) | | | — | | | — | Benefit payments | | | (15,574) | | | (15,348) | | | (469) | | | (467) | | | (15,347) | | | (15,574) | | | (478) | | | (469) | Benefit obligation at end of year | | $ | 213,285 | | $ | 199,072 | | $ | 21,305 | | $ | 19,716 | | $ | 219,392 | | $ | 213,285 | | $ | 22,538 | | $ | 21,305 | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Pension Benefits | | Other Benefits | (dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | Fair value of plan assets at beginning of year | | $ | 99,581 | | $ | 114,220 | | $ | — | | $ | — | Actual return on plan assets | | | 20,863 | | | (6,936) | | | — | | | — | Benefit payments from trust | | | (7,785) | | | (7,703) | | | — | | | — | Fair value of plan assets at end of year | | $ | 112,659 | | $ | 99,581 | | $ | — | | $ | — |
The actuarial losses related to changes in the Company’s PBO for pension benefits are primarily due to changes in discount rates for the years ended December 31, 2020 and 2019. | | | | | | | | | | | | | | | Pension Benefits | | Other Benefits | (dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 | Fair value of plan assets at beginning of year | | $ | 112,659 | | $ | 99,581 | | $ | — | | $ | — | Actual return on plan assets | | | 9,637 | | | 20,863 | | | — | | | — | Benefit payments from trust | | | (7,501) | | | (7,785) | | | — | | | — | Fair value of plan assets at end of year | | $ | 114,795 | | $ | 112,659 | | $ | — | | $ | — |
The following table summarizes the funded status of the Company’s plans and amounts recognized in the Company’s consolidated balance sheets as of December 31, 20192020 and 2018:2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits | (dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 | Pension assets for overfunded plans | | $ | 16,291 | | $ | 8,702 | | $ | — | | $ | — | | $ | 16,237 | | $ | 16,291 | | $ | — | | $ | — | Pension liabilities for underfunded plans | | | (116,917) | | | (108,193) | | | (21,305) | | | (19,716) | | | (120,834) | | | (116,917) | | | (22,538) | | | (21,305) | Funded status | | $ | (100,626) | | $ | (99,491) | | $ | (21,305) | | $ | (19,716) | | $ | (104,597) | | $ | (100,626) | | $ | (22,538) | | $ | (21,305) | | | | | | | | | | | | | | |
The following table provides information regarding the PBO, accumulated benefit obligation (“ABO”), and fair value of plan assets as of December 31, 20192020 and 2018:2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Funded Pension Plan | | Unfunded Pension Plans | | Total Pension Plans | | Funded Pension Plan | | Unfunded Pension Plans | | Total Pension Plans | (dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | Projected benefit obligation | | $ | 96,368 | | $ | 90,879 | | $ | 116,917 | | $ | 108,193 | | $ | 213,285 | | $ | 199,072 | | $ | 98,558 | | $ | 96,368 | | $ | 120,834 | | $ | 116,917 | | $ | 219,392 | | $ | 213,285 | Accumulated benefit obligation | | | 96,368 | | | 90,879 | | | 116,834 | | | 106,357 | | | 213,202 | | | 197,236 | | | 98,558 | | | 96,368 | | | 120,766 | | | 116,834 | | | 219,324 | | | 213,202 | Fair value of plan assets | | | 112,659 | | | 99,581 | | | — | | | — | | | 112,659 | | | 99,581 | | | 114,795 | | | 112,659 | | | — | | | — | | | 114,795 | | | 112,659 | Overfunded (underfunded) portion of PBO/ABO | | | 16,291 | | | 8,702 | | | (116,917) | | | (108,193) | | | (100,626) | | | (99,491) | | | 16,237 | | | 16,291 | | | (120,834) | | | (116,917) | | | (104,597) | | | (100,626) |
The Company recognizes the overfunded and underfunded status of its pension plans as an asset and liability in the consolidated balance sheets. Unrecognized net gains or losses that exceed 5% of the greater of the PBO or the fair value of plan assets as of the beginning of the year are amortized on a straight-line basis over five years in accordance with ASC 715. Amortization of the unrecognized net gain or loss is included as a component of net periodic pension cost. If amortization results in an amount less than the minimum amortization required under GAAP, the minimum required amount is recorded. The following table summarizes the change in net actuarial loss and amortization for the years ended December 31, 20192020 and 2018:2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | Pension Benefits | | Other Benefits | | Pension Benefits | | Other Benefits | (dollars in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2020 | | 2019 | | 2020 | | 2019 | Net actuarial loss (gain) at beginning of year | | $ | 41,822 | | $ | 43,547 | | $ | (2,507) | | $ | 248 | | $ | 40,061 | | $ | 41,822 | | $ | (1,582) | | $ | (2,507) | Amortization cost | | | (6,995) | | | (7,315) | | | 385 | | | — | | | (5,806) | | | (6,995) | | | 211 | | | 385 | Liability loss (gain) | | | 21,512 | | | (6,619) | | | 540 | | | (2,755) | | Asset (gain) loss | | | (16,278) | | | 12,209 | | | — | | | — | | Liability loss | | | | 14,935 | | | 21,512 | | | 303 | | | 540 | Asset gain | | | | (4,839) | | | (16,278) | | | — | | | — | Net actuarial loss (gain) at end of year | | $ | 40,061 | | $ | 41,822 | | $ | (1,582) | | $ | (2,507) | | $ | 44,351 | | $ | 40,061 | | $ | (1,068) | | $ | (1,582) |
The following table sets forth the components of net periodic benefit cost for the years ended December 31, 2020, 2019 2018 and 2017:2018: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Income line item where recognized in | | Pension Benefits | | Other Benefits | | | Income line item where recognized in | | Pension Benefits | | Other Benefits | | (dollars in thousands) | | the consolidated statements of income | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | | the consolidated statements of income | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 | | Service cost | | Salaries and employee benefits | | $ | 14 | | $ | 696 | | $ | 629 | | $ | 710 | | $ | 750 | | $ | 738 | | | Salaries and employee benefits | | $ | — | | $ | 14 | | $ | 696 | | $ | 768 | | $ | 710 | | $ | 750 | | Interest cost | | Other noninterest expense | | | 8,261 | | | 7,362 | | | 8,297 | | | 808 | | | 739 | | | 776 | | | Other noninterest expense | | | 6,519 | | | 8,261 | | | 7,362 | | | 640 | | | 808 | | | 739 | | Expected return on plan assets | | Other noninterest expense | | | (4,585) | | | (5,273) | | | (5,003) | | | — | | | — | | | — | | | Other noninterest expense | | | (4,800) | | | (4,585) | | | (5,273) | | | — | | | — | | | — | | Prior service credit | | Other noninterest expense | | | — | | | — | | | — | | | (429) | | | (429) | | | (429) | | | Other noninterest expense | | | — | | | — | | | — | | | (51) | | | (429) | | | (429) | | Recognized net actuarial loss (gain) | | Other noninterest expense | | | 6,995 | | | 7,315 | | | 8,625 | | | (385) | | | — | | | — | | | Other noninterest expense | | | 5,806 | | | 6,995 | | | 7,315 | | | (211) | | | (385) | | | — | | Total net periodic benefit cost | | | | $ | 10,685 | | $ | 10,100 | | $ | 12,548 | | $ | 704 | | $ | 1,060 | | $ | 1,085 | | | | | $ | 7,525 | | $ | 10,685 | | $ | 10,100 | | $ | 1,146 | | $ | 704 | | $ | 1,060 | |
The funded pension benefit amounts included in pension benefits for the years ended December 31, 2020, 2019 2018 and 20172018 were as follows: | | | | | | | | | | | | | | | | | | | | | Funded Pension Benefits | | Funded Pension Benefits | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | 2020 | | 2019 | | 2018 | Interest cost | | $ | 3,808 | | $ | 3,420 | | $ | 3,922 | | $ | 2,946 | | $ | 3,808 | | $ | 3,420 | Expected return on plan assets | | | (4,585) | | | (5,273) | | | (5,003) | | | (4,800) | | | (4,585) | | | (5,273) | Recognized net actuarial loss | | | 3,714 | | | 2,600 | | | 4,316 | | | 1,421 | | | 3,714 | | | 2,600 | Total net periodic benefit cost | | $ | 2,937 | | $ | 747 | | $ | 3,235 | | $ | (433) | | $ | 2,937 | | $ | 747 |
Assumptions The following weighted-average assumptions were used to determine benefit obligations at December 31, 20192020 and 2018:2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FHI ERP Pension Benefits | | SERP Pension Benefits | | Other Benefits | | | FHI ERP Pension Benefits | | SERP Pension Benefits | | Other Benefits | | | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 | | 2020 | | 2019 | | 2020 | | 2019 | | Discount rate | | 3.16 | % | 4.30 | % | 3.16 | % | 4.30 | % | 3.16 | % | 4.30 | % | | 2.37 | % | 3.16 | % | 2.37 | % | 3.16 | % | 2.37 | % | 3.16 | % | Rate of compensation increase | | NA | | NA | | 4.00 | % | 4.00 | % | NA | | NA | | | NA | | NA | | NA | | 4.00 | % | NA | | NA | |
Weighted-average assumptions used to determine net periodic benefit cost for the years ended December 31, 2020, 2019 2018 and 20172018 were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FHI ERP Pension Benefits | | SERP Pension Benefits | | Other Benefits | | | FHI ERP Pension Benefits | | SERP Pension Benefits | | Other Benefits | | | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | 2019 | | 2018 | | 2017 | | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 | | Discount rate | | 4.30 | % | 3.51 | % | 4.05 | % | 4.30 | % | 3.51 | % | 4.05 | % | 4.30 | % | 3.51 | % | 4.05 | % | | 3.16 | % | 4.30 | % | 3.51 | % | 3.16 | % | 4.30 | % | 3.51 | % | 3.16 | % | 4.30 | % | 3.51 | % | Expected long-term return on plan assets | | 4.75 | % | 4.75 | % | 4.75 | % | NA | | NA | | NA | | NA | | NA | | NA | | | 4.40 | % | 4.75 | % | 4.75 | % | NA | | NA | | NA | | NA | | NA | | NA | | Rate of compensation increase | | NA | | NA | | NA | | 4.00 | % | 4.00 | % | 4.00 | % | NA | | NA | | NA | | | NA | | NA | | NA | | NA | | 4.00 | % | 4.00 | % | NA | | NA | | NA | |
To select the discount rate, the Company reviews the yield on high quality corporate bonds. This rate is adjusted to convert the yield to an annual discount rate basis and may be adjusted for the population of plan participants to reflect the expected duration of the benefit payments of the plan. Assumed healthcare cost trend rates were as follows at December 31, 2020, 2019 2018 and 2017:2018: | | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | 2020 | | 2019 | | 2018 | | Healthcare cost trend rate assumed for next year | | 6.50 | % | 7.00 | % | 7.00 | % | | 6.25 | % | 6.50 | % | 7.00 | % | Rate to which the cost trend is assumed to decline (the ultimate trend rate) | | 5.00 | % | 5.00 | % | 5.00 | % | | 5.00 | % | 5.00 | % | 5.00 | % | Year that the rate reaches the ultimate trend rate | | 2026 | | 2026 | | 2026 | | | 2026 | | 2026 | | 2026 | |
A one percentage-point change in the assumed healthcare cost trend rates would have had the following pre-tax effect:
| | | | | | | | | One Percentage- | | One Percentage- | (dollars in thousands) | | Point Increase | | Point Decrease | Effect on 2019 total of service and interest cost components | | $ | 75 | | $ | (67) | Effect on postretirement benefit obligation at December 31, 2019 | | | 353 | | | (328) |
Plan Assets The Company’s pension plan assets were allocated as follows as of December 31, 20192020 and 2018:2019: | | | | | | | | | | | | | Asset Allocation | | | Asset Allocation | | | | 2019 | | 2018 | | | 2020 | | 2019 | | Equity securities | | 31 | % | 29 | % | | 13 | % | 31 | % | Debt securities | | 66 | % | 69 | % | | 85 | % | 66 | % | Other securities | | 3 | % | 2 | % | | 2 | % | 3 | % | Total | | 100 | % | 100 | % | | 100 | % | 100 | % |
There were 0 holdings of FHI or BNPP stock included in equity securities at December 31, 20192020 and 2018.2019. The assets within the pension plan are managed in accordance with ERISA. The objective of the plan is to achieve, over full market cycles, a compounded annual rate of return equal to or greater than the pension plan’s expected long-term rate of return. The pension plan’s participants recognize that capital markets can be unpredictable and that any investment could result in periods where the market value of the pension plan’s assets will decline in value. Asset allocation is likely to be the primary determinant of the pension plan’s return and the associated volatility of returns for the pension plan. The Company estimated the long-term rate of return for the 20192020 net periodic pension cost to be 4.75%4.40%. The return was selected based on a model of U.S. capital market assumptions with expected returns reflecting the anticipated asset allocation of the pension plan. The target asset allocation for the pension plan at December 31, 2019,2020, was as follows: | | | | | | Target | | | Allocation | Equity securities | | 3010
| % | Debt securities | | 6888
| % | Other securities | | 2 | % |
Estimated Future Benefit Payments The following table presents benefit payments that are expected to be paid over the next ten years, giving consideration to expected future service as appropriate: | | | | | | | | | | | | | | | Pension | | Other | | Pension | | Other | (dollars in thousands) | | Benefits | | Benefits | | Benefits | | Benefits | 2020 | | $ | 16,120 | | $ | 1,205 | | 2021 | | | 15,902 | | | 1,315 | | $ | 15,861 | | $ | 1,227 | 2022 | | | 15,580 | | | 1,410 | | | 15,608 | | | 1,324 | 2023 | | | 15,176 | | | 1,487 | | | 15,238 | | | 1,412 | 2024 | | | 14,739 | | | 1,546 | | | 14,829 | | | 1,480 | 2025 to 2029 | | | 69,769 | | | 8,085 | | 2025 | | | | 14,960 | | | 1,504 | 2026 to 2030 | | | | 67,898 | | | 7,960 |
Fair Value Measurement of Plan Assets The Company’s overall investment strategy includes a wide diversification of asset types, fund strategies and fund managers. Investments in mutual funds and exchange-traded funds consist primarily of investments in large-cap companies located in the United States. Fixed income securities include U.S. government agencies and corporate bonds of companies from diversified industries.
The fair values of the Company’s pension plans assets at December 31, 2019 and 2018, by asset class, were as follows:
| | | | | | | | | | | | | | | December 31, 2019 | | | Quoted Prices | | Significant | | | | | | | In Active | | Other | | Significant | | | | | Markets for | | Observable | | Unobservable | | | | | Identical Assets | | Inputs | | Inputs | | | (dollars in thousands) | | (Level 1) | | (Level 2) | | (Level 3) | | Total | Asset classes: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 2,824 | | $ | — | | $ | — | | $ | 2,824 | Fixed income - U.S. Treasury securities | | | — | | | 4,053 | | | — | | | 4,053 | Fixed income - U.S. government agency securities | | | — | | | 3,504 | | | — | | | 3,504 | Fixed income - U.S. corporate securities | | | — | | | 58,808 | | | — | | | 58,808 | Fixed income - municipal securities | | | — | | | 484 | | | — | | | 484 | Fixed income - mutual funds | | | 6,204 | | | — | | | — | | | 6,204 | Fixed income - international securities | | | 1,544 | | | — | | | — | | | 1,544 | Equity - large-cap exchange-traded funds | | | 23,278 | | | — | | | — | | | 23,278 | Equity - mid-cap exchange-traded funds | | | 3,379 | | | — | | | — | | | 3,379 | Equity - small-cap exchange-traded funds | | | 1,645 | | | — | | | — | | | 1,645 | Equity - international funds | | | 6,936 | | | — | | | — | | | 6,936 | Total | | $ | 45,810 | | $ | 66,849 | | $ | — | | $ | 112,659 |
| | | | | | | | | | | | | | | December 31, 2018 | | | Quoted Prices | | Significant | | | | | | | In Active | | Other | | Significant | | | | | Markets for | | Observable | | Unobservable | | | | | Identical Assets | | Inputs | | Inputs | | | (dollars in thousands) | | (Level 1) | | (Level 2) | | (Level 3) | | Total | Asset classes: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 2,428 | | $ | — | | $ | — | | $ | 2,428 | Fixed income - U.S. Treasury securities | | | — | | | 4,450 | | | — | | | 4,450 | Fixed income - U.S. government agency securities | | | — | | | 3,565 | | | — | | | 3,565 | Fixed income - U.S. corporate securities | | | — | | | 53,721 | | | — | | | 53,721 | Fixed income - municipal securities | | | — | | | 451 | | | — | | | 451 | Fixed income - mutual funds | | | 6,272 | | | — | | | — | | | 6,272 | Equity - large-cap mutual funds | | | 8,831 | | | — | | | — | | | 8,831 | Equity - large-cap exchange-traded funds | | | 10,482 | | | — | | | — | | | 10,482 | Equity - mid-cap exchange-traded funds | | | 2,544 | | | — | | | — | | | 2,544 | Equity - small-cap exchange-traded funds | | | 1,176 | | | — | | | — | | | 1,176 | Equity - international funds | | | 5,661 | | | — | | | — | | | 5,661 | Total | | $ | 37,394 | | $ | 62,187 | | $ | — | | $ | 99,581 |
The fair values of the Company’s pension plan assets at December 31, 2020 and 2019, by asset class, were as follows: | | | | | | | | | | | | | | | December 31, 2020 | | | Quoted Prices | | Significant | | | | | | | In Active | | Other | | Significant | | | | | Markets for | | Observable | | Unobservable | | | | | Identical Assets | | Inputs | | Inputs | | | (dollars in thousands) | | (Level 1) | | (Level 2) | | (Level 3) | | Total | Asset classes: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 2,576 | | $ | — | | $ | — | | $ | 2,576 | Fixed income - U.S. Treasury securities | | | — | | | 6,776 | | | — | | | 6,776 | Fixed income - U.S. government agency securities | | | — | | | 12,441 | | | — | | | 12,441 | Fixed income - U.S. corporate securities | | | — | | | 70,401 | | | — | | | 70,401 | Fixed income - municipal securities | | | — | | | 521 | | | — | | | 521 | Fixed income - mutual funds | | | 5,626 | | | — | | | — | | | 5,626 | Fixed income - international securities | | | 1,980 | | | — | | | — | | | 1,980 | Equity - large-cap exchange-traded funds | | | 9,321 | | | — | | | — | | | 9,321 | Equity - mid-cap exchange-traded funds | | | 1,566 | | | — | | | — | | | 1,566 | Equity - small-cap exchange-traded funds | | | 785 | | | — | | | — | | | 785 | Equity - international funds | | | 2,802 | | | — | | | — | | | 2,802 | Total | | $ | 24,656 | | $ | 90,139 | | $ | — | | $ | 114,795 |
| | | | | | | | | | | | | | | December 31, 2019 | | | Quoted Prices | | Significant | | | | | | | In Active | | Other | | Significant | | | | | Markets for | | Observable | | Unobservable | | | | | Identical Assets | | Inputs | | Inputs | | | (dollars in thousands) | | (Level 1) | | (Level 2) | | (Level 3) | | Total | Asset classes: | | | | | | | | | | | | | Cash and cash equivalents | | $ | 2,824 | | $ | — | | $ | — | | $ | 2,824 | Fixed income - U.S. Treasury securities | | | — | | | 4,053 | | | — | | | 4,053 | Fixed income - U.S. government agency securities | | | — | | | 3,504 | | | — | | | 3,504 | Fixed income - U.S. corporate securities | | | — | | | 58,808 | | | — | | | 58,808 | Fixed income - municipal securities | | | — | | | 484 | | | — | | | 484 | Fixed income - mutual funds | | | 6,204 | | | — | | | — | | | 6,204 | Fixed income - international securities | | | 1,544 | | | — | | | — | | | 1,544 | Equity - large-cap exchange-traded funds | | | 23,278 | | | — | | | — | | | 23,278 | Equity - mid-cap exchange-traded funds | | | 3,379 | | | — | | | — | | | 3,379 | Equity - small-cap exchange-traded funds | | | 1,645 | | | — | | | — | | | 1,645 | Equity - international funds | | | 6,936 | | | — | | | — | | | 6,936 | Total | | $ | 45,810 | | $ | 66,849 | | $ | — | | $ | 112,659 |
NaN fair value measurements used Level 3 inputs as of December 31, 20192020 and 2018.2019. The plan’s investments in fixed income securities represent approximately 66.2%85.1% and 68.7%66.2% of total plan assets as of December 31, 20192020 and 2018,2019, respectively, which is the most significant concentration of risk in the plan. Valuation Methodologies Cash and cash equivalents — includes investments ininstitutional money market funds. Carryingfunds, whose carrying value is a reasonable estimate ofrepresents fair value based on thebecause of their short-term naturematurities of the instruments.instruments held by these funds. U.S. Treasury securities — includes securities issued by the U.S. government valued at fair value based on observable market prices for similar securities or other market observable inputs. U.S. government agency securities — includes investment-grade debt securities issued by U.S. government agencies. These securities are valued at fair value based upon the quoted market values of the underlying net assets. U.S. corporate securities — includes investment-grade debt securities issued by U.S. corporations. These securities are valued at fair value based on observable market prices for similar securities or other market observable inputs. Municipal securities — includes bonds issued by a city or other local government, or their agencies. Potential issuers of municipal bonds include cities, counties, redevelopment agencies, special-purpose districts, school districts, public utility districts, publicly owned airports and seaports, and any other governmental entity (or group of governments) below the state level. Municipal bonds may be general obligations of the issuer or secured by specified revenues. These securities are valued at fair value based on observable market prices for similar securities or other market observable inputs. Mutual funds — includes an open-end fixed-income fund benchmarked to the Barclay’s Capital U.S. Government/Credit Bond Index. At least 80% of its assets are high-grade corporate bonds and U.S. government debt obligations. The fair value is based upon the quoted market values of the underlying net assets. Large-cap mutual fundsInternational securities — includes open-end equity funds holding a diversified portfolio of large-cap domestic equity securities. The portfolio has a bias towards stocks with growth characteristics and stocks with high cash flow and growing dividends.investment-grade debt securities issued by international corporations. The fair value is based upon the quoted market values of the underlying net assets.
Large-cap exchange-traded fund — includes an exchange-traded fund which invests mainly in U.S. large-cap stocks such as those in the S&P 500 index. The fair value is based upon the quoted market values of the underlying net assets. Mid-cap exchange-traded funds — includes broadly-diversified exchange-traded funds which invest in U.S. mid-cap stocks such as those in the S&P 400 Mid Cap index. The fair value is based upon the quoted market values of the underlying net assets. Small-cap exchange-traded funds — includes broadly-diversified exchange-traded funds which invest in U.S. small-cap stocks such as those in the S&P 600 Small Cap index. The fair value is based upon the quoted market values of the underlying net assets.
International funds — includes well-diversified exchange-traded funds tracking broad-based international equity indexes. The fair value is based upon the quoted market values of the underlying net assets. 16. Income Taxes On December 22, 2017, President Trump signed into law the Tax Act. The Tax Act made many significant amendments to the Internal Revenue Code of 1986, as amended (the “Code”), including reducing the corporate tax rate from 35% to 21%, effective January 1, 2018. GAAP requires that companies record and reflect the impact of the Tax Act in their financial statements for the quarter during which the Tax Act becomes law, even if provisions of the Tax Act become effective at a future date. Accordingly, the Company reported the impact of the Tax Act on its results of operations in its consolidated financial statements for the fourth quarter and year ended December 31, 2017. The reduction in the corporate tax rate under the Tax Act required a one-time revaluation of certain tax-related assets, which resulted in the Company recording $47.6 million in additional income tax expense in our consolidated statements of income in the fourth quarter of 2017.
For the years ended December 31, 2020, 2019 2018 and 2017,2018, the provision (benefit) for income taxes was comprised of the following: | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | | 2020 | | 2019 | | 2018 | | Current: | | | | | | | | | | | | | | | | | | | | | Federal | | $ | 56,450 | | $ | 69,477 | | $ | 101,162 | | | $ | 55,535 | | $ | 56,450 | | $ | 69,477 | | State and local | | | 23,796 | | | 27,909 | | | 24,595 | | | | 21,831 | | | 23,796 | | | 27,909 | | Total current | | | 80,246 | | | 97,386 | | | 125,757 | | | | 77,366 | | | 80,246 | | | 97,386 | | Deferred: | | | | | | | | | | | | | | | | | | | | | Federal | | | 14,047 | | | (2,043) | | | 58,732 | | | | (10,638) | | | 14,047 | | | (2,043) | | State and local | | | 3,013 | | | (1,559) | | | 184 | | | | (8,758) | | | 3,013 | | | (1,559) | | Total deferred | | | 17,060 | | | (3,602) | | | 58,916 | | | | (19,396) | | | 17,060 | | | (3,602) | | Total provision for income taxes | | $ | 97,306 | | $ | 93,784 | | $ | 184,673 | | | $ | 57,970 | | $ | 97,306 | | $ | 93,784 | |
The Company files Federal and state income tax returns for its subsidiaries. The Company’s subsidiary also files income tax returns in Guam, Saipan and Saipan.certain other state jurisdictions. The Company had a current income tax receivable due from various jurisdictions of $24.4$19.0 million and $25.3$24.4 million as of December 31, 20192020 and 2018,2019, respectively, for its share of consolidated and combined tax overpayments that had not yet been received. The components of net deferred income tax assets and liabilities at December 31, 20192020 and 2018,2019, were as follows: | | | | | | | | | | | | | | | December 31, | | December 31, | (dollars in thousands) | | 2019 | | 2018 | | 2020 | | 2019 | Assets: | | | | | | | | | | | | | Deferred compensation expense | | $ | 56,148 | | $ | 56,989 | | $ | 57,727 | | $ | 56,148 | Allowance for loan and lease losses and nonperforming assets | | | 35,195 | | | 38,245 | | Allowance for credit losses and nonperforming assets | | | | 63,899 | | | 35,195 | Lease liabilities | | | 11,951 | | | — | | | 10,839 | | | 11,951 | Investment securities | | | 2,474 | | | 45,846 | | | — | | | 2,474 | State income taxes | | | 3,338 | | | 5,378 | | | 4,243 | | | 3,338 | Total deferred income tax assets before valuation allowance | | | 109,106 | | | 146,458 | | | 136,708 | | | 109,106 | Valuation allowance | | | (1,393) | | | (1,901) | | | (1,675) | | | (1,393) | Total deferred income tax assets after valuation allowance | | | 107,713 | | | 144,557 | | | 135,033 | | | 107,713 | Liabilities: | | | | | | | | | | | | | Leases | | | (14,873) | | | (10,597) | | | (18,583) | | | (14,873) | Investment securities | | | | (19,965) | | | — | Deferred income | | | (16,069) | | | (15,471) | | | (11,399) | | | (16,069) | Lease right-of-use assets | | | (11,931) | | | — | | | (10,736) | | | (11,931) | Intangible assets | | | (500) | | | (788) | | | (604) | | | (500) | Other | | | (10,570) | | | (9,852) | | | (19,222) | | | (10,570) | Total deferred income tax liabilities | | | (53,943) | | | (36,708) | | | (80,509) | | | (53,943) | Net deferred income tax assets | | $ | 53,770 | | $ | 107,849 | | $ | 54,524 | | $ | 53,770 |
Net deferred income tax assets were included in other assets in the consolidated balance sheets as of December 31, 20192020 and 2018.2019. Management evaluated the deferred income tax assets for recoverability by considering negative and positive evidence. Negative evidence included the uncertainty of generating future capital gains and restrictions on the ability to sell low-income housing investments during periods when carrybacks of capital losses are allowed. Positive evidence included the generation of capital gains in the current year and carryback years. Based on the weight of all available evidence, management determined a valuation allowance to offset deferred tax assets related to investments in low-income housing projects that can only be utilized to offset capital gains was required. Management further concluded it is more likely than not that the remaining deferred tax assets will be realized through carryback to taxable income in prior years, future reversals of existing taxable temporary differences, and projected future taxable income. Consequently, the remaining deferred income tax assets are not subject to a valuation allowance. The following analysis reconciles the Federal statutory income tax rate to the effective income tax rate for the years ended December 31, 2020, 2019 2018 and 2017:2018: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | | (dollars in thousands) | | Amount | | Percent | | | Amount | | Percent | | | Amount | | Percent | | | Amount | | Percent | | | Amount | | Percent | | | Amount | | Percent | | Federal statutory income tax expense and rate | | $ | 80,157 | | 21.00 | % | | $ | 75,217 | | 21.00 | % | | $ | 128,924 | | 35.00 | % | | $ | 51,182 | | 21.00 | % | | $ | 80,157 | | 21.00 | % | | $ | 75,217 | | 21.00 | % | State and local taxes, net of federal income tax benefit | | | 21,179 | | 5.55 | | | | 20,817 | | 5.81 | | | | 16,106 | | 4.37 | | | | 10,327 | | 4.24 | | | | 21,179 | | 5.55 | | | | 20,817 | | 5.81 | | Impact of Tax Reform | | | — | | — | | | | — | | — | | | | 47,598 | | 12.92 | | | Tax credits | | | | (3,914) | | (1.60) | | | | (400) | | (0.10) | | | | (61) | | (0.02) | | Nontaxable income | | | (3,269) | | (0.86) | | | | (2,037) | | (0.57) | | | | (4,974) | | (1.35) | | | | (3,678) | | (1.51) | | | | (3,269) | | (0.86) | | | | (2,037) | | (0.57) | | Other | | | (761) | | (0.20) | | | | (213) | | (0.06) | | | | (2,981) | | (0.81) | | | | 4,053 | | 1.66 | | | | (361) | | (0.10) | | | | (152) | | (0.04) | | Income tax expense and effective income tax rate | | $ | 97,306 | | 25.49 | % | | $ | 93,784 | | 26.18 | % | | $ | 184,673 | | 50.13 | % | | $ | 57,970 | | 23.79 | % | | $ | 97,306 | | 25.49 | % | | $ | 93,784 | | 26.18 | % |
The Company is subject to examination by the Internal Revenue Service (“IRS”) and tax authorities in states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. The Company’s 2010, 2011, 2016 and 2017 first short-period tax returns are currently under IRS examination. In addition, refund claims and tax returns for certain years are being reviewed by state jurisdictions. No material adjustments are anticipated as a result of these examinations and reviews. The Company’s income tax returns for 20162017 and subsequent tax years generally remain subject to examination by U.S. federal and foreign jurisdictions, and 20152016 and subsequent years are subject to examination by state taxing authorities. A reconciliation of the amount of unrecognized tax benefits is as follows for the years ended December 31, 2020, 2019 2018 and 2017:2018: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31, | | | Year Ended December 31, | | | | 2019 | | 2018 | | 2017 | | | 2020 | | 2019 | | 2018 | | | | | | | Interest | | | | | | | | Interest | | | | | | | | Interest | | | | | | | | | Interest | | | | | | | | Interest | | | | | | | | Interest | | | | | | | | | | and | | | | | | | | and | | | | | | | | and | | | | | | | | | and | | | | | | | | and | | | | | | | | and | | | | | (dollars in thousands) | | Tax | | Penalties | | Total | | Tax | | Penalties | | Total | | Tax | | Penalties | | Total | | | Tax | | Penalties | | Total | | Tax | | Penalties | | Total | | Tax | | Penalties | | Total | | Balance at beginning of year | | $ | 131,570 | | $ | 12,524 | | $ | 144,094 | | $ | 130,619 | | $ | 10,660 | | $ | 141,279 | | $ | 127,085 | | $ | 9,965 | | $ | 137,050 | | | $ | 134,312 | | $ | 14,701 | | $ | 149,013 | | $ | 131,570 | | $ | 12,524 | | $ | 144,094 | | $ | 130,619 | | $ | 10,660 | | $ | 141,279 | | Additions for current year tax positions | | | 1,038 | | | — | | | 1,038 | | | 2,260 | | | — | | | 2,260 | | | 2,727 | | | — | | | 2,727 | | | | 1,426 | | | — | | | 1,426 | | | 1,038 | | | — | | | 1,038 | | | 2,260 | | | — | | | 2,260 | | Additions for Reorganization Transactions | | | — | | | 986 | | | 986 | | | — | | | 832 | | | 832 | | | — | | | 226 | | | 226 | | | | — | | | 1,479 | | | 1,479 | | | — | | | 986 | | | 986 | | | — | | | 832 | | | 832 | | Additions for prior years' tax positions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | New uncertain tax positions identified | | | 1,894 | | | — | | | 1,894 | | | — | | | — | | | — | | | — | | | — | | | — | | | | — | | | — | | | — | | | 1,894 | | | — | | | 1,894 | | | — | | | — | | | — | | Accrual of interest and penalties | | | — | | | 1,280 | | | 1,280 | | | — | | | 1,159 | | | 1,159 | | | — | | | 621 | | | 621 | | | | — | | | 2,812 | | | 2,812 | | | — | | | 1,280 | | | 1,280 | | | — | | | 1,159 | | | 1,159 | | Other | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,152 | | | — | | | 1,152 | | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Reductions for prior years' tax positions: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Expiration of statute of limitations | | | (190) | | | (89) | | | (279) | | | (280) | | | (127) | | | (407) | | | (345) | | | (152) | | | (497) | | | | (143) | | | (66) | | | (209) | | | (190) | | | (89) | | | (279) | | | (280) | | | (127) | | | (407) | | Other | | | — | | | — | | | — | | | (1,029) | | | — | | | (1,029) | | | — | | | — | | | — | | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,029) | | | — | | | (1,029) | | Balance at December 31, | | $ | 134,312 | | $ | 14,701 | | $ | 149,013 | | $ | 131,570 | | $ | 12,524 | | $ | 144,094 | | $ | 130,619 | | $ | 10,660 | | $ | 141,279 | | | $ | 135,595 | | $ | 18,926 | | $ | 154,521 | | $ | 134,312 | | $ | 14,701 | | $ | 149,013 | | $ | 131,570 | | $ | 12,524 | | $ | 144,094 | |
Included in the balance of unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018, and 2017, was $22.2 million, $19.1 million $16.2 million and $14.9$16.2 million, respectively, of unrecognized tax benefits that, if recognized, would impact the effective tax rate. In connection with the Reorganization Transactions discussed below, the Company recorded unrecognized tax benefits and interest and penalties of $121.4 million and $7.0 million, respectively. Included in the balance of the unrecognized tax benefits as of both December 31, 20192020 and 2018,2019, was $93.9 million attributable to tax refund claims with respect to tax years 2005 through 2012 in the State of California. Such refund claims were filed by the Company in 2015, on behalf of the Company and its affiliates, including BOW, concerning the determination of taxes for which 0 benefit is currently recognized. It is reasonably possible that the amount of unrecognized tax benefits could decrease within the next 12 months by as much as $1.4$2.4 million of taxes and $0.9 million of accrued interest and penalties as a result of settlements and the expiration of the statute of limitations in various states. The Company recognizes interest and penalties attributable to both unrecognized tax benefits and undisputed tax adjustments in the provision for income taxes. For the years ended December 31, 2020, 2019 2018 and 2017,2018, the Company recorded $4.4 million, $2.4 million $1.0 million and $0.7$1.0 million, respectively, of net expense attributable to interest and penalties. The Company had a liability of $16.3$20.6 million and $13.8$16.3 million as of December 31, 20192020 and 2018,2019, respectively, accrued for interest and penalties, of which $14.7$18.9 million and $12.5$14.7 million as of December 31, 20192020 and 2018,2019, respectively, were attributable to unrecognized tax benefits and the remainder was attributable to tax adjustments which are not expected to be in dispute. Prior to the Reorganization Transactions, the Company filed consolidated U.S. Federal and combined state tax returns that incorporated the tax receivables and unrecognized tax benefits of FHB and BOW. The consummation of the Reorganization Transactions did not relieve the Company of the pre-Reorganization Transactions tax receivables and unrecognized tax benefits recognized by BOW that were included in the Company's consolidated and combined tax returns. As a result, on April 1, 2016, the Company recorded $72.8 million related to current tax receivables, $116.6 million related to unrecognized tax benefits, and an indemnification payable of $28.6 million. As of both December 31, 20192020 and 2018,2019, the Company maintained balances of $93.1 million related to current tax receivables. As of December 31, 20192020 and 2018,2019, the Company maintained balances of $118.1$119.3 million and $117.3$118.1 million, respectively, related to unrecognized tax benefits, and an indemnification receivable of $25.0$26.1 million and $24.2$25.0 million, respectively. Additionally, in connection with the Reorganization Transactions, the Company has incurred certain tax-related liabilities related to the distribution of its interest in BWHI amounting to $95.4 million. The amount necessary to pay the distribution taxes (net of the expected federal tax benefit of $33.4 million) was paid by BNPP to the Company on April 1, 2016. The Company reported total distribution taxes of $92.1 million in the 2016 tax returns of various state and local jurisdictions, and reimbursed BWHI approximately $2.1 million pursuant to a tax sharing agreement entered into on April 1, 2016 and pursuant to certain tax allocation agreements entered into among the parties. The Company expects that any future adjustment to such taxes will be similarly reimbursed to, or funded by, BWHI or its affiliates. Accordingly, the assumption of the pre-Reorganization Transactions tax receivables, unrecognized tax benefits and distribution tax liabilities and the offsetting indemnification receivables or payables were reflected as equity contributions and distributions on April 1, 2016. The reimbursement of distribution taxes to BWHI was also reflected as an adjustment to equity. If there are any future adjustments to the indemnified tax receivables or unrecognized tax benefits, including as a result of the IRS audit of the Company’s 2016 income tax returns, an offsetting adjustment to the indemnification receivables or payables will be recorded to the provision for income taxes and other noninterest income or expense. For the years ended December 31, 2020, 2019 2018 and 2017,2018, the Company recorded nil,$1.2 million, NaN and $1.5 million and $3.9 million, respectively, of such adjustments through the provision for income taxes and noninterest income. 17. Derivative Financial Instruments The Company enters into derivative contracts primarily to manage its interest rate risk, as well as for customer accommodation purposes. Derivatives used for risk management purposes consist of interest rate swaps that are designated as either a fair value hedge or a cash flow hedge. The derivatives are recognized on the consolidated balance sheets as either assets or liabilities at fair value. Derivatives entered into for customer accommodation purposes consist of various free-standing interest rate derivative products and foreign exchange contracts. 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 following table summarizes notional amounts and fair values of derivatives held by the Company as of December 31, 20192020 and 2018:2019: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | December 31, 2018 | | December 31, 2020 | | December 31, 2019 | | | | | | Fair Value | | | | | Fair Value | | | | | Fair Value | | | | | Fair Value | | | Notional | | Asset | | Liability | | Notional | | Asset | | Liability | | Notional | | Asset | | Liability | | Notional | | Asset | | Liability | (dollars in thousands) | | Amount | | Derivatives(1) | | Derivatives(2) | | Amount | | Derivatives(1) | | Derivatives(2) | | Amount | | Derivatives(1) | | Derivatives(2) | | Amount | | Derivatives(1) | | Derivatives(2) | Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | $ | 23,190 | | $ | — | | $ | (682) | | $ | 41,317 | | $ | 31 | | $ | (44) | | $ | 22,451 | | $ | — | | $ | (1,276) | | $ | 23,190 | | $ | — | | $ | (682) | Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | | 2,818,803 | | | 63,527 | | | — | | | 2,269,247 | | | 12,305 | | | (12,007) | | | 3,002,333 | | | 129,888 | | | — | | | 2,818,803 | | | 63,527 | | | — | Funding swap | | | 82,900 | | | — | | | (4,233) | | | 62,039 | | | — | | | (2,607) | | | 92,647 | | | — | | | (4,554) | | | 82,900 | | | — | | | (4,233) | Interest rate caps and floors | | | | 148,800 | | | 7 | | | (7) | | | — | | | — | | | — | Foreign exchange contracts | | | 1,428 | | | 12 | | | — | | | 1,191 | | | — | | | (34) | | | 326 | | | — | | | — | | | 1,428 | | | 12 | | | — |
(1) | The positive fair values of derivative assets are included in other assets. |
(2) | The negative fair values of derivative liabilities are included in other liabilities. |
Certain interest rate swaps noted above, are cleared through clearinghouses, rather than directly with counterparties. Those transactions cleared through a clearinghouse require initial margin collateral and variation margin payments depending on the contracts being in a net asset or liability position. The amount of initial margin cash collateral posted by the Company was $8.7$4.8 million and $2.1$8.7 million as of December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2018,2019, the variation margin was $129.9 million and $63.5 million, respectively. In 2017 and 2018, eachAs of the Chicago Mercantile Exchange (“CME”) and the London Clearing House (“LCH”) amended its rulebook to legally characterize variation margin payments for derivative contracts that are referred to as settled-to-market as settlements of the derivative’s mark-to-market exposure and not collateral. Based on these changes,December 31, 2020, the Company has treated the CMEpledged $30.8 million in financial instruments and LCH variation margins$25.2 million in cash as settlements, which has resulted in a decrease in the Company’s cash collateral and a corresponding decrease in the Company’s derivative asset and liability.for interest rate swaps. As of December 31, 2019, the Company pledged $29.9 million in financial instruments and 2018, the CME variation margin was $1.0$13.4 million and $0.5 million, respectively.in cash as collateral for interest rate swaps. As of December 31, 2020 and 2019, the cash collateral includes the excess initial margin for interest rate swaps cleared through clearinghouses and 2018, the LCH variation margin was $62.5 million and $0.6 million, respectively.cash collateral for interest rate swaps with financial institution counterparties.
As of December 31, 2019, the Company pledged $29.9 million in financial instruments and $13.4 million in cash as collateral for interest rate swaps. As of December 31, 2018, the Company pledged $26.2 million in financial instruments and $2.6 million in cash as collateral for interest rate swaps. As of December 31, 2019 and 2018, the cash collateral includes the excess initial margin for interest rate swaps cleared through clearinghouses and cash collateral for interest rate swaps with financial institution counterparties.
Fair Value Hedges To manage the risk related to the Company’s net interest margin, interest rate swaps are utilized to hedge certain fixed-rate loans. These swaps have maturity, amortization and prepayment features that correspond to the loans hedged and are designated and qualify as fair value hedges. Any gain or loss on the swaps, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, is recognized in current period earnings. At December 31, 2020 and 2019, the Company carried 1 interest rate swap with a notional amount of $22.5 million and $23.2 million, respectively, with a negative fair value of $1.3 million and $0.7 million, respectively, that was categorized as a fair value hedge for a commercial and industrial loan. The Company received a USD Prime floating rate and paid a fixed rate of 2.90%. The swap matures in 2023. At December 31, 2018, the Company carried interest rate swaps with notional amounts totaling $41.3 million with a positive fair value of nil and a negative fair value of nil that were categorized as fair value hedges for commercial and industrial loans and commercial real estate loans. The following table shows the net gains and losses recognized in income related to derivatives in fair value hedging relationships for the years ended December 31, 2020, 2019 2018 and 2017:2018: | | | | | | | | | | | | | | | | | | | | | | | | | | | Gains (losses) recognized in | | | | | | | | | | | | Gains (losses) recognized in | | | | | | | | | the consolidated statements | | December 31, | | | the consolidated statements | | December 31, | | (dollars in thousands) | | of income line item | | 2019 | | 2018 | | 2017 | | | of income line item | | 2020 | | 2019 | | 2018 | | Gains (losses) on fair value hedging relationships recognized in interest income(1): | | | | | | | | | | | | | | | | | | | | | | | | | Recognized on interest rate swap | | Loans and lease financing | | $ | (671) | | $ | — | | $ | — | | | Loans and lease financing | | $ | (594) | | $ | (671) | | $ | — | | Recognized on hedged item | | Loans and lease financing | | | 735 | | | — | | | — | | | Loans and lease financing | | | 470 | | | 735 | | | — | | | | | | | | | | | | | | | | | | | | | | | | | | | Gains (losses) on fair value hedging relationships recognized in noninterest income(2): | | | | | | | | | | | | | | | | | | | | | | | | | Recognized on interest rate swap | | Other | | $ | — | | $ | 629 | | $ | 846 | | | Other | | $ | — | | $ | — | | $ | 629 | | Recognized on hedged item | | Other | | | — | | | (723) | | | (841) | | | Other | | | — | | | — | | | (723) | |
(1) | In connection with the adoption of ASU 2017-12, beginning January 1, 2019, gain (loss) amounts for the interest rate swap qualifying as fair value hedging and the hedged item are included in interest income from loans and lease financing. |
(2) | Prior to January 1, 2019, gain (loss) amounts for the interest rate swaps qualifying as fair value hedging and the hedged items were included in other noninterest income. |
As of December 31, 20192020 and 2018,2019, the following amounts were recorded in the consolidated balance sheets related to the cumulative basis adjustments for fair value hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cumulative Amount of Fair Value | | | | Cumulative Amount of Fair Value | | | | | | | | | | | Hedging Adjustment Included in the | | | | | | | | | | Hedging Adjustment Included in the | | | Carrying Amount of the Hedged Asset | | Carrying Amount of the Hedged Asset | | Carrying Amount of the Hedged Asset | | Carrying Amount of the Hedged Asset | (dollars in thousands) | | December 31, 2019 | | December 31, 2018 | | December 31, 2019 | | December 31, 2018 | | December 31, 2020 | | December 31, 2019 | | December 31, 2020 | | December 31, 2019 | Line item in the consolidated balance sheets in which the hedged item is included | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Loans and leases | | $ | 24,415 | | $ | 42,496 | | $ | 1,017 | | $ | 293 | | $ | 24,355 | | $ | 24,415 | | $ | 1,487 | | $ | 1,017 |
Cash Flow Hedges During 2018, and 2017, the Company carried 2 interest rate swaps with notional amounts totaling $150.0 million, in order to reduce exposure to interest rate increases associated with short-term fixed-rate liabilities. The Company received 6-month LIBOR and paid fixed rates ranging from 2.98% to 3.03%. The swaps matured in December 2018. As of December 31, 20192020 and 2018,2019, the Company held 0 cash flow hedges. The Company utilized interest rate swaps to reduce exposure to interest rates associated with short-term fixed-rate liabilities. The Company entered into interest rate swaps paying fixed rates and receiving LIBOR. The LIBOR index corresponded to the short-term fixed-rate nature of the liabilities being hedged. If interest rates rose, the increase in interest received on the swaps offset increases in interest costs associated with these liabilities. By hedging with interest rate swaps, the Company minimized the adverse impact on interest expense associated with increasing rates on short-term liabilities. The interest rate swaps were designated and qualified as cash flow hedges. The effective portion of the gain or loss on the interest rate swaps was reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affected earnings. During the year ended December 31, 2018, the pretax gain recognized in accumulated other comprehensive income of $7.6 million was reclassified into other noninterest income on the maturity dates of the cash flow hedges. The interest rate swaps designated as cash flow hedges resulted in net interest expense of $1.2 million and $2.4 million during the yearsyear ended December 31, 2018 and 2017, respectively.2018. The Company also recognized expenses related to the ineffective portion of the change in fair value of the cash flow hedges of nil and $0.1 million for the yearsyear ended December 31, 2018 and 2017, respectively.2018. The following table summarizes the effect of cash flow hedging relationships for the yearsyear ended December 31, 2018 and 2017:2018: | | | | | | | | | | | | December 31, | | | | (dollars in thousands) | | 2018 | | 2017 | | 2018 | Pretax gains recognized in other comprehensive income on derivatives (effective portion) | | $ | 1,475 | | $ | 2,473 | | $ | 1,475 | Pretax gain reclassified from accumulated other comprehensive income | | | (7,558) | | | — | | | (7,558) |
Free-Standing Derivative Instruments For the derivatives that are not designated as hedges, changes in fair value are reported in current period earnings. The following table summarizes the impact on pretax earnings of derivatives not designated as hedges, as reported on the consolidated statements of income for the years ended December 31, 2020, 2019 2018 and 2017:2018: | | | | | | | | | | | | | | | | | | | | | | | | | | | Net gains (losses) recognized | | | | | Net gains (losses) recognized | | | | | | | | | | | | | in the consolidated statements | | December 31, | | | in the consolidated statements | | December 31, | | (dollars in thousands) | | of income line item | | 2019 | | 2018 | | 2017 | | | of income line item | | 2020 | | 2019 | | 2018 | | Derivatives Not Designated As Hedging Instruments: | | | | | | | | | | | | | | | | | | | | | | | | | Interest rate swaps | | Other noninterest income | | $ | 16 | | $ | 574 | | $ | 819 | | | Other noninterest income | | $ | — | | $ | 16 | | $ | 574 | | Funding swap | | Other noninterest income | | | (5,355) | | | (172) | | | (169) | | | Other noninterest income | | | (4,641) | | | (5,355) | | | (172) | | Foreign exchange contracts | | Other noninterest income | | | 12 | | | (58) | | | 171 | | | Other noninterest income | | | — | | | 12 | | | (58) | |
As of December 31, 2020, the Company carried multiple interest rate swaps with notional amounts totaling $3.0 billion, all of which were related to the Company’s customer swap program, with a positive fair value of $129.9 million and a negative fair value of nil. The Company received floating rates ranging from 0.15% to 3.16% and paid fixed rates ranging from 2.02% to 5.78%. The swaps mature between 2021 and 2040. As of December 31, 2019, the Company carried multiple interest rate swaps with notional amounts totaling $2.8 billion, all of which were related to the Company’s customer swap program, with a positive fair value of $63.5 million and a negative fair value of nil.NaN. The Company received 1-month LIBOR and paid fixed rates ranging from 1.71% to 8.73%. The swaps mature between 2021 and 2039. As of December 31, 2018, the Company carried multiple interest rate swaps with notional amounts totaling $2.3 billion, including $2.2 billion related to the Company’s customer swap program, with a positive fair value of $12.3 million and a negative fair value of $12.0 million. The Company received 1-month LIBOR and paid fixed rates ranging from 2.02% to 5.78%. These swaps resulted in net interest expense of NaN, $0.5 millionNaN and $0.9$0.5 million for the years ended December 31, 2020, 2019, 2018, and 2017,2018, respectively. The Company’s customer swap program is designed by offering customers a variable-rate loan that is swapped to fixed-rate through an interest-rate swap. The Company simultaneously executes an offsetting interest-rate swap with a swap dealer. Upfront fees on the dealer swap are recorded in other noninterest income and totaled $8.3 million, $4.5 million $7.3 million and $6.7$7.3 million for the years ended December 31, 2019, 2018, and 2017, respectively. Interest rate swaps related to the program had asset fair values of $63.5 million and $12.3 million as of December 31, 2019 and 2018, respectively, and liability fair values of NaN and $11.2 million as of December 31,2020, 2019, and 2018, respectively. In conjunction with the 2016 sale of Class B restricted shares of common stock issued by Visa, the Company entered into a funding swap agreement with the buyer that requires payment to the buyer in the event Visa reduces each member bank’s Class B conversion rate to unrestricted Class A common shares. On June 28, 2018, Visa additionally funded its litigation escrow account, thereby reducing each member bank’s Class B conversion rate to unrestricted Class A common shares. Accordingly, on July 5, 2018, Visa announced a decrease in conversion rate from 1.6483 to 1.6298 effective June 28, 2018. In July 2018, the Company made a payment of approximately $0.7 million to the buyer as a result of the reduction in the Visa Class B conversion rate. On September 27, 2019, Visa additionally funded its litigation escrow account, thereby further reducing each member bank’s Class B conversion rate to unrestricted Class A common shares. Accordingly, on September 30, 2019, Visa announced a decrease in conversion rate from 1.6298 to 1.6228, effective September 27, 2019. In October 2019, the Company made a payment of approximately $0.3 million to the buyer as a result of the reduction in the Visa Class B conversion rate. Under the terms of the funding swap agreement, the Company will make monthly payments to the buyer based on Visa’s Class A stock price and the number of Visa Class B restricted shares that were sold until the date on which the covered litigation is settled. During the yearyears ended December 31, 2020 and 2019, the Company recorded a $4.5 million losslosses in other noninterest income of $4.8 million and $4.5 million, respectively, related to a revaluation adjustment to increase the fair value of the derivative liability (“Visa derivative”). The Visa derivative of $4.2$4.6 million and $2.6$4.2 million was included in the consolidated balance sheets at December 31, 20192020 and 2018,2019, respectively, to provide for the fair value of this liability. There were 0 sales of these shares prior to 2016. See “Note 22. Fair Value” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information. Counterparty Credit Risk By using derivatives, the Company is exposed to counterparty credit risk if counterparties to the derivative contracts do not perform as expected. If a counterparty fails to perform, the Company’s counterparty credit risk is equal to the amount reported as a derivative asset, net of cash or other collateral received, and net of derivatives in a loss position with the same counterparty to the extent master netting arrangements exist. The Company minimizes counterparty credit risk through credit approvals, limits, monitoring procedures, executing master netting arrangements and obtaining collateral, where appropriate. Counterparty credit risk related to derivatives is considered in determining fair value. The Company’s interest rate swap agreements include bilateral collateral agreements with collateral requirements which begin with exposures in excess of $0.5$0.3 million. For each counterparty, the Company reviews the interest rate swap collateral daily. Collateral for customer interest rate swap agreements, calculated as the pledged asset less loan balance, requires valuation of the pledged asset. Counterparty credit risk adjustments of $0.1 million were recognized during each of the years ended December 31, 2020, 2019 2018 and 2017.2018. Credit-Risk Related Contingent Features Certain of our derivative contracts contain provisions whereby if the Company’s credit rating were to be downgraded by certain major credit rating agencies as a result of a merger or material adverse change in the Company’s financial condition, the counterparty could require an early termination of derivative instruments in a net liability position. The aggregate fair value of all derivative instruments with such credit-risk related contingent features that are in a net liability position was $4.0$19.8 million and $0.8$4.0 million at December 31, 20192020 and 2018,2019, respectively, for which we posted $4.7$20.4 million and $0.5$4.7 million, respectively, in collateral in the normal course of business. If the Company’s credit rating had been downgraded on December 31, 20192020 and 2018,2019, we may have been required to settle the contract in an amount equal to its fair value. 18. Commitments and Contingent Liabilities Contingencies On November 2, 2020, a lawsuit was filed in Hawaii Circuit Court by a Bank customer related to the sale of credit facilities that the Bank had previously extended to the customer. The customer asserts claims against the Bank for interference with the customer’s contract and business opportunity, unfair methods of competition and declaratory and injunctive relief. The outcome of this legal proceeding is uncertain at this point. Based on information available to the Company at present, the Company cannot reasonably estimate a range of potential loss, if any, for this action. Accordingly, the Company has not recognized any liability associated with this action. Management disputes any wrongdoing and the case is being vigorously defended. On January 27, 2017, a putative class action lawsuit was filed by a Bank customer alleging that FHB improperly charges an overdraft fee in circumstances where an account had sufficient funds to cover the transaction at the time the transaction is authorized, but not at the time the transaction is presented for payment and that this practice constitutes an unjust and deceptive trade practice and a breach of contract. The lawsuit further alleged that FHB’s practice of assessing a one-time continuous negative balance overdraft fee on accounts remaining in a negative balance for a seven-day period constitutes a usurious interest charge and an unfair and deceptive trade practice. On October 2, 2018, the parties reached an agreement in principle to resolve this class action lawsuit. In connection with the anticipated settlement agreement, the Company recorded an expense of approximately $4.1 million during the year ended December 31, 2018. In August 2019, the court approved the settlement agreement executed by the parties, pursuant to which the Company funded a $4.1 million settlement account. During the year ended December 31, 2019, the Company received insurance proceeds of $0.7 million to partially cover the litigation expense incurred in the prior year. In addition to the litigation noted above, various other legal proceedings are pending or threatened against the Company. After consultation with legal counsel, management does not expect that the aggregate liability, if any, resulting from these proceedings would have a material effect on the Company’s consolidated financial position, results of operations or cash flows. Financial Instruments with Off-Balance Sheet Risk The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and commercial letters of credit which are not reflected in the consolidated financial statements. Unfunded Commitments to Extend Credit A commitment to extend credit is a legally binding agreement to lend funds to a customer, usually at a stated interest rate and for a specified purpose. Commitments are reported net of participations sold to other institutions. Such commitments have fixed expiration dates and generally require a fee. The extension of a commitment gives rise to credit risk. The actual liquidity requirements or credit risk that the Company will experience is expected to be lower than the contractual amount of commitments to extend credit because a significant portion of those commitments are expected to expire without being drawn upon. Certain commitments are subject to loan agreements containing covenants regarding the financial performance of the customer that must be met before the Company is required to fund the commitment. The Company uses the same credit policies in making commitments to extend credit as it does in making loans. In addition, the Company manages the potential credit risk in commitments to extend credit by limiting the total amount of arrangements, both by individual customer and in the aggregate, by monitoring the size and expiration structure of these portfolios and by applying the same credit standards maintained for all of its related credit activities. Commitments to extend credit are reported net of participations sold to other institutions of $94.1$93.1 million and $92.3$94.1 million at December 31, 20192020 and 2018,2019, respectively. Standby and Commercial Letters of Credit Standby letters of credit are issued on behalf of customers in connection with contracts between the customers and third parties. Under standby letters of credit, the Company assures that the third parties will receive specified funds if customers fail to meet their contractual obligations. The credit risk to the Company arises from its obligation to make payment in the event of a customer’s contractual default. Standby letters of credit are reported net of participations sold to other institutions of $9.0$11.0 million and $17.3$9.0 million at December 31, 20192020 and 2018,2019, respectively. The Company also had commitments for commercial and similar letters of credit. Commercial letters of credit are issued specifically to facilitate commerce whereby the commitment is typically drawn upon when the underlying transaction between the customer and a third-party is consummated. The maximum amount of potential future payments guaranteed by the Company is limited to the contractual amount of these letters. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held supports those commitments for which collateral is deemed necessary. The commitments outstanding as of December 31, 20192020 have maturities ranging from January 20202021 to May 2022. Substantially all fees received from the issuance of such commitments are deferred and amortized on a straight-line basis over the term of the commitment. Financial instruments with off-balance sheet risk at December 31, 20192020 and 20182019 were as follows: | | | | | | | | | | | | | | | December 31, | | December 31, | (dollars in thousands) | | 2019 | | 2018 | | 2020 | | 2019 | Financial instruments whose contract amounts represent credit risk: | | | | | | | | | | | | | Commitments to extend credit | | $ | 5,907,690 | | $ | 5,549,591 | | $ | 5,934,535 | | $ | 5,907,690 | Standby letters of credit | | | 181,412 | | | 204,324 | | | 185,108 | | | 181,412 | Commercial letters of credit | | | 7,334 | | | 7,535 | | | 3,834 | | | 7,334 |
Guarantees The Company sells residential mortgage loans in the secondary market primarily to The Federal National Mortgage Association (“FNMA” or “Fannie Mae”) and The Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie “Freddie Mac”) that may potentially require repurchase under certain conditions. This risk is managed through the Company’s underwriting practices. The Company services loans sold to investors and loans originated by other originators under agreements that may include repurchase remedies if certain servicing requirements are not met. This risk is managed through the Company’s quality assurance and monitoring procedures. Management does not anticipate any material losses as a result of these transactions.
Lease Commitments The Company’s lease commitments are discussed in “Note 14. Leases” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data.statements. Foreign Exchange Contracts The Company has forward foreign exchange contracts that represent commitments to purchase or sell foreign currencies at a future date at a specified price. The Company’s utilization of forward foreign exchange contracts is subject to the primary underlying risk of movements in foreign currency exchange rates and to additional counterparty risk should its counterparties fail to meet the terms of their contracts. Forward foreign exchange contracts are utilized to mitigate the Company’s risk to satisfy customer demand for foreign currencies and are not used for trading purposes. See “Note 17. Derivative Financial Instruments” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information. Reorganization Transactions In connection with the Reorganization Transactions as discussed in “Note 1. Organization and Summary of Significant Accounting Policies” in the notes to the consolidated financial statements, included in Item 8. Financial Statements and Supplementary Data, FHI (formerly BancWest) distributed its interest in BWHI (including BOW) to BNPP so that BWHI was held directly by BNPP (BWHI is now held indirectly by BNPP through its intermediate holding company). As a result of the Reorganization Transactions that occurred on April 1, 2016, various tax or other contingent liabilities could arise related to the business of BOW, or related to the Company’s operations prior to the restructuring when it was known as BancWest, including its then wholly owned subsidiary, BOW. The Company is not able to determine the ultimate outcome or estimate the amounts of these contingent liabilities, if any, at this time. 19. Revenue from Contracts with Customers In accordance with Topic 606, Revenue from Contracts with Customers, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. Disaggregation of Revenue
In 2019, the Company made changes to the internal measurement of segment operating profits for the purpose of evaluating segment performance and resource allocation. The Company has restated the selected financial information for the year ended December 31, 2018 in order to conform with the current presentation. See “Note 23. Reportable Operating Segments” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for further information.
Disaggregation of Revenue The following table summarizes the Company’s revenues, which includes net interest income on financial instruments and noninterest income, disaggregated by type of service and business segments for the years ended December 31, 2020, 2019 and 2018: | | | | | | | | | | | | | | | | Year Ended December 31, 2020 | | | | | | | | Treasury | | | | | | Retail | | Commercial | | and | | | | (dollars in thousands) | | Banking | | Banking | | Other | | Total | Net interest income(1) | | $ | 393,466 | | $ | 133,301 | | $ | 8,967 | | $ | 535,734 | | | | | | | | | | | | | | Service charges on deposit accounts | | | 25,326 | | | 1,305 | | | 1,538 | | | 28,169 | Credit and debit card fees | | | — | | | 48,999 | | | 4,373 | | | 53,372 | Other service charges and fees | | | 20,084 | | | 1,550 | | | 1,533 | | | 23,167 | Trust and investment services income | | | 35,652 | | | — | | | — | | | 35,652 | Other | | | 700 | | | 6,403 | | | 1,811 | | | 8,914 | Not in scope of Topic 606(1) | | | 16,264 | | | 19,945 | | | 11,897 | | | 48,106 | Total noninterest income | | | 98,026 | | | 78,202 | | | 21,152 | | | 197,380 | Total revenue | | $ | 491,492 | | $ | 211,503 | | $ | 30,119 | | $ | 733,114 |
| | | | | | | | | | | | | | | | Year Ended December 31, 2019 | | | | | | | | Treasury | | | | | | Retail | | Commercial | | and | | | | (dollars in thousands) | | Banking | | Banking | | Other | | Total | Net interest income(1) | | $ | 413,029 | | $ | 141,227 | | $ | 19,146 | | $ | 573,402 | | | | | | | | | | | | | | Service charges on deposit accounts | | | 30,298 | | | 1,238 | | | 2,242 | | | 33,778 | Credit and debit card fees | | | — | | | 58,034 | | | 6,812 | | | 64,846 | Other service charges and fees | | | 20,454 | | | 2,096 | | | 2,155 | | | 24,705 | Trust and investment services income | | | 35,102 | | | — | | | — | | | 35,102 | Other | | | 715 | | | 4,899 | | | 3,351 | | | 8,965 | Not in scope of Topic 606(1) | | | 8,844 | | | 7,368 | | | 8,925 | | | 25,137 | Total noninterest income | | | 95,413 | | | 73,635 | | | 23,485 | | | 192,533 | Total revenue | | $ | 508,442 | | $ | 214,862 | | $ | 42,631 | | $ | 765,935 |
| | | | | | | | | | | | | | | | Year Ended December 31, 2018 | | | | | | | | Treasury | | | | | | Retail | | Commercial | | and | | | | (dollars in thousands) | | Banking | | Banking | | Other | | Total | Net interest income(1) | | $ | 420,165 | | $ | 140,333 | | $ | 5,820 | | $ | 566,318 | | | | | | | | | | | | | | Service charges on deposit accounts | | | 28,866 | | | 1,146 | | | 2,024 | | | 32,036 | Credit and debit card fees | | | — | | | 78,218 | | | 7,080 | | | 85,298 | Other service charges and fees | | | 19,977 | | | 4,089 | | | 2,175 | | | 26,241 | Trust and investment services income | | | 31,324 | | | — | | | — | | | 31,324 | Other | | | 585 | | | 6,616 | | | 2,731 | | | 9,932 | Not in scope of Topic 606(1) | | | 8,917 | | | (9,165) | | | (5,590) | | | (5,838) | Total noninterest income | | | 89,669 | | | 80,904 | | | 8,420 | | | 178,993 | Total revenue | | $ | 509,834 | | $ | 221,237 | | $ | 14,240 | | $ | 745,311 |
(1) | Most of the Company’s revenue is not within the scope of Topic 606. The guidance explicitly excludes net interest income from financial assets and liabilities as well as other noninterest income from loans, leases, investment securities and derivative financial instruments. |
For the years ended December 31, 2020, 2019 and 2018, substantially all of the Company’s revenues under the scope of Topic 606 were related to performance obligations satisfied at a point in time. The following is a discussion of revenues within the scope of Topic 606. Service Charges on Deposit Accounts Service charges on deposit accounts relate to fees generated from a variety of deposit products and services rendered to customers. Charges include, but are not limited to, overdraft fees, non-sufficient fund fees, dormant fees and monthly service charges. Such fees are recognized concurrent with the event on a daily basis or on a monthly basis depending upon the customer’s cycle date. Credit and Debit Card Fees Credit and debit card fees primarily represent revenues earned from interchange fees, ATM fees and merchant processing fees. Interchange and network revenues are earned on credit and debit card transactions conducted with payment networks. ATM fees are primarily earned as a result of surcharges assessed to non-FHB customers who use an FHB ATM. Merchant processing fees are primarily earned on transactions in which FHB is the acquiring bank. Such fees are generally recognized concurrently with the delivery of services on a daily basis. Trust and Investment Services Fees Trust and investment services fees represent revenue earned by directing, holding and managing customers’ assets. Fees are generally computed based on a percentage of the previous period’s value of assets under management. The transaction price (i.e., percentage of assets under management) is established at the inception of each contract. Trust and investment services fees also include broker dealer fees which represent revenue earned from buying and selling securities on behalf of customers. Such fees are recognized at the end of a valuation period or concurrently with the execution of a buy or sell transaction. Other Fees Other fees primarily include revenues generated from wire transfers, lockboxes, bank issuance of checks and insurance commissions. Such fees are recognized concurrent with the event or on a monthly basis. Contract Balances A contract liability is an entity’s obligation to transfer goods or services to a customer for which the entity has received consideration (or the amount is due) from the customer. In prior years, the Company received signing bonuses from 2 vendors which are being amortized over the term of the respective contracts. As of December 31, 20192020 and 2018,2019, the Company had contract liabilities of $1.8$1.0 million and $2.6$1.8 million, respectively, which will be recognized over the remaining term of the respective contracts with the vendors. For botheach of the years ended December 31, 2020, 2019 and 2018, the Company recognized revenues, andthereby decreasing contract liabilities decreased by approximately $0.8 million due to the passage of time. There were 0 changes in contract liabilities due to changes in transaction price estimates. A contract asset is the right to consideration for transferred goods or services when the amount is conditioned on something other than the passage of time. As of December 31, 20192020 and 2018,2019, there were 0 material receivables from contracts with customers or contract assets recorded on the Company’s consolidated balance sheets. Other Except for the contract liabilities noted above, the Company did not have any significant performance obligations as of December 31, 20192020 and 2018.2019. The Company also did not have any material contract acquisition costs or use any significant judgments or estimates in recognizing revenue for financial reporting purposes. 20. Earnings per Share TheFor the year ended December 31, 2020, the Company made 0 adjustments to net income for the purposespurpose of computing earnings per share and there were 410,000 antidilutive securities. For the years ended December 31, 2019 and 2018, the Company made 0 adjustments to net income for the purpose of computing earnings per share and there were 0 antidilutive securities.
The computations of basic and diluted earnings per share were as follows for the years ended December 31, 2019, 2018 and 2017:
| | | | | | | | | | | | | Year Ended December 31, | | (dollars in thousands, except shares and per share amounts) | | 2019 | | 2018 | | 2017 | | Numerator: | | | | | | | | | | | Net income | | $ | 284,392 | | $ | 264,394 | | $ | 183,682 | | | | | | | | | | | | | Denominator: | | | | | | | | | | | Basic: weighted-average shares outstanding | | | 133,076,489 | | | 136,945,134 | | | 139,560,305 | | Add: weighted-average equity-based awards | | | 310,668 | | | 166,286 | | | 96,688 | | Diluted: weighted-average shares outstanding | | | 133,387,157 | | | 137,111,420 | | | 139,656,993 | | | | | | | | | | | | | Basic earnings per share | | $ | 2.14 | | $ | 1.93 | | $ | 1.32 | | Diluted earnings per share | | $ | 2.13 | | $ | 1.93 | | $ | 1.32 | |
The computations of basic and diluted earnings per share were as follows for the years ended December 31, 2020, 2019 and 2018: | | | | | | | | | | | | | Year Ended December 31, | | (dollars in thousands, except shares and per share amounts) | | 2020 | | 2019 | | 2018 | | Numerator: | | | | | | | | | | | Net income | | $ | 185,754 | | $ | 284,392 | | $ | 264,394 | | | | | | | | | | | | | Denominator: | | | | | | | | | | | Basic: weighted-average shares outstanding | | | 129,890,225 | | | 133,076,489 | | | 136,945,134 | | Add: weighted-average equity-based awards | | | 329,852 | | | 310,668 | | | 166,286 | | Diluted: weighted-average shares outstanding | | | 130,220,077 | | | 133,387,157 | | | 137,111,420 | | | | | | | | | | | | | Basic earnings per share | | $ | 1.43 | | $ | 2.14 | | $ | 1.93 | | Diluted earnings per share | | $ | 1.43 | | $ | 2.13 | | $ | 1.93 | |
21. Stock-Based Compensation The Company has several stock-based compensation plans that allow for grants of restricted stock, restricted shares, performance share units, performance shares and restricted stock units to its employees and non-employee directors. The Company’s stock-based compensation plans are administered by the Compensation Committee of the Board of Directors. For the years ended December 31, 2020, 2019 2018 and 2017,2018, stock-based compensation expense was $10.0 million, $7.8 million $6.9 million and $3.1$6.9 million, respectively, and the related income tax benefit was $2.4 million, $2.0 million $1.8 million and $1.6$1.8 million, respectively. For the years ended December 31, 2020, 2019 2018 and 2017,2018, all common stock issuances in connection with stock-based compensation arrangements were issued from unissued shares. As of December 31, 2019,2020, total shares authorized under the Company’s stock-based compensation plan for employees were 5.6 million shares, of which 4.33.8 million shares were available for future grants. As of December 31, 2019,2020, total shares authorized under the 2016 Non-Employee Director Plan were 75,000 shares, of which 34,8426,059 shares were available for future grants. Restricted Share Awards Restricted share awards (“Restricted Stock”) provide grantees with rights to shares of common stock contingent upon completion of a service period. Restricted Stock generally vests and any restrictions will lapse over a period of three years in equal annual installments on each of the first, second and third anniversaries of the grant date, provided that the grantee remain continuously employed through the applicable vesting date, subject to certain exceptions. Grantees have the right to receive all dividends without restrictions at the times and in the manner paid to shareholders generally. The fair value of Restricted Stock is determined based on the closing price of FHI’s common stock on the date of grant. The Company recognizes compensation expense related to Restricted Stock on a straight-line basis over the vesting period for service-based awards. The following presents the Company’s Restricted Stock activity for the years ended December 31, 2020 and 2019: | | | | | | | | | | | | | Weighted | | | | Number | | | Average Grant | | | | of Shares | | | Date Fair Value | Unvested as of December 31, 2018 | | | — | | $ | — | Granted | | | 162,550 | | | 27.06 | Vested | | | (11,239) | | | 27.37 | Forfeited | | | (11,593) | | | 27.04 | Unvested as of December 31, 2019 | | | 139,718 | | | 27.04 | Granted | | | 172,046 | | | 25.96 | Vested | | | (48,340) | | | 27.03 | Forfeited | | | (1,047) | | | 25.96 | Unvested as of December 31, 2020 | | | 262,377 | | $ | 26.35 |
For the year ended December 31, 2019:
| | | | | | | | | | | | | Weighted | | | | Number | | | Average Grant | | | | of Shares | | | Date Fair Value | Unvested as of December 31, 2018 | | | — | | $ | — | Granted | | | 162,550 | | | 27.06 | Vested | | | (11,239) | | | 27.37 | Forfeited | | | (11,593) | | | 27.04 | Unvested as of December 31, 2019 | | | 139,718 | | $ | 27.04 |
2020, the Company granted 172,046 shares of Restricted Stock with a weighted-average grant date fair value of $25.96 to key employees. For the year ended December 31, 2019, the Company granted 162,550 shares of Restricted Stock with a weighted-average grant date fair value of $27.06 to key employees. The total grant date fair value of Restricted Stock that vested for the yearyears ended December 31, 2020 and 2019 was $1.3 million and $0.3 million.million, respectively. Unrecognized compensation expense related to unvested Restricted Stock was $2.9$4.1 million and nil$2.9 million as of December 31, 20192020 and 2018,2019, respectively. The unrecognized compensation expense as of December 31, 20192020 is expected to be recognized over a weighted average vesting period of 1.31.1 years. There were 0 shares of Restricted Stock granted for the yearsyear ended December 31, 2018 and 2017.2018. Performance Share Units and Performance Share Awards Performance share units (“PSUs”) and performance share awards (“PSAs”) (collectively, “Performance Awards”) are an award of units or shares in which the recipient’s rights in the units or shares are contingent on the achievement of pre-established performance goals. At the end of the performance period, the Compensation Committee will determine to what extent the performance goals originally outlined when the Performance Awards were granted have been achieved. Depending on the level of performance achieved, 0-100% of the original grant (target number) of PSUs will be earned and will vest and 0-200% of the original grant (target number) of PSAs will be earned and will vest. All remaining unvested PSUs or PSAs will be immediately forfeited. Employees must be continuously employed by the Company from the grant date through the applicable vesting date, with any unvested Performance Awards being forfeited upon termination of employment, subject to certain exceptions. Following vesting, the Company will issue 1 share of FHI common stock for each vested PSU and evidence of ownership of one1 share of FHI common stock for each vested PSA. The fair value of Performance Awards is estimated based on the use of a Monte Carlo simulation or based on the closing price of FHI’s common stock on the date of grant and is amortized on a straight-line basis over the vesting period. For PSUs, grantees have no voting rights until the shares of common stock underlying vested PSUs are delivered to the grantee. Conversely, for PSAs, grantees have full voting rights as of the grant date. The Performance Awards are governed by the Company’s Long-Term Incentive Plan (the “LTIP”), which is designed to reward selected key executives for their individual performance and the Company’s performance measured over multi-year performance cycles. Awards related to the LTIP provide for equity-based awards based on the Company’s profitability and market conditions that are based on the Company’s performance relative to peer groups over a three-year performance period. The following presents the Company’s Performance Award activity for the years ended December 31, 2020, 2019 2018 and 2017, which includes the PSUs based on 100% target performance and the PSAs based on 200% maximum performance:2018: | | | | | | | | | | | | | | | | | | | Weighted | | | | | | Weighted | | | | Number | | | Average Grant | | | Number | | | Average Grant | | | | of Shares | | | Date Fair Value | | | of Shares | | | Date Fair Value | Unvested as of December 31, 2016 | | | 321,612 | | $ | 29.11 | | Granted | | | 244,218 | | | 30.44 | | Vested | | | (38,522) | | | 24.41 | | Forfeited | | | (21,257) | | | 33.20 | | Unvested as of December 31, 2017 | | | 506,051 | | $ | 30.82 | | | 506,051 | | $ | 30.82 | Granted | | | 277,197 | | | 22.39 | | | 277,197 | | | 22.39 | Vested | | | (229,809) | | | 32.17 | | | (229,809) | | | 32.17 | Forfeited | | | (48,942) | | | 30.52 | | | (48,942) | | | 30.52 | Unvested as of December 31, 2018 | | | 504,497 | | $ | 25.93 | | | 504,497 | | | 25.93 | Granted | | | 310,696 | | | 27.04 | | | 310,696 | | | 27.04 | Vested | | | (36,342) | | | 24.51 | | | (36,342) | | | 24.51 | Forfeited | | | (83,535) | | | 26.37 | | | (83,535) | | | 26.37 | Unvested as of December 31, 2019 | | | 695,316 | | $ | 26.46 | | | 695,316 | | | 26.46 | Granted | | | | 340,758 | | | 25.96 | Vested | | | | (172,167) | | | 29.95 | Forfeited | | | | (6,625) | | | 26.13 | Unvested as of December 31, 2020 | | | | 857,282 | | $ | 25.43 |
For the years ended December 31, 2020, 2019 2018 and 2017,2018, the Company granted 340,758, 310,696 277,197 and 209,374277,197 Performance Awards, respectively, to key employees. The Company granted these Performance Awards in connection with its LTIP for the three-year performance periods which began on January 1, 2020, 2019 2018 and 2017.2018. These awards have performance conditions that are based on the Company’s profitability and market conditions that are based on the Company’s performance relative to peer groups. For the year ended December 31, 2016, the Company granted 115,566 PSUs in connection with its IPO. One-third of these PSUs vested on each of the first, second and third anniversaries of the IPO date. However, transfer restrictions remained on these shares for six months following the vesting date. The performance condition related to these PSUs was based on the Company’s profitability in the fiscal years immediately preceding the vesting dates. The total grant date fair value of Performance Awards that vested for the years ended December 31, 2020, 2019 and 2018 and 2017 was $5.2 million, $0.9 million $7.4 million and $0.9$7.4 million, respectively. Unrecognized compensation expense related to unvested Performance Shares was $6.2 million, $5.6 million $6.2 million and $4.3$6.2 million as of December 31, 2020, 2019 2018 and 2017,2018, respectively. The unrecognized compensation expense as of December 31, 20192020 is expected to be recognized over a weighted average vesting period of 1.51.1 years. Restricted Stock Units Restricted stock units (“RSUs”) are an award of units that correspond in number and value to a specified number of shares of FHI’s common stock that are subject to vesting requirements, including certain service conditions, and transferability restrictions. RSUs do not represent actual ownership of common stock and grantees have no voting rights until the shares of common stock underlying the RSUs are delivered. Following vesting, the Company will issue 1 share of FHI common stock for each vested RSU. The fair value of RSUs is valued based on the closing price of FHI’s common stock on the date of grant and is amortized on a straight-line basis over the vesting period. The following presents the Company’s RSU activity for the years ended December 31, 2020, 2019 2018 and 2017:2018: | | | | | | | | | | | | | | | | | | | Weighted | | | | | | Weighted | | | | Number | | | Average Grant | | | Number | | | Average Grant | | | | of Shares | | | Date Fair Value | | | of Shares | | | Date Fair Value | Unvested as of December 31, 2016 | | | 5,379 | | $ | 24.41 | | Granted | | | 14,506 | | | 29.74 | | Vested | | | (8,379) | | | 26.77 | | Forfeited | | | — | | | — | | Unvested as of December 31, 2017 | | | 11,506 | | $ | 29.74 | | | 11,506 | | $ | 29.74 | Granted | | | 47,094 | | | 28.64 | | | 47,094 | | | 28.64 | Vested | | | (9,839) | | | 32.31 | | | (9,839) | | | 32.31 | Forfeited | | | — | | | — | | | — | | | — | Unvested as of December 31, 2018 | | | 48,761 | | $ | 28.60 | | | 48,761 | | | 28.60 | Granted | | | 20,418 | | | 26.50 | | | 20,418 | | | 26.50 | Vested | | | (22,452) | | | 28.37 | | | (22,452) | | | 28.37 | Forfeited | | | (1,944) | | | 28.29 | | | (1,944) | | | 28.29 | Unvested as of December 31, 2019 | | | 44,783 | | $ | 27.82 | | | 44,783 | | | 27.82 | Granted | | | | 28,783 | | | 15.86 | Vested | | | | (30,016) | | | 27.47 | Forfeited | | | | — | | | — | Unvested as of December 31, 2020 | | | | 43,550 | | $ | 21.93 |
For the year ended December 31, 2020, the Company granted 28,783 RSUs to non-employee directors with a weighted-average grant date fair value of $15.86 and 0 RSUs were granted to employees. For the year ended December 31, 2019, the Company granted 15,918 RSUs to non-employee directors with a weighted-average grant date fair value of $26.38 and granted 4,500 RSUs to employees with a weighted average grant date fair value of $26.92. For the year ended December 31, 2018, the Company granted 11,799 RSUs to non-employee directors with a weighted-average grant date fair value of $27.89 and granted 35,295 RSUs to employees with a weighted average grant date fair value of $28.89. For the year ended December 31, 2017, the Company granted 9,006 RSUs to non-employee directors with a weighted-average grant date fair value of $30.19 and granted 5,500 RSUs to employees with a weighted average grant date fair value of $28.97. The awards will vest on various dates. The total grant date fair value of RSUs that vested during the years ended December 31, 2020, 2019 and 2018 and 2017 was $0.8 million, $0.6 million $0.3 million and $0.2$0.3 million, respectively. Unrecognized compensation expense related to unvested RSUs was $0.4 million, $0.9 million $1.1 million and $0.2$1.1 million as of December 31, 2020, 2019 2018 and 2017,2018, respectively. The unrecognized compensation expense as of December 31, 20192020 is expected to be recognized over a weighted average vesting period of 1.00.5 years. For all awards of PSUs, PSAs, and RSUs, dividend equivalents will accrue from the date of grant and the Company, upon delivery of the common stock, with respect to the vested PSUs and RSUs, and evidence of ownership of the shares, with respect to the vested PSAs, will pay to each grantee a cash amount equal to the product of all cash dividends paid on a share of common stock from the grant date to such delivery date and the number of shares of common stock underlying such vested PSUs, PSAs, and RSUs, as applicable, on such delivery date. Employee Stock Purchase Plan The Company also has an employee stock purchase plan (“ESPP”) which permits employees to periodically purchase Company stock on a payroll deduction basis. Participant purchases through the ESPP receive a discount of 5% from the closing price of FHI’s common stock on the exercise date. Participants are required to adhere to a two-year holding period with regards to shares purchased through the ESPP. The ESPP has been determined to be non-compensatory in nature. As a result, the Company expects that expenses related to the ESPP will not be material. As of December 31, 2019,2020, total shares authorized under the Company’s ESPP were 600,000 shares. The Company issued 12,34119,069 shares and 15,96112,341 shares of common stock to employee participants in July 2020 and January 2018, and 2017, respectively, which resulted in 571,698552,629 shares of common stock authorized for future purchases. 22. Fair Value The Company determines the fair values of its financial instruments based on the requirements established in ASC 820, Fair Value Measurements, which provides a framework for measuring fair value under GAAP and requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 defines fair value as the exit price, the price that would be received for an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date under current market conditions. Fair Value Hierarchy ASC 820 establishes three levels of fair values based on the markets in which the assets or liabilities are traded and the reliability of the assumptions used to determine fair value. The levels are: | ● | Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. |
| ● | Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
| ● | Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability (“Company-level data”). Level 3 assets and liabilities include financial instruments whose value is determined using unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
ASC 820 requires that the Company disclose estimated fair values for certain financial instruments. Financial instruments include such items as investment securities, loans, deposits, interest rate and foreign exchange contracts, swaps and other instruments as defined by the standard. The Company has an organized and established process for determining and reviewing the fair value of financial instruments reported in the Company’s financial statements. The fair value measurements are reviewed to ensure they are reasonable and in line with market experience in similar asset and liability classes. Additionally, the Company may be required to record at fair value other assets on a nonrecurring basis, such as other real estate owned, other customer relationships, and other intangible assets. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-fair-value accounting or write-downs of individual assets. Disclosure of fair values is not required for certain items such as lease financing, obligations for pension and other postretirement benefits, premises and equipment, prepaid expenses, deposit liabilities with no defined or contractual maturity, and income tax assets and liabilities. Reasonable comparisons of fair value information with that of other financial institutions cannot necessarily be made because the standard permits many alternative calculation techniques, and numerous assumptions have been used to estimate the Company’s fair values. Valuation Techniques Used in the Fair Value Measurement of Assets and Liabilities Carried at Fair Value For the assets and liabilities measured at fair value on a recurring basis (categorized in the valuation hierarchy table below), the Company applies the following valuation techniques: Available-for-sale securities Available-for-sale debt securities are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices, including estimates by third-party pricing services, if available. If quoted prices are not available, fair values are measured using proprietary valuation models that utilize market observable parameters from active market makers and inter-dealer brokers whereby securities are valued based upon available market data for securities with similar characteristics. Management reviews the pricing information received from the Company’s third-party pricing service to evaluate the inputs and valuation methodologies used to place securities into the appropriate level of the fair value hierarchy and transfers of securities within the fair value hierarchy are made if necessary. On a monthly basis, management reviews the pricing information received from the third-party pricing service which includes a comparison to non-binding third-party broker quotes, as well as a review of market-related conditions impacting the information provided by the third-party pricing service. Management also identifies investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume or frequency of trades, relative to historical levels, as well as instances of a significant widening of the bid-ask spread in the brokered markets. As of December 31, 20192020 and 2018,2019, management did not make adjustments to prices provided by the third-party pricing services as a result of illiquid or inactive markets. The Company’s third-party pricing service has also established processes for the Company to submit inquiries regarding quoted prices. Periodically, the Company will challenge the quoted prices provided by the third-party pricing service. The Company’s third-party pricing service will review the inputs to the evaluation in light of the new market data presented by the Company. The Company’s third-party pricing service may then affirm the original quoted price or may update the evaluation on a going forward basis. The Company classifies all available-for-sale securities as Level 2. Derivatives Most of the Company’s derivatives are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the Company measures fair value on a recurring basis using proprietary valuation models that primarily use market observable inputs, such as yield curves, and option volatilities. The fair value of derivatives includes values associated with counterparty credit risk and the Company’s own credit standing. The Company classifies these derivatives, included in other assets and other liabilities, as Level 2. Concurrent with the sale of the Visa Class B restricted shares, the Company entered into an agreement with the buyer that requires payment to the buyer in the event Visa reduces each member bank’s Class B conversion rate to unrestricted Class A common shares. On July 5, 2018, Visa announced a decrease in conversion rate from 1.6483 to 1.6298 effective June 28, 2018. Additionally, on September 30, 2019, Visa announced a decrease in conversion rate from 1.6298 to 1.6228, effective September 27, 2019. The Visa derivative of $4.2$4.6 million and $2.6$4.2 million was included in the consolidated balance sheets at December 31, 20192020 and 2018,2019, respectively, to provide for the fair value of this liability. The potential liability related to this funding swap agreement was determined based on management’s estimate of the timing and the amount of Visa’s litigation settlement and the resulting payments due to the counterparty under the terms of the contract. As such, the funding swap agreement is classified as Level 3 in the fair value hierarchy. The significant unobservable inputs used in the fair value measurement of the Company’s funding swap agreement are the potential future changes in the conversion rate, expected term and growth rate of the market price of Visa Class A common shares. Material increases (or decreases) in any of those inputs may result in a significantly higher (or lower) fair value measurement. Assets and Liabilities Recorded at Fair Value on a Recurring Basis Assets and liabilities measured at fair value on a recurring basis as of December 31, 20192020 and 20182019 are summarized below: | | | | | | | | | | | | | | | | | | | | | | | | | | | Fair Value Measurements as of December 31, 2019 | | Fair Value Measurements as of December 31, 2020 | | | Quoted Prices in | | Significant | | | | | | Quoted Prices in | | Significant | | | | | | | Active Markets for | | Other | | Significant | | | | Active Markets for | | Other | | Significant | | | | | Identical Assets | | Observable | | Unobservable | | | | Identical Assets | | Observable | | Unobservable | | | (dollars in thousands) | | (Level 1) | | Inputs (Level 2) | | Inputs (Level 3) | | Total | | (Level 1) | | Inputs (Level 2) | | Inputs (Level 3) | | Total | Assets | | | | | | | | | | | | | | | | | | | | | | | | | U.S. Treasury securities | | $ | — | | $ | 29,888 | | $ | — | | $ | 29,888 | | Government-sponsored enterprises debt securities | | | — | | | 101,439 | | | — | | | 101,439 | | U.S. Treasury and government agency debt securities | | | $ | — | | $ | 171,421 | | $ | — | | $ | 171,421 | Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | Residential - Government agency(1) | | | — | | | 291,209 | | | — | | | 291,209 | | | — | | | 160,462 | | | — | | | 160,462 | Residential - Government-sponsored enterprises(1) | | | — | | | 399,492 | | | — | | | 399,492 | | | — | | | 447,200 | | | — | | | 447,200 | Commercial - Government agency | | | | — | | | 599,650 | | | — | | | 599,650 | Commercial - Government-sponsored enterprises | | | — | | | 101,719 | | | — | | | 101,719 | | | — | | | 932,157 | | | — | | | 932,157 | Collateralized mortgage obligations: | | | | | | | | | | | | | | | | | | | | | | | | | Government agency | | | — | | | 2,381,278 | | | — | | | 2,381,278 | | | — | | | 1,933,553 | | | — | | | 1,933,553 | Government-sponsored enterprises | | | — | | | 770,619 | | | — | | | 770,619 | | | — | | | 1,826,972 | | | — | | | 1,826,972 | Total available-for-sale securities | | | — | | | 4,075,644 | | | — | | | 4,075,644 | | | — | | | 6,071,415 | | | — | | | 6,071,415 | Other assets(2) | | | — | | | 63,539 | | | — | | | 63,539 | | | 11,691 | | | 129,895 | | | — | | | 141,586 | Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | Other liabilities(3) | | | — | | | (682) | | | (4,233) | | | (4,915) | | | — | | | (1,283) | | | (4,554) | | | (5,837) | Total | | $ | — | | $ | 4,138,501 | | $ | (4,233) | | $ | 4,134,268 | | $ | 11,691 | | $ | 6,200,027 | | $ | (4,554) | | $ | 6,207,164 |
| | | | | | | | | | | | | | | Fair Value Measurements as of December 31, 2018 | | | Quoted Prices in | | Significant | | | | | | | | Active Markets for | | Other | | Significant | | | | | Identical Assets | | Observable | | Unobservable | | | (dollars in thousands) | | (Level 1) | | Inputs (Level 2) | | Inputs (Level 3) | | Total | Assets | | | | | | | | | | | | | U.S. Treasury securities | | $ | — | | $ | 389,470 | | $ | — | | $ | 389,470 | Government-sponsored enterprises debt securities | | | — | | | 241,594 | | | — | | | 241,594 | Mortgage-backed securities: | | | | | | | | | | | | | Residential - Government agency(1) | | | — | | | 411,536 | | | — | | | 411,536 | Residential - Government-sponsored enterprises(1) | | | — | | | 150,847 | | | — | | | 150,847 | Collateralized mortgage obligations: | | | | | | | | | | | | | Government agency | | | — | | | 2,682,449 | | | — | | | 2,682,449 | Government-sponsored enterprises | | | — | | | 602,592 | | | — | | | 602,592 | Debt securities issued by states and political subdivisions | | | — | | | 19,854 | | | — | | | 19,854 | Total available-for-sale securities | | | — | | | 4,498,342 | | | — | | | 4,498,342 | Other assets(2) | | | — | | | 12,336 | | | — | | | 12,336 | Liabilities | | | | | | | | | | | | | Other liabilities(3) | | | — | | | (12,085) | | | (2,607) | | | (14,692) | Total | | $ | — | | $ | 4,498,593 | | $ | (2,607) | | $ | 4,495,986 |
| | | | | | | | | | | | | | | Fair Value Measurements as of December 31, 2019 | | | Quoted Prices in | | Significant | | | | | | | | Active Markets for | | Other | | Significant | | | | | Identical Assets | | Observable | | Unobservable | | | (dollars in thousands) | | (Level 1) | | Inputs (Level 2) | | Inputs (Level 3) | | Total | Assets | | | | | | | | | | | | | U.S. Treasury securities | | $ | — | | $ | 29,888 | | $ | — | | $ | 29,888 | Government-sponsored enterprises debt securities | | | — | | | 101,439 | | | — | | | 101,439 | Mortgage-backed securities: | | | | | | | | | | | | | Residential - Government agency(1) | | | — | | | 291,209 | | | — | | | 291,209 | Residential - Government-sponsored enterprises(1) | | | — | | | 399,492 | | | — | | | 399,492 | Commercial - Government-sponsored enterprises | | | — | | | 101,719 | | | — | | | 101,719 | Collateralized mortgage obligations: | | | | | | | | | | | | | Government agency | | | — | | | 2,381,278 | | | — | | | 2,381,278 | Government-sponsored enterprises | | | — | | | 770,619 | | | — | | | 770,619 | Total available-for-sale securities | | | — | | | 4,075,644 | | | — | | | 4,075,644 | Other assets(2) | | | — | | | 63,539 | | | — | | | 63,539 | Liabilities | | | | | | | | | | | | | Other liabilities(3) | | | — | | | (682) | | | (4,233) | | | (4,915) | Total | | $ | — | | $ | 4,138,501 | | $ | (4,233) | | $ | 4,134,268 |
(1) | Backed by residential real estate. |
(2) | As of December 31, 2020, other assets classified as Level 1 include mutual funds and money market funds that have quoted prices in active markets and are related to the Company’s deferred compensation plans. Other assets classified as Level 2 include derivative assets.assets as of December 31, 2020 and 2019. |
(3) | Other liabilities include derivative liabilities. |
Changes in Fair Value Levels For any transfers in and out of the levels of the fair value hierarchy, the Company discloses the fair value measurement at the beginning of the reporting period during which the transfer occurred. During the years ended December 31, 2020 and 2019, and 2018, there were 0 transfers between fair value hierarchy levels. The changes in Level 3 liabilities measured at fair value on a recurring basis for the years ended December 31, 20192020 and 20182019 are summarized below: | | | | | | | | | | | | | | | Visa Derivative | | Visa Derivative | (dollars in thousands) | | 2019 | | 2018 | | 2020 | | 2019 | Year Ended December 31, | | | | | | | | | | | | | Balance as of January 1, | | $ | (2,607) | | $ | (5,439) | | $ | (4,233) | | $ | (2,607) | Total net losses included in other noninterest income | | | (5,354) | | | (173) | | | (4,641) | | | (5,354) | Settlements | | | 3,728 | | | 3,005 | | | 4,320 | | | 3,728 | Balance as of December 31, | | $ | (4,233) | | $ | (2,607) | | $ | (4,554) | | $ | (4,233) | Total net losses included in net income attributable to the change in unrealized gains or losses related to liabilities still held as of December 31, | | $ | (5,354) | | $ | (173) | | $ | (4,641) | | $ | (5,354) |
Assets and Liabilities Carried at Other Than Fair Value The following tables summarize for the periods indicated the estimated fair value of the Company’s financial instruments that are not required to be carried at fair value on a recurring basis, excluding leases and deposit liabilities with no defined or contractual maturity: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | | December 31, 2020 | | | | | | Fair Value Measurements | | | | | Fair Value Measurements | | | | | | Quoted Prices in | | Significant | | Significant | | | | | | | Quoted Prices in | | Significant | | Significant | | | | | | | | Active Markets | | Other | | Unobservable | | | | | | | Active Markets | | Other | | Unobservable | | | | | | | | for Identical | | Observable | | Inputs | | | | | | | for Identical | | Observable | | Inputs | | | (dollars in thousands) | | Book Value | | Assets (Level 1) | | Inputs (Level 2) | | (Level 3) | | Total | | Book Value | | Assets (Level 1) | | Inputs (Level 2) | | (Level 3) | | Total | Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 694,017 | | $ | 360,375 | | $ | 333,642 | | $ | — | | $ | 694,017 | | $ | 1,040,944 | | $ | 303,373 | | $ | 737,571 | | $ | — | | $ | 1,040,944 | Loans held for sale | | | 904 | | | — | | | 904 | | | — | | | 904 | | | 11,579 | | | — | | | 12,018 | | | — | | | 12,018 | Loans(1) | | | 13,009,167 | | | — | | | — | | | 13,140,898 | | | 13,140,898 | | | 13,033,686 | | | — | | | — | | | 13,255,636 | | | 13,255,636 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Time deposits(2) | | $ | 2,510,157 | | $ | — | | $ | 2,501,478 | | $ | — | | $ | 2,501,478 | | $ | 2,348,298 | | $ | — | | $ | 2,357,137 | | $ | — | | $ | 2,357,137 | Short-term borrowings | | | 400,000 | | | — | | | 401,709 | | | — | | | 401,709 | | Long-term borrowings(3) | | | 200,000 | | | — | | | 207,104 | | | — | | | 207,104 | | | 200,000 | | | — | | | 214,167 | | | — | | | 214,167 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2018 | | December 31, 2019 | | | | | | Fair Value Measurements | | | | | Fair Value Measurements | | | | | | Quoted Prices in | | Significant | | Significant | | | | | | | Quoted Prices in | | Significant | | Significant | | | | | | | | Active Markets | | Other | | Unobservable | | | | | | | Active Markets | | Other | | Unobservable | | | | | | | | for Identical | | Observable | | Inputs | | | | | | | for Identical | | Observable | | Inputs | | | (dollars in thousands) | | Book Value | | Assets (Level 1) | | Inputs (Level 2) | | (Level 3) | | Total | | Book Value | | Assets (Level 1) | | Inputs (Level 2) | | (Level 3) | | Total | Financial assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash and cash equivalents | | $ | 1,003,637 | | $ | 396,836 | | $ | 606,801 | | $ | — | | $ | 1,003,637 | | $ | 694,017 | | $ | 360,375 | | $ | 333,642 | | $ | — | | $ | 694,017 | Loans held for sale | | | 432 | | | — | | | 432 | | | — | | | 432 | | | 904 | | | — | | | 904 | | | — | | | 904 | Loans(1) | | | 12,928,422 | | | — | | | — | | | 12,664,170 | | | 12,664,170 | | | 13,009,167 | | | — | | | — | | | 13,140,898 | | | 13,140,898 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Financial liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Time deposits(2) | | $ | 3,092,164 | | $ | — | | $ | 3,058,792 | | $ | — | | $ | 3,058,792 | | $ | 2,510,157 | | $ | — | | $ | 2,501,478 | | $ | — | | $ | 2,501,478 | Short-term borrowings | | | | 400,000 | | | — | | | 401,709 | | | — | | | 401,709 | Long-term borrowings(3) | | | 600,000 | | | — | | | 602,088 | | | — | | | 602,088 | | | 200,000 | | | — | | | 207,104 | | | — | | | 207,104 |
(1) | Excludes financing leases of $245.4 million at December 31, 2020 and $202.5 million at December 31, 2019 and $147.8 million at December 31, 2018.2019. |
(2) | Excludes deposit liabilities with no defined or contractual maturity of $16.9 billion at December 31, 2020 and $13.9 billion at December 31, 2019 and $14.1 billion at December 31, 2018.2019. |
(3) | Excludes capital lease obligations of $19$10 thousand and $26$19 thousand at December 31, 20192020 and 2018,2019, respectively. |
Unfunded loan and lease commitments and letters of credit are not included in the tables above. As of both December 31, 20192020 and 2018,2019, the Company had $6.1 billion and $5.8 billion, respectively, of unfunded loan and lease commitments and letters of credit. A reasonable estimate of the fair value of these instruments is the carrying value of deferred fees plus the related reserve for unfunded commitments, which totaled $14.4$42.3 million and $14.2$14.4 million at December 31, 20192020 and 2018,2019, respectively. No active trading market exists for these instruments and the estimated fair value does not include value associated with the borrower relationship. The Company does not estimate the fair values of certain unfunded loan and lease commitments that can be canceled by providing notice to the borrower. As Company-level data is incorporated into the fair value measurement, unfunded loan and lease commitments and letters of credit are classified as Level 3. Valuation Techniques Used in the Fair Value Measurement of Assets and Liabilities Carried at the Lower of Cost or Fair Value The Company applies the following valuation techniques to assets measured at the lower of cost or fair value: Mortgage servicing rights MSRs are carried at the lower of cost or fair value and are therefore subject to fair value measurements on a nonrecurring basis. The fair value of MSRs is determined using models which use significant unobservable inputs, such as estimates of prepayment rates, the resultant weighted average lives of the MSRs and the option-adjusted spread levels. Accordingly, the Company classifies MSRs as Level 3. ImpairedCollateral-dependent loans
A large portionCollateral-dependent loans are those for which repayment is expected to be provided substantially through the operation or sale of the Company’s impairedcollateral.These loans are collateral dependent and are measured at fair value on a nonrecurring basis using collateral values as a practical expedient. The fair values of collateral for impaired loans are primarily based on real estate appraisal reports prepared by third-party appraisers less disposition costs, present value of the expected future cash flows or the loan’s observable market price. Certain loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective rate, which is not a fair value measurement.estimated selling costs. The Company measures the impairmentestimated credit losses on certaincollateral-dependent loans and leases by performing a lower-of-cost-or-fair-value analysis. If impairment isthe estimated credit losses are determined by the value of the collateral, or an observable market price, itthe net carrying amount is written downadjusted to fair value on a nonrecurring basis as Level 3.3 by recognizing an allowance for credit losses.
Other real estate owned The Company values these properties at fair value at the time the Company acquires them, which establishes their new cost basis. After acquisition, the Company carries such properties at the lower of cost or fair value less estimated selling costs on a nonrecurring basis. Fair value is measured on a nonrecurring basis using collateral values as a practical expedient. The fair values of collateral for other real estate owned are primarily based on real estate appraisal reports prepared by third-party appraisers less disposition costs and are classified as Level 3. Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis The Company may be required to record certain assets at fair value on a nonrecurring basis in accordance with GAAP. These assets are subject to fair value adjustments that result from the application of lower of cost or fair value accounting or write-downs of individual assets to fair value. The following table provides the level of valuation inputs used to determine each fair value adjustment and the fair value of the related individual assets or portfolio of assets with fair value adjustments on a nonrecurring basis as of December 31, 20192020 and 2018:2019: | | | | | | | | | | | | | | | | | | | (dollars in thousands) | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 | December 31, 2020 | | | | | | | | | | | Collateral-dependent loans | | | $ | — | | $ | — | | $ | 1,840 | December 31, 2019 | | | | | | | | | | | | | | | | | | | Impaired loans | | $ | — | | $ | — | | $ | 1,502 | | December 31, 2018 | | | | | | | | | | | Impaired loans | | $ | — | | $ | — | | $ | 402 | | Collateral-dependent loans | | | $ | — | | $ | — | | $ | 1,502 |
Total losses on impairedcollateral-dependent loans for the years ended December 31, 2020, 2019 and 2018 and 2017 were $1.0$0.4 million, $0.7$1.0 million and $0.7 million, respectively. For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of December 31, 20192020 and 2018,2019, the significant unobservable inputs used in the fair value measurements were as follows: | | | | | | | | | | | | Quantitative Information about Level 3 Fair Value Measurements at December 31, 2019 | | | | | | | | Significant | | Range | (dollars in thousands) | | Fair value | | Valuation Technique | | Unobservable Input | | (Weighted Average) | Impaired loans | | $ | 1,502 | | Appraisal Value | | Appraisal Value | | n/m(1) | Visa derivative | | $ | (4,233) | | Discounted Cash Flow | | Expected Conversion Rate | | 1.6228 | | | | | | | | Expected Term | | 1 year | | | | | | | | Growth Rate | | 13% |
| | | | | | | | | | | | | | | | | | | | | Quantitative Information about Level 3 Fair Value Measurements at December 31, 2018 | | Quantitative Information about Level 3 Fair Value Measurements at December 31, 2020 | | | | | | | | | | Range | | | | | | | Significant | | | (dollars in thousands) | | Fair value | | Valuation Technique | | Unobservable Input | | (Weighted Average) | | Fair value | | Valuation Technique | | Unobservable Input | | Range | Impaired loans | | $ | 402 | | Appraisal Value | | Appraisal Value | | n/m(1) | | Collateral-dependent loans | | | $ | 1,840 | | Appraisal Value | | Appraisal Value | | n/m(1) | Visa derivative | | $ | (2,607) | | Discounted Cash Flow | | Expected Conversion Rate | | 1.6298 | | $ | (4,554) | | Discounted Cash Flow | | Expected Conversation Rate - 1.6228(2) | | 1.5977-1.6228 | | | | | | | | Expected Term | | 4 years | | | | | | | Expected Term - 1 year(3) | | 0.5 to 1.5 years | | | | | | | | Growth Rate | | 15% | | | | | | | Growth Rate - 13%(4) | | 4% - 17% |
(1) | The fair value of these assets is determined based on appraised values of the collateral or broker price opinions, the range of which is not meaningful to disclose. |
(2) | Due to the uncertainty in the movement of the conversion rate, the current conversion rate was utilized in the fair value calculation. |
(3) | The expected term of 1 year was based on the median of 0.5 to 1.5 years. |
(4) | The growth rate of 13% was based on the arithmetic average of analyst price targets. |
| | | | | | | | | | Quantitative Information about Level 3 Fair Value Measurements at December 31, 2019 | | | | | | | | Significant | (dollars in thousands) | | Fair value | | Valuation Technique | | Unobservable Input | Collateral-dependent loans | | $ | 1,502 | | Appraisal Value | | Appraisal Value | Visa derivative | | $ | (4,233) | | Discounted Cash Flow | | Expected Conversion Rate - 1.6228 | | | | | | | | Expected Term - 1 year | | | | | | | | Growth Rate - 13% |
23. Reportable Operating Segments The Company’s operations are organized into 3 business segments – Retail Banking, Commercial Banking and Treasury and Other. These segments reflect how discrete financial information is currently evaluated by the chief operating decision maker and how performance is assessed and resources allocated. The Company’s internal management process measures the performance of these business segments. This process, which is not necessarily comparable with similar information for 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 loan and leasecredit 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. 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. The Company allocates the provision for loancredit losses from the Treasury and lease lossesOther business segment (which is comprised of many of the Company’s support units) to each segmentthe Retail and Commercial business segments. These allocations are based on management’s estimate ofdirect costs incurred by the inherent loss content in each of the specific loanRetail and lease portfolios. Commercial business segments. Noninterest income and expense includes allocations from support units to the business segments. These allocations are based on actual usage where practicably calculated or by management’s estimate of such usage.
In 2019, Income tax expense is allocated to each business segment based on the Company made changes to the internal measurement of segment operating profitsconsolidated effective income tax rate for the purpose of evaluating segment performance and resource allocation. The primary reason for the change was to align deposit balances within the business segment that directly manages them. Specifically, certain deposit balances previously included as part of the Retail Banking segment have been reclassified to the Commercial Banking segment. The reallocation of select deposit balances affected net interest income, net interest income after provision for loan and lease losses, noninterest income, provision for income taxes and net income. The Company has reported its selected financial information using the new deposit balance alignments for the year ended December 31, 2019. The Company has restated the selected financial information for the years ended December 31, 2018 and 2017 in order to conform with the current presentation.
Additionally, during the fourth quarter of 2019 the Company changed its assumptions embedded in allocating deposit costs to the business segments. The Company has reported its selected financial information using the new deposit cost assumptions starting with the fourth quarter of 2019.period shown.
Business Segments Retail Banking Retail Banking offers a broad range of financial products and services to consumers and small businesses. Loan and lease products offered include residential and commercial mortgage loans, home equity lines of credit, automobile loans and leases, personal lines of credit, installment loans and small business loans and leases. Deposit products offered include checking, savings and time deposit accounts. Retail Banking also offers wealth management services. Products and services from Retail Banking are delivered to customers through 5854 banking locations throughout the State of Hawaii, Guam and Saipan. Commercial Banking Commercial Banking offers products that include corporate banking, residential and commercial real estate loans, commercial lease financing, automobile loans and auto dealer financing, business deposit products and credit cards. Commercial lending and deposit products are offered primarily to middle-market and large companies locally, nationally and internationally. Treasury and Other Treasury consists of corporate asset and liability management activities including interest rate risk management. The segment’s assets and liabilities (and related interest income and expense) consist of interest-bearing deposits, investment securities, federal funds sold and purchased, government deposits, short- and long-term borrowings and bank-owned properties. The primary sources of noninterest income are from bank-owned life insurance, net gains from the sale of investment securities, foreign exchange income related to customer-driven currency requests from merchants and island visitors and management of bank-owned properties. 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, Credit and Risk Management, Human Resources, Finance, Administration, Marketing 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. The following tables present selected business segment financial information for the years indicated: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Treasury | | | | | | | | | | Treasury | | | | | | Retail | | Commercial | | and | | | | | Retail | | Commercial | | and | | | | (dollars in thousands) | | Banking | | Banking | | Other | | Total | | Banking | | Banking | | Other | | Total | Year Ended December 31, 2019 | | | | | | | | | | | | | | Year Ended December 31, 2020 | | | | | | | | | | | | | | Net interest income | | $ | 413,029 | | $ | 141,227 | | $ | 19,146 | | $ | 573,402 | | $ | 393,466 | | $ | 133,301 | | $ | 8,967 | | $ | 535,734 | Provision for loan and lease losses | | | (6,248) | | | (7,552) | | | — | | | (13,800) | | Net interest income after provision for loan and lease losses | | | 406,781 | | | 133,675 | | | 19,146 | | | 559,602 | | Provision for credit losses | | | | (52,719) | | | (53,921) | | | (15,078) | | | (121,718) | Net interest income (loss) after provision for credit losses | | | | 340,747 | | | 79,380 | | | (6,111) | | | 414,016 | | | | | | | | | | | | | | | | | | | | | | | | | | Noninterest income | | | 95,413 | | | 73,635 | | | 23,485 | | | 192,533 | | | 98,026 | | | 78,202 | | | 21,152 | | | 197,380 | Noninterest expense | | | (228,389) | | | (82,380) | | | (59,668) | | | (370,437) | | | (231,404) | | | (81,533) | | | (54,735) | | | (367,672) | Income (loss) before (provision) benefit for income taxes | | | 273,805 | | | 124,930 | | | (17,037) | | | 381,698 | | | 207,369 | | | 76,049 | | | (39,694) | | | 243,724 | | | | | | | | | | | | | | | | | | | | | | | | | | (Provision) benefit for income taxes | | | (69,285) | | | (32,298) | | | 4,277 | | | (97,306) | | | (48,605) | | | (17,171) | | | 7,806 | | | (57,970) | Net income (loss) | | $ | 204,520 | | $ | 92,632 | | $ | (12,760) | | $ | 284,392 | | $ | 158,764 | | $ | 58,878 | | $ | (31,888) | | $ | 185,754 | Total assets as of December 31, 2019 | | $ | 7,276,047 | | $ | 6,071,356 | | $ | 6,819,331 | | $ | 20,166,734 | | Total assets as of December 31, 2020 | | | $ | 7,611,375 | | $ | 5,810,090 | | $ | 9,241,366 | | $ | 22,662,831 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Treasury | | | | | | | | | | Treasury | | | | | | Retail | | Commercial | | and | | | | | Retail | | Commercial | | and | | | | (dollars in thousands) | | Banking | | Banking | | Other (1) | | Total | | Banking | | Banking | | Other | | Total | Year Ended December 31, 2018 | | | | | | | | | | | | | | Year Ended December 31, 2019 | | | | | | | | | | | | | | Net interest income | | $ | 420,165 | | $ | 140,333 | | $ | 5,820 | | $ | 566,318 | | $ | 413,029 | | $ | 141,227 | | $ | 19,146 | | $ | 573,402 | Provision for loan and lease losses | | | (8,753) | | | (13,427) | | | — | | | (22,180) | | Net interest income after provision for loan and lease losses | | | 411,412 | | | 126,906 | | | 5,820 | | | 544,138 | | Provision for credit losses | | | | (6,248) | | | (7,552) | | | — | | | (13,800) | Net interest income after provision for credit losses | | | | 406,781 | | | 133,675 | | | 19,146 | | | 559,602 | | | | | | | | | | | | | | | | | | | | | | | | | | Noninterest income | | | 89,669 | | | 80,904 | | | 8,420 | | | 178,993 | | | 95,413 | | | 73,635 | | | 23,485 | | | 192,533 | Noninterest expense | | | (225,881) | | | (80,766) | | | (58,306) | | | (364,953) | | | (228,389) | | | (82,380) | | | (59,668) | | | (370,437) | Income (loss) before (provision) benefit for income taxes | | | 275,200 | | | 127,044 | | | (44,066) | | | 358,178 | | | 273,805 | | | 124,930 | | | (17,037) | | | 381,698 | | | | | | | | | | | | | | | | | | | | | | | | | | (Provision) benefit for income taxes | | | (70,335) | | | (32,700) | | | 9,251 | | | (93,784) | | | (69,285) | | | (32,298) | | | 4,277 | | | (97,306) | Net income (loss) | | $ | 204,865 | | $ | 94,344 | | $ | (34,815) | | $ | 264,394 | | $ | 204,520 | | $ | 92,632 | | $ | (12,760) | | $ | 284,392 | Total assets as of December 31, 2018 | | $ | 7,078,016 | | $ | 6,346,541 | | $ | 7,271,121 | | $ | 20,695,678 | | Total assets as of December 31, 2019 | | | $ | 7,276,047 | | $ | 6,071,356 | | $ | 6,819,331 | | $ | 20,166,734 |
| | | | | | | | | | | | | | | | | | | | Treasury | | | | | | Retail | | Commercial | | and | | | | (dollars in thousands) | | Banking | | Banking | | Other (1) | | Total | Year Ended December 31, 2018 | | | | | | | | | | | | | Net interest income | | $ | 420,165 | | $ | 140,333 | | $ | 5,820 | | $ | 566,318 | Provision for credit losses | | | (8,753) | | | (13,427) | | | — | | | (22,180) | Net interest income after provision for credit losses | | | 411,412 | | | 126,906 | | | 5,820 | | | 544,138 | | | | | | | | | | | | | | Noninterest income | | | 89,669 | | | 80,904 | | | 8,420 | | | 178,993 | Noninterest expense | | | (225,881) | | | (80,766) | | | (58,306) | | | (364,953) | Income (loss) before (provision) benefit for income taxes | | | 275,200 | | | 127,044 | | | (44,066) | | | 358,178 | | | | | | | | | | | | | | (Provision) benefit for income taxes | | | (70,335) | | | (32,700) | | | 9,251 | | | (93,784) | Net income (loss) | | $ | 204,865 | | $ | 94,344 | | $ | (34,815) | | $ | 264,394 | Total assets as of December 31, 2018 | | $ | 7,078,016 | | $ | 6,346,541 | | $ | 7,271,121 | | $ | 20,695,678 |
(1) Includes $24.1 million in OTTI write-downs. | | | | | | | | | | | | | | | | | | | | Treasury | | | | | | Retail | | Commercial | | and | | | | (dollars in thousands) | | Banking | | Banking | | Other (1) | | Total | Year Ended December 31, 2017 | | | | | | | | | | | | | Net interest income (expense) | | $ | 409,796 | | $ | 131,692 | | $ | (12,684) | | $ | 528,804 | Provision for loan and lease losses | | | (6,837) | | | (11,663) | | | — | | | (18,500) | Net interest income (expense) after provision for loan and lease losses | | | 402,959 | | | 120,029 | | | (12,684) | | | 510,304 | | | | | | | | | | | | | | Noninterest income | | | 89,372 | | | 75,566 | | | 40,667 | | | 205,605 | Noninterest expense | | | (223,652) | | | (68,167) | | | (55,735) | | | (347,554) | Income (loss) before (provision) benefit for income taxes | | | 268,679 | | | 127,428 | | | (27,752) | | | 368,355 | | �� | | | | | | | | | | | | (Provision) benefit for income taxes | | | (130,130) | | | (57,857) | | | 3,314 | | | (184,673) | Net income (loss) | | $ | 138,549 | | $ | 69,571 | | $ | (24,438) | | $ | 183,682 | Total assets as of December 31, 2017 | | $ | 7,003,724 | | $ | 5,462,370 | | $ | 8,083,367 | | $ | 20,549,461 |
(1)Includes $6.9 million gains on the sale of real estate.
24. Parent Company
The following tables present Parent Company-only condensed financial statements:
| | | | | | | | | | | Condensed Statements of Comprehensive Income | | | | | | | | | | | | | Year Ended December 31, | | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | Income | | | | | | | | | | | Dividends from FHB | | $ | 300,300 | | $ | 263,400 | | $ | 105,400 | | Other income | | | 1,691 | | | 1,541 | | | 3,937 | | Total income | | | 301,991 | | | 264,941 | | | 109,337 | | Noninterest expense | | | | | | | | | | | Salaries and employee benefits | | | 5,241 | | | 5,940 | | | 5,949 | | Contracted services and professional fees | | | 2,689 | | | 3,780 | | | 3,643 | | Equipment | | | — | | | 31 | | | 55 | | Advertising and marketing | | | — | | | — | | | 1 | | Other | | | 721 | | | 732 | | | 570 | | Total noninterest expense | | | 8,651 | | | 10,483 | | | 10,218 | | Income before benefit (provision) for income taxes and (excess distributions) equity in undistributed income of FHB | | | 293,340 | | | 254,458 | | | 99,119 | | Benefit (provision) for income taxes | | | 1,672 | | | 1,184 | | | (642) | | (Excess distributions) equity in undistributed income of FHB | | | (10,620) | | | 8,752 | | | 85,205 | | Net income | | $ | 284,392 | | $ | 264,394 | | $ | 183,682 | | Comprehensive income | | $ | 384,838 | | $ | 248,650 | | $ | 175,310 | | | | | | | | | | | | |
24. Parent Company The following tables present Parent Company-only condensed financial statements: | | | | | | | | | | Condensed Statements of Comprehensive Income | | | | | | | | | | | | Year Ended December 31, | (dollars in thousands) | | 2020 | | 2019 | | 2018 | Income | | | | | | | | | | Dividends from FHB | | $ | 142,000 | | $ | 300,300 | | $ | 263,400 | Other income | | | 1,169 | | | 1,691 | | | 1,541 | Total income | | | 143,169 | | | 301,991 | | | 264,941 | Noninterest expense | | | | | | | | | | Salaries and employee benefits | | | 3,660 | | | 5,241 | | | 5,940 | Contracted services and professional fees | | | 2,544 | | | 2,689 | | | 3,780 | Equipment | | | 31 | | | — | | | 31 | Other | | | 1,439 | | | 721 | | | 732 | Total noninterest expense | | | 7,674 | | | 8,651 | | | 10,483 | Income before benefit for income taxes and equity in undistributed income (excess distributions) of FHB | | | 135,495 | | | 293,340 | | | 254,458 | Benefit for income taxes | | | 679 | | | 1,672 | | | 1,184 | Equity in undistributed income (excess distributions) of FHB | | | 49,580 | | | (10,620) | | | 8,752 | Net income | | $ | 185,754 | | $ | 284,392 | | $ | 264,394 | Comprehensive income | | $ | 249,107 | | $ | 384,838 | | $ | 248,650 | | | | | | | | | | |
| | | | | | | Condensed Statements of Condition | | | | | | | | | December 31, | (dollars in thousands) | | 2020 | | 2019 | Assets | | | | | | | Cash and cash equivalents | | $ | 18,066 | | $ | 24,455 | Investment in FHB | | | 2,726,497 | | | 2,617,949 | Other assets | | | 26,138 | | | 24,969 | Total assets | | $ | 2,770,701 | | $ | 2,667,373 | Liabilities and Stockholders' Equity | | | | | | | Retirement benefits payable | | $ | 580 | | $ | 553 | Other liabilities | | | 26,017 | | | 26,562 | Total liabilities | | | 26,597 | | | 27,115 | | | | | | | | Total stockholders' equity | | | 2,744,104 | | | 2,640,258 | Total liabilities and stockholders' equity | | $ | 2,770,701 | | $ | 2,667,373 |
| | | | | | | Condensed Statements of Condition | | | | | | | | | December 31, | (dollars in thousands) | | 2019 | | 2018 | Assets | | | | | | | Cash and cash equivalents | | $ | 24,455 | | $ | 5,647 | Investment in FHB | | | 2,617,949 | | | 2,521,347 | Other assets | | | 24,969 | | | 19,358 | Total assets | | $ | 2,667,373 | | $ | 2,546,352 | Liabilities and Stockholders' Equity | | | | | | | Retirement benefits payable | | $ | 553 | | $ | 509 | Other liabilities | | | 26,562 | | | 21,004 | Total liabilities | | | 27,115 | | | 21,513 | Stockholders' Equity | | | | | | | Stockholders' equity | | | 2,640,258 | | | 2,524,839 | Total stockholders' equity | | | 2,640,258 | | | 2,524,839 | Total liabilities and stockholders' equity | | $ | 2,667,373 | | $ | 2,546,352 | | | | | | | |
| | | | | | | | | | | Condensed Statements of Cash Flows | | | | | | | | | | | | | Year Ended December 31, | | (dollars in thousands) | | 2019 | | 2018 | | 2017 | | Cash flows from operating activities | | | | | | | | | | | Net income | | $ | 284,392 | | $ | 264,394 | | $ | 183,682 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | Excess distributions (equity in undistributed income) of FHB | | | 10,620 | | | (8,752) | | | (85,205) | | Deferred income taxes | | | 85 | | | (48) | | | (274) | | Stock-based compensation | | | 84 | | | 281 | | | 244 | | Change in assets and liabilities: | | | | | | | | | | | Net decrease (increase) in other assets | | | 5,318 | | | (9,635) | | | 36,467 | | Net (decrease) increase in other liabilities | | | (5,439) | | | 7,633 | | | (2,058) | | Net cash provided by operating activities | | | 295,060 | | | 253,873 | | | 132,856 | | | | | | | | | | | | | Cash flows from investing activities | | | | | | | | | | | Other, net | | | — | | | — | | | 7 | | Net cash provided by investing activities | | | — | | | — | | | 7 | | | | | | | | | | | | | Cash flows from financing activities | | | | | | | | | | | Dividends paid | | | (138,246) | | | (131,036) | | | (122,810) | | Distributions paid | | | — | | | — | | | (2,118) | | Stock tendered for payment of withholding taxes | | | (1,764) | | | (69) | | | (120) | | Proceeds from employee stock purchase plan | | | — | | | 342 | | | 528 | | Common stock repurchased | | | (136,242) | | | (131,800) | | | — | | Net cash used in financing activities | | | (276,252) | | | (262,563) | | | (124,520) | | Net increase (decrease) in cash and cash equivalents | | | 18,808 | | | (8,690) | | | 8,343 | | Cash and cash equivalents at beginning of year | | | 5,647 | | | 14,337 | | | 5,994 | | Cash and cash equivalents at end of year | | $ | 24,455 | | $ | 5,647 | | $ | 14,337 | |
| | | | | | | | | | Condensed Statements of Cash Flows | | | | | | | | | | | | Year Ended December 31, | (dollars in thousands) | | 2020 | | 2019 | | 2018 | Cash flows from operating activities | | | | | | | | | | Net income | | $ | 185,754 | | $ | 284,392 | | $ | 264,394 | Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | (Equity in undistributed income) excess distributions of FHB | | | (49,580) | | | 10,620 | | | (8,752) | Deferred income taxes | | | 5 | | | 85 | | | (48) | Stock-based compensation | | | 713 | | | 84 | | | 281 | Change in assets and liabilities: | | | | | | | | | | Net (increase) decrease in other assets | | | (1,451) | | | 5,318 | | | (9,635) | Net (decrease) increase in other liabilities | | | (294) | | | (5,439) | | | 7,633 | Net cash provided by operating activities | | | 135,147 | | | 295,060 | | | 253,873 | | | | | | | | | | | Cash flows from financing activities | | | | | | | | | | Dividends paid | | | (135,099) | | | (138,246) | | | (131,036) | Stock tendered for payment of withholding taxes | | | (1,749) | | | (1,764) | | | (69) | Proceeds from employee stock purchase plan | | | 312 | | | — | | | 342 | Common stock repurchased | | | (5,000) | | | (136,242) | | | (131,800) | Net cash used in financing activities | | | (141,536) | | | (276,252) | | | (262,563) | Net (decrease) increase in cash and cash equivalents | | | (6,389) | | | 18,808 | | | (8,690) | Cash and cash equivalents at beginning of year | | | 24,455 | | | 5,647 | | | 14,337 | Cash and cash equivalents at end of year | | $ | 18,066 | | $ | 24,455 | | $ | 5,647 |
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. ITEM 9A. 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 December 31, 2019.2020. 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 December 31, 2019.2020. Management’s Annual Report on Internal Control over Financial Reporting Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting. Internal control is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation of reliable published financial statements. Internal control over financial reporting includes self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified. Because of inherent limitations in any system of internal control, no matter how well designed, misstatements due to error or fraud may occur and not be detected, including the possibility of the circumvention or overriding of controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control effectiveness may vary over time. Management assessed the Company’s internal control over financial reporting as of December 31, 2019.2020. This assessment was based on criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, the Chief Executive Officer and Chief Financial Officer assert that the Company maintained effective internal control over financial reporting as of December 31, 20192020 based on the specified criteria. Attestation Report of the Company’s Independent Registered Public Accounting Firm The effectiveness of the Company’s internal control over financial reporting as of December 31, 20192020 has been audited by Deloitte & Touche LLP, the independent registered public accounting firm who also has audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K. Deloitte & Touche LLP’s attestation report on the Company’s internal control over financial reporting appears on the following page and is incorporated by reference herein. 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 December 31, 20192020 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To Thethe Stockholders and the Board of Directors of First Hawaiian, Inc. Honolulu, Hawaii Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of First Hawaiian, Inc. and Subsidiary (the “Company”) as of December 31, 2019,2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Because management's assessment and our audit were conducted to meet the reporting requirements of Section 112 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), management's assessment and our audit of the Company’s internal control over financial reporting included controls over the preparation of the schedules equivalent to the basic financial statements in accordance with the instructions for the Consolidated Financial Statements for Bank Holding Companies (Form FR Y-9C). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have not examined and, accordingly, we do not express an opinion or any other form of assurance on management's statement referring to compliance with laws and regulations. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019,2020, of the Company and our report dated February 27, 202025, 2021 expressed an unqualified opinion on those financial statements.statements and included an explanatory paragraph regarding the Company’s adoption of a new accounting standard. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP Honolulu, Hawaii
February 27, 202025, 2021 ITEM 9B. OTHER INFORMATION Information Required Pursuant to Section 13(r) of the Securities Exchange Act
Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 amended Section 13 of the Exchange Act of 1934 (the “Exchange Act”) to add new subsection (r), which requires disclosure if, during the reporting period, the issuer or any of its affiliates has knowingly engaged in certain specified activities involving Iran or other persons targeted by the United States sanctions programs related to terrorism (Executive Order 13224) or the proliferation of weapons of mass destruction (Executive Order 13382). Disclosure is generally required even if the activities were conducted outside the United States by non-U.S. entities in compliance with applicable law.
First Hawaiian, Inc. and the Bank (the “Company”) have not engaged in any activities that would require reporting under Section 13(r) of the Exchange Act. However, during the reporting period (until February 1, 2019), the Company was controlled by BNP Paribas under the Bank Holding Company Act of 1956, as amended, and was under common control with BNP Paribas’ affiliates (collectively “BNPP”). As a result, until February 1, 2019, BNPP was an affiliate of the Company. To help the Company comply with Section 13(r) of the Exchange Act, in April 2019, BNPP requested relevant information from its affiliates globally, and it provided the following information to the Company. Unless stated otherwise, the information below is as of March 31, 2019. From February 2019, BNPP was no longer an affiliate of the Company.
BNPP is committed to economic sanctions compliance, the prevention of money laundering and the fight against corruption and terrorist financing. As part of these efforts, BNPP has adopted and maintains a risk-based compliance program reasonably designed to ensure conformity with applicable anti-money laundering, anti-corruption, counter-terrorist financing, and sanctions laws and regulations in the territories in which BNPP operates.
Legacy agreements: In the past, BNPP issued and participated in legacy guarantees and other financing arrangements that supported various projects, including the construction of petrochemical plants in Iran. Some of these financing arrangements had counterparties that were entities or instrumentalities of the Government of Iran, involved Iranian banks that were subsequently sanctioned pursuant to Executive Orders 13224 or 13382, or involved a Syrian entity that was subsequently sanctioned pursuant to Executive Order 13382. BNPP continued to have obligations under these arrangements and made efforts to close the positions which remain outstanding in accordance with applicable law. BNPP received gross revenues of approximately EUR $1.0 million during the three months ended March 31, 2019, in connection with these projects, with a net profit of less than that amount, which were mainly comprised of repayments and fees on those legacy guarantees and other financing arrangements.
Other relationships with Iranian banks: Until August 1, 2017, BNPP maintained a safe deposit box in Italy for the Rome branch of an Iranian government-owned bank. There was no gross revenue to BNPP during the first quarter of 2019 for this activity.
Clearing systems: As part of its operations and in conformance with applicable law, BNPP participated in various local clearing and settlement exchange systems. Iranian government-owned banks also participate in some of these clearing systems and may act as counterparty banks. BNPP intended to continue to participate in the local clearing and settlement exchange systems in various countries. There was no measurable gross revenue or net profit generated by this activity for BNPP during the first quarter of 2019.
Restricted accounts and transactions: BNPP maintained various accounts that are blocked or restricted for sanctions-related reasons, for which no activity took place during the first quarter of 2019, except for the crediting of interest or the deduction of standard account charges, in accordance with applicable law. During the fourth quarter of 2016, BNPP froze payments where required under relevant sanctions programs. BNPP will continue to hold these assets in a blocked or restricted status, as applicable laws may require or permit.
Amendment of Bylaws
On February 26, 2020, the Company’s Board of Directors (the “Board”) approved certain amendments to the Company’s amended and restated bylaws (the “Bylaws”) effective as of such date to change the voting standard for the election of directors in uncontested elections from a plurality to a majority voting standard. The Board also amended the Company’s Corporate Governance Guidelines (the “Corporate Governance Guidelines”) to include a director resignation policy. The amended Corporate Governance Guidelines are available on the Company’s website at www.fhb.com. The Bylaws were also amended to remove the reference in Section 2.1 therein to the initial number of directors, which is no longerNot applicable.
The foregoing description is qualified in its entirety by reference to the full text of the Bylaws, a copy of which is attached hereto as Exhibit 3.3 and is incorporated herein by reference.
PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Directors and Executive Officers For information relating to the directors and executive officers of the Company, the section captioned “Directors and Executive Officers”“Director Nominees” in the Company’s definitive Proxy Statement for the 20202021 Annual Meeting of Stockholders (the “Proxy Statement”) to be filed with the SEC within 120 days after the end of the Company'sCompany’s fiscal year is incorporated herein by reference. For information regarding procedures for stockholder nominations,relating to the executive officers of the Company, the section captioned “Stockholder Proposals for the 2020 Annual Meeting”“Executive Officers” in the Proxy Statement is incorporated herein by reference. Compliance with Section 16(a) of the Securities Exchange Act of 1934 For information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934, the section captioned “Delinquent Section 16(a) Reports” in the Company’s Proxy Statement is incorporated herein by reference. Disclosure of Code of Ethics For information concerning Thethe Company’s Code of Ethics, the information contained under the section captioned “Board“Corporate Governance and Board Matters – Board of Directors, Committees and Governance—Corporate Governance Guidelines and Code of Conduct and Ethics” in the Company’s Proxy Statement is incorporated herein by reference. Corporate GovernanceProcedures for Stockholder Nominations
For information regarding procedures for stockholder nominations, the section captioned “Other Business – Stockholder Proposals for the 2021 Annual Meeting” in the Proxy Statement is incorporated herein by reference. Audit Committee For information regarding the Audit Committee and its composition and the audit committee financial experts, the section captioned “Board of Directors, Committees and Governance — Committees of Our Board of Directors — Audit Committee” in the Company’s Proxy Statement is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION For information regarding executive and director compensation, the sections captioned “Executive Compensation” and “Director Compensation” in the Company’s Proxy Statement are incorporated herein by reference. For information regarding compensation committee interlocks and insider participation, the section captioned “Board“Corporate Governance and Board Matters – Board of Directors, Committees and Governance — Compensation Committee Interlocks and Insider Participation” in the Company’s Proxy Statement is incorporated herein by reference. For our Compensation Committee Report, seethe section captioned “Executive Compensation — Compensation Disclosure and Analysis — Compensation Committee Report.”Report” in the Proxy Statement is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS For information regarding Security Ownership of Certain Beneficial Owners, Directors and Management, the section captioned “Security Ownership of Certain Beneficial Owners, Directors and Management”“Stock Ownership” in the Company’s Proxy Statement is incorporated herein by reference. The following table sets forth information about the Company common stock that may be issued upon the exercise of stock options, warrants and rights under all of the Company’s equity compensation plans as of December 31, 2019.2020. | | | | | | | | | | | | | | | | | | | | | Number of securities | | | | | | Number of securities | | | Number of securities | | Weighted average | | remaining available | | Number of securities | | Weighted average | | remaining available | | | to be issued upon | | exercise price of | | for future issuance | | to be issued upon | | exercise price of | | for future issuance | | | exercise of outstanding | | outstanding options, | | under equity | | exercise of outstanding | | outstanding options, | | under equity | Plan Category | | options, warrants and rights | | warrants and rights | | compensation plans | | options, warrants and rights | | warrants and rights | | compensation plans | Equity compensation plans approved by security holders | 879,817 | | $ | — | | 4,911,647 | | 1,163,209 | | $ | — | | 4,358,977 | Equity compensation plans not approved by security holders | | — | | | — | | — | | — | | | — | | — | Total | | 879,817 | | $ | — | | 4,911,647 | | 1,163,209 | | $ | — | | 4,358,977 |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE For information regarding transactions with related persons, promoters and certain control persons, the section captioned “Certain“Corporate Governance and Board Matters – Board of Directors, Committees and Governance – Our Relationship with BNPP and Certain Other Related Party Transactions” in the Company’s Proxy Statement is incorporated herein by reference. For information regarding director independence, the section captioned “Board of Directors, Committees and Governance — Director Independence” in the Company’s Proxy Statement is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES For information regarding transactions with related persons, promotersprincipal accounting fees and certain control persons,services, the sectionsections captioned “Principal“Audit Fees – Principal Accountant Fees” and “– Preapproval Policies and Procedures” in the Company’s Proxy Statement is incorporated herein by reference. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) | 1.Financial Statements |
The following consolidated financial statements of First Hawaiian, Inc. and Subsidiary are included in Item 8 of this report: Consolidated Statements of Income – For the years ended December 31, 2020, 2019 2018 and 20172018 Consolidated Statements of Comprehensive Income – For the years ended December 31, 2020, 2019 2018 and 20172018 Consolidated Balance Sheets – As of December 31, 20192020 and 20182019 Consolidated Statements of Stockholders’ Equity – For the years ended December 31, 2020, 2019 2018 and 20172018 Consolidated Statements of Cash Flows – For the years ended December 31, 2020, 2019 2018 and 20172018 Notes to Consolidated Financial Statements 2.Financial Statement Schedules All schedules are omitted since the required information is either not applicable, not deemed material, or is disclosed in the Company’s consolidated financial statements. 3.Exhibits The list of exhibits required to be filed as exhibits to this Annual Report on Form 10-K is listed below in the “Exhibit Index”. ITEM 16. FORM 10-K SUMMARY None. EXHIBIT INDEX Exhibit Number |
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| 3.1 | | Second Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by First Hawaiian, Inc. on August 10, 2016 (File No. 001-14585)) | | 3.2 | | Certificate of Amendment to Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1(a) to the Quarterly Report on Form 10-Q filed by First Hawaiian, Inc. on April 27, 2018 (File No. 001-14585)) | | 3.3 | | Fourth Amended and Restated Bylaws of First Hawaiian, Inc., effective as of February 26, 2020 (incorporated by reference to Exhibit 3.3 to the Annual Report on Form 10-K filed by First Hawaiian, Inc. on February 28, 2020 (File No. 001-14585)) | | 4.1 | | Description of First Hawaiian, Inc. securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (incorporated by reference to Exhibit 4.1 to the Annual Report on Form 10-K filed by First Hawaiian, Inc. on February 28, 2020 (File No. 001-14585)) | | 10.1 | | Master Reorganization Agreement, dated as of April 1, 2016, by and among BancWest Corporation (to be renamed First Hawaiian, Inc.), BancWest Holding Inc., BWC Holding Inc. and BNP Paribas (incorporated by reference to Exhibit 10.8 to the Registration Statement on Form S-1 filed by First Hawaiian, Inc. on July 8, 2016 (File No. 333-212451)) | | 10.2 | | Tax Sharing Agreement, dated as of April 1, 2016, by and among BNP Paribas, BancWest Corporation (to be renamed First Hawaiian, Inc.) and BancWest Holding Inc. (incorporated by reference to Exhibit 10.9 to the Registration Statement on Form S-1 filed by First Hawaiian, Inc. on July 8, 2016 (File No. 333-212451)) | | 10.3 | | Agreement for Allocation and Settlement of Income Tax Liabilities, effective as of July 1, 2016, by and among BNP Paribas, BNP Paribas Fortis, BNP Paribas USA, Inc., BancWest Corporation, BancWest Holding Inc., Bank of the West, First Hawaiian, Inc. and First Hawaiian Bank (incorporated by reference to Exhibit 10.17 to Amendment No. 1 the Registration Statement on Form S-1 filed by First Hawaiian, Inc. on July 26, 2016 (File No. 333-212451)) | | 10.4 | | Insurance Agreement, by and among BNP Paribas, BNP Paribas USA, Inc. and First Hawaiian, Inc. (incorporated by reference to Exhibit 10.6 to the Current Report on Form 8-K filed by First Hawaiian, Inc. on August 10, 2016 (File No. 001-14585)) | | 10.5 | | First Hawaiian Bank Long-Term Incentive Plan, as amended and restated as of January 1, 2013 (incorporated by reference to Exhibit 10.5 to the Registration Statement on Form S-1 filed by First Hawaiian, Inc. on July 8, 2016 (File No. 333-212451)) | | 10.6 | | Certification Regarding Amendment and Restatement of the First Hawaiian Bank Incentive Plan for Key Employees, dated February 24, 2014 (incorporated by reference to Exhibit 10.6 to the Registration Statement on Form S-1 filed by First Hawaiian, Inc. on July 8, 2016 (File No. 333-212451)) | | 10.7 | | First Hawaiian, Inc. 2016 Omnibus Incentive Compensation Plan (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8 filed by First Hawaiian, Inc. on August 8, 2016 (File No. 333-212996)) | | 10.8 | | First Hawaiian, Inc. 2016 Non-Employee Director Plan (incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-8 filed by First Hawaiian, Inc. on August 8, 2016 (File No. 333-212996)) | | 10.9 | | First Hawaiian, Inc. Bonus Plan (incorporated by reference to Exhibit 10.4 to the Current Report on Form 8-K filed by First Hawaiian, Inc. on August 10, 2016 (File No. 001-14585)) | | 10.10 | | First Hawaiian, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.3 to the Registration Statement on Form S-8 filed by First Hawaiian, Inc. on August 8, 2016 (File No. 333-212996)) |
Exhibit Number |
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| 10.11 | | Executive Change-in-Control Retention Plan of First Hawaiian Bank (incorporated by reference to Exhibit 10.20 to the Registration Statement on Form S-1 filed by First Hawaiian, Inc. on July 8, 2016 (File No. 333-212451)) | | 10.12 | | First Hawaiian, Inc. Long-Term Incentive Plan, as amended and restated effective August 9, 2016 (incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K filed by First Hawaiian, Inc. on August 10, 2016 (File No. 001-14585)) | | 10.13 | | Form of First Hawaiian, Inc. 2016 Omnibus Incentive Compensation Plan IPO Restricted Share Award Agreement (incorporated by reference to Exhibit 10.22 to the Registration Statement on Form S-1 filed by First Hawaiian, Inc. on July 8, 2016 (File No. 333-212451)) | | 10.14 | | Form of First Hawaiian, Inc. 2016 Omnibus Incentive Compensation Plan IPO Performance Share Unit Award Agreement (incorporated by reference to Exhibit 10.23 to the Registration Statement on Form S-1 filed by First Hawaiian, Inc. on July 8, 2016 (File No. 333-212451)) | | 10.15 | | Form of First Hawaiian, Inc. Long-Term Incentive Plan Performance Share Unit Award Agreement (incorporated by reference to Exhibit 10.24 to the Registration Statement on Form S-1 filed by First Hawaiian, Inc. on July 8, 2016 (File No. 333-212451)) | | 10.16 | | Form of First Hawaiian, Inc. Long-Term Incentive Plan Performance Share Award Agreement (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by First Hawaiian, Inc. on March 5, 2019 (File No. 001-14585)) | | 10.17 | | Form of First Hawaiian, Inc. 2016 Non-Employee Director Plan Restricted Stock Unit Award Agreement (incorporated by reference to Exhibit 10.25 to the Registration Statement on Form S-1 filed by First Hawaiian, Inc. on July 8, 2016 (File No. 333-212451)) | | 10.18 | | Form of First Hawaiian, Inc. 2016 Omnibus Incentive Compensation Plan Restricted Share Unit Award Agreement (incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q filed by First Hawaiian, Inc. on October 26, 2018 (File No. 001-14585)) | | 10.19 | | Form of First Hawaiian, Inc. 2016 Omnibus Incentive Compensation Plan Restricted Share Award Agreement (2019) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by First Hawaiian, Inc. on March 5, 2019 (File No. 001-14585)) | | 10.20 | | Form of First Hawaiian, Inc. 2016 Omnibus Incentive Compensation Plan Restricted Share Award Agreement (2020) (incorporated by reference to Exhibit 10.20 to the Annual Report on Form 10-K filed by First Hawaiian, Inc. on February 28, 2020 (File No. 001-14585)) | | 10.21 | | BancWest Corporation Deferred Compensation Plan Part B (2016 Restatement) (incorporated by reference to Exhibit 10.1 to the Registration Statement on Form S-8 filed by First Hawaiian, Inc. on December 13, 2016 (File No. 333-215068)) | | 10.22 | | First Hawaiian Inc. Supplemental Executive Retirement Plan Part B (2019 Restatement) (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q filed by First Hawaiian, Inc. on April 26, 2019 (File No. 001-14585)) | | 10.23 | | Amended and Restated First Hawaiian Bank Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by First Hawaiian, Inc. on April 27, 2018 (File No. 001-14585)) | | 10.24 | | Employment Agreement, dated as of October 20, 2011, by and among Robert S. Harrison, First Hawaiian Bank and BancWest Corporation (incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-1 filed by First Hawaiian, Inc. on July 8, 2016 (File No. 333-212451)) |
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| 10.25 | | First Hawaiian, Inc. Role-Based Allowance Award Agreement for Robert S. Harrison (incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K filed by First Hawaiian, Inc. on August 10, 2016 (File No. 001-14585)) | | 10.26 | | Offer Letter, dated as of June 15, 2015, from Robert S. Harrison on behalf of First Hawaiian Bank to Eric K. Yeaman (incorporated by reference to Exhibit 10.30 to the Registration Statement on Form S-1 filed by First Hawaiian, Inc. on January 24, 2017 (File No. 333-215676)) | | 10.27 | | Offer Letter, dated as of July 25, 2018, from Robert S. Harrison on behalf of First Hawaiian Bank to Ravi Mallela (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q filed by First Hawaiian, Inc. on October 26, 2018 (File No. 001-14585)) | | 10.28 | | First Hawaiian, Inc. 2016 Omnibus Incentive Compensation Plan Form of Restricted Stock Unit Award Agreement (2021) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by First Hawaiian, Inc. on February 4, 2021 (File No. 001-14585)) | | 10.29 | | First Hawaiian, Inc. Long-Term Incentive Plan Form of Performance Share Unit Award Agreement (2021) (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by First Hawaiian, Inc. on February 4, 2021 (File No. 001-14585)) | | 21.1 | | Subsidiaries of First Hawaiian, Inc. | | 23.1 | | Consent of Deloitte & Touche LLP | | 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 | | 32.1 | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | 32.2 | | Certification of 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 | | 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.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | 104 | | Cover Page Interactive Data File – the cover page XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101) |
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: February 27, 202025, 2021 | | First Hawaiian, Inc. | | | | | | | | | | | By: | /s/ Robert S. Harrison | | | Robert S. Harrison | | | Chairman of the Board, President and Chief Executive Officer | | | (Principal Executive Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. | | | | | | Date: February 27, 202025, 2021 | | | | | | | | | | | | /s/ Robert S. Harrison | | /s/ Ravi Mallela | Robert S. Harrison Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) | | Ravi Mallela Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | | | | | | | /s/ Matthew J. Cox | | /s/ W. Allen Doane | Matthew J. Cox, Director | | W. Allen Doane, Director | | | | | | | | | | | | | /s/ Faye W. Kurren | | /s/ Allen B. Uyeda | Faye W. Kurren, Director | | Allen B. Uyeda, Director | | | | | | | | | | | | | /s/ Jenai S. Wall | | /s/ C. Scott WoVanessa L. Washington | Jenai S. Wall, Director | | Vanessa L. Washington, Director | | | | | | | | | | | | | /s/ C. Scott Wo | | | C. Scott Wo, Director | | |
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