First Hawaiian 10Q 2019 Q3 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-14585

FIRST HAWAIIAN, INC.

(Exact Name of Registrant as Specified in its Charter)


Delaware		99-0156159
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

999 Bishop Street, 29th Floor

Honolulu, HI

96813

(Address of Principal Executive Offices)

(Zip Code)

(808) 525-7000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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


Title of each class:	Trading Symbol(s)	Name of each exchange on which registered:
Common Stock, par value $0.01 per share	FHB	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻.

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻.

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

Large Accelerated Filer ⌧

Accelerated filer ◻

Non-accelerated filer ◻

Smaller reporting company ☐

Emerging growth company ☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 130,977,395 shares of Common Stock, par value $0.01 per share, were outstanding as of October 17, 2019.

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TABLE OF CONTENTS

FIRST HAWAIIAN, INC.

FORM 10-Q

INDEX


Part I Financial Information			Page No.
	Item 1.	Financial Statements (unaudited)		2
		Consolidated Statements of Income for the three and nine months ended September 30, 2019 and 2018		2
		Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018		3
		Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018		4
		Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2019 and 2018		5
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018		7
		Notes to Consolidated Financial Statements (unaudited)		8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		49
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		90
	Item 4.	Controls and Procedures		90
Part II Other Information				90
	Item 1.	Legal Proceedings		90
	Item 1A.	Risk Factors		90
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		91
	Item 6.	Exhibits		92
	Exhibit Index			92
	Signatures			93

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands, except per share amounts)	2019		2018		2019		2018
Interest income
Loans and lease financing	$	144,691	$	135,394	$	435,980	$	389,228
Available-for-sale securities		22,256		25,196		71,526		81,586
Other		3,234		3,462		9,054		7,193
Total interest income		170,181		164,052		516,560		478,007
Interest expense
Deposits		22,753		20,205		69,643		52,824
Short-term and long-term borrowings		4,347		2,589		13,134		2,850
Total interest expense		27,100		22,794		82,777		55,674
Net interest income		143,081		141,258		433,783		422,333
Provision for loan and lease losses		—		4,460		9,550		16,430
Net interest income after provision for loan and lease losses		143,081		136,798		424,233		405,903
Noninterest income
Service charges on deposit accounts		8,554		7,933		24,737		23,609
Credit and debit card fees		16,839		16,535		50,123		48,961
Other service charges and fees		8,903		9,578		27,435		28,553
Trust and investment services income		8,698		7,487		26,247		23,429
Bank-owned life insurance		5,743		3,692		12,946		8,131
Investment securities losses, net		—		—		(2,592)		—
Other		1,243		2,180		6,929		13,219
Total noninterest income		49,980		47,405		145,825		145,902
Noninterest expense
Salaries and employee benefits		44,955		41,959		132,000		125,755
Contracted services and professional fees		14,649		11,478		42,597		36,770
Occupancy		7,250		6,757		21,522		20,149
Equipment		4,024		4,181		12,852		13,104
Regulatory assessment and fees		1,992		3,966		5,588		12,164
Advertising and marketing		1,647		1,060		5,593		3,126
Card rewards program		6,930		5,805		21,326		17,882
Other		12,019		17,941		37,901		46,649
Total noninterest expense		93,466		93,147		279,379		275,599
Income before provision for income taxes		99,595		91,056		290,679		276,206
Provision for income taxes		25,396		23,668		74,123		71,807
Net income	$	74,199	$	67,388	$	216,556	$	204,399
Basic earnings per share	$	0.56	$	0.50	$	1.62	$	1.48
Diluted earnings per share	$	0.56	$	0.50	$	1.61	$	1.48
Basic weighted-average outstanding shares		132,583,902		135,466,669		133,957,192		137,643,005
Diluted weighted-average outstanding shares		132,877,769		135,675,498		134,231,762		137,809,573

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	2019		2018		2019		2018
Net income	$	74,199	$	67,388	$	216,556	$	204,399
Other comprehensive income (loss), net of tax:
Net change in pensions and other benefits		—		—		(594)		—
Net change in investment securities		13,210		(22,420)		114,015		(89,236)
Net change in cash flow derivative hedges		—		131		—		988
Other comprehensive income (loss)		13,210		(22,289)		113,421		(88,248)
Total comprehensive income	$	87,409	$	45,099	$	329,977	$	116,151

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)


	September 30,		December 31,
(dollars in thousands, except share amount)	2019		2018
Assets
Cash and due from banks	$	358,863	$	396,836
Interest-bearing deposits in other banks		985,154		606,801
Investment securities		4,157,082		4,498,342
Loans held for sale		1,594		432
Loans and leases		12,843,396		13,076,191
Less: allowance for loan and lease losses		132,964		141,718
Net loans and leases		12,710,432		12,934,473

Premises and equipment, net		315,309		304,996
Other real estate owned and repossessed personal property		82		751
Accrued interest receivable		44,671		48,920
Bank-owned life insurance		453,410		446,076
Goodwill		995,492		995,492
Mortgage servicing rights		13,630		16,155
Other assets		562,501		446,404
Total assets	$	20,598,220	$	20,695,678
Liabilities and Stockholders' Equity
Deposits:
Interest-bearing	$	11,136,424	$	11,142,127
Noninterest-bearing		5,720,822		6,007,941
Total deposits		16,857,246		17,150,068
Short-term borrowings		400,000		—
Long-term borrowings		200,018		600,026
Retirement benefits payable		128,442		127,909
Other liabilities		357,956		292,836
Total liabilities		17,943,662		18,170,839

Commitments and contingent liabilities (Note 13)

Stockholders' equity
Common stock ($0.01 par value; authorized 300,000,000 shares; issued/outstanding: 139,908,699 / 131,260,900 as of September 30, 2019; issued/outstanding: 139,656,674 / 134,874,302 as of December 31, 2018)		1,399		1,397
Additional paid-in capital		2,501,324		2,495,853
Retained earnings		403,317		291,919
Accumulated other comprehensive loss, net		(18,774)		(132,195)
Treasury stock (8,647,799 shares as of September 30, 2019 and 4,782,372 shares as of December 31, 2018)		(232,708)		(132,135)
Total stockholders' equity		2,654,558		2,524,839
Total liabilities and stockholders' equity	$	20,598,220	$	20,695,678

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)


	Three Months Ended September 30, 2019
								Accumulated
				Additional				Other
	Common Stock			Paid-In		Retained		Comprehensive		Treasury
(dollars in thousands, except share amounts)	Shares	Amount		Capital		Earnings		Income (Loss)		Stock		Total
Balance as of June 30, 2019	133,508,212	$	1,399	$	2,499,946	$	363,748	$	(31,984)	$	(173,668)	$	2,659,441
Net income	—		—		—		74,199		—		—		74,199
Cash dividends declared ($0.26 per share)	—		—		—		(34,408)		—		—		(34,408)
Equity-based awards	41,980		—		1,378		(222)		—		(231)		925
Common stock repurchased	(2,289,292)		—		—		—		—		(58,809)		(58,809)
Other comprehensive income, net of tax	—		—		—		—		13,210		—		13,210
Balance as of September 30, 2019	131,260,900	$	1,399	$	2,501,324	$	403,317	$	(18,774)	$	(232,708)	$	2,654,558


	Nine Months Ended September 30, 2019
								Accumulated
				Additional				Other
	Common Stock			Paid-In		Retained		Comprehensive		Treasury
(dollars in thousands, except share amounts)	Shares	Amount		Capital		Earnings		Income (Loss)		Stock		Total
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	—		—		—		216,556		—		—		216,556
Cash dividends declared ($0.78 per share)	—		—		—		(104,392)		—		—		(104,392)
Equity-based awards	185,736		2		5,471		(766)		—		(1,764)		2,943
Common stock repurchased	(3,799,138)		—		—		—		—		(98,809)		(98,809)
Other comprehensive income, net of tax	—		—		—		—		113,421		—		113,421
Balance as of September 30, 2019	131,260,900	$	1,399	$	2,501,324	$	403,317	$	(18,774)	$	(232,708)	$	2,654,558

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

(Unaudited)


	Three Months Ended September 30, 2018
								Accumulated
				Additional				Other
	Common Stock			Paid-In		Retained		Comprehensive		Treasury
(dollars in thousands, except share amounts)	Shares	Amount		Capital		Earnings		Loss		Stock		Total
Balance as of June 30, 2018	136,642,060	$	1,396	$	2,492,656	$	229,615	$	(182,410)	$	(82,082)	$	2,459,175
Net income	—		—		—		67,388		—		—		67,388
Cash dividends declared ($0.24 per share)	—		—		—		(32,370)		—		—		(32,370)
Equity-based awards	33,469		1		1,780		(170)		—		(53)		1,558
Common stock repurchased	(1,801,801)		—		—		—		—		(50,000)		(50,000)
Other comprehensive loss, net of tax	—		—		—		—		(22,289)		—		(22,289)
Balance as of September 30, 2018	134,873,728	$	1,397	$	2,494,436	$	264,463	$	(204,699)	$	(132,135)	$	2,423,462


	Nine Months Ended September 30, 2018
								Accumulated
				Additional				Other
	Common Stock			Paid-In		Retained		Comprehensive		Treasury
(dollars in thousands, except share amounts)	Shares	Amount		Capital		Earnings		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	—		—		—		204,399		—		—		204,399
Cash dividends declared ($0.72 per share)	—		—		—		(98,666)		—		—		(98,666)
Common stock issued under Employee Stock Purchase Plan	12,341		—		342		—		—		—		342
Equity-based awards	42,475		1		5,451		(515)		—		(53)		4,884
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	—		—		—		—		(88,248)		—		(88,248)
Balance as of September 30, 2018	134,873,728	$	1,397	$	2,494,436	$	264,463	$	(204,699)	$	(132,135)	$	2,423,462

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended
	September 30,
(dollars in thousands)	2019		2018
Cash flows from operating activities
Net income	$	216,556	$	204,399
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses		9,550		16,430
Depreciation, amortization and accretion, net		49,976		41,893
Deferred income taxes		19,124		2,208
Stock-based compensation		4,707		4,884
Other losses (gains)		18		(897)
Originations of loans held for sale		(12,960)		(28,472)
Proceeds from sales of loans held for sale		11,856		28,614
Net losses (gains) on sales of loans originated for investment and held for sale		1,156		(148)
Net losses on investment securities		2,592		—
Change in assets and liabilities:
Net (increase) decrease in other assets		(46,083)		5,573
Net decrease in other liabilities		(85,425)		(8,973)
Net cash provided by operating activities		171,067		265,511
Cash flows from investing activities
Available-for-sale securities:
Proceeds from maturities and principal repayments		536,058		637,538
Proceeds from calls and sales		943,630		—
Purchases		(999,490)		(130,251)
Other investments:
Proceeds from sales		9,238		10,333
Purchases		(19,429)		(45,432)
Loans:
Net decrease (increase) in loans and leases resulting from originations and principal repayments		55,138		(171,306)
Proceeds from sales of loans originated for investment		407,698		562
Purchases of loans		(247,711)		(158,616)
Proceeds from bank-owned life insurance		5,612		1,154
Purchases of premises, equipment and software		(22,370)		(13,495)
Purchases of mortgage servicing rights		—		(6,444)
Proceeds from sales of other real estate owned		759		332
Other		(2,023)		(2,054)
Net cash provided by investing activities		667,110		122,321
Cash flows from financing activities
Net decrease in deposits		(292,822)		(922,849)
Net increase in short-term borrowings		—		30,000
Proceeds from long-term borrowings		—		400,000
Repayment of long-term borrowings		(10)		(10)
Dividends paid		(104,392)		(98,666)
Stock tendered for payment of withholding taxes		(1,764)		—
Proceeds from employee stock purchase plan		—		342
Common stock repurchased		(98,809)		(131,800)
Net cash used in financing activities		(497,797)		(722,983)
Net increase (decrease) in cash and cash equivalents		340,380		(335,151)
Cash and cash equivalents at beginning of period		1,003,637		1,034,644
Cash and cash equivalents at end of period	$	1,344,017	$	699,493

Supplemental disclosures
Interest paid	$	80,886	$	56,430
Income taxes paid, net of income tax refunds		69,173		29,204
Noncash investing and financing activities:
Transfers from loans and leases to other real estate owned		75		143
Operating lease right-of-use assets obtained in exchange for new lease obligations		1,401		—
Transfers from loans and leases to loans held for sale		408,912		—

The accompanying notes are an integral part of these unaudited interim consolidated financial statements.

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FIRST HAWAIIAN, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and 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”), its only direct, wholly owned subsidiary. FHB 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 accompanying unaudited interim consolidated financial statements of First Hawaiian, Inc. and Subsidiary (the “Company”) have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.

The accompanying unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

In the opinion of management, all adjustments, which consist of normal recurring adjustments necessary for a fair presentation of the interim period consolidated financial information, have been made. Results of operations for interim periods are not necessarily indicative of results to be expected for the entire year. Intercompany account balances and transactions have been eliminated in consolidation.

Transition to an Independent Public Company

On July 1, 2016, FHI became a direct wholly owned subsidiary of BancWest Corporation (“BWC”), a Delaware corporation and an indirect wholly owned subsidiary of BNP Paribas (“BNPP”). In connection with FHI’s initial public offering (“IPO”) in August 2016, 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.

Following a series of secondary offerings completed in 2017 and 2018, on February 1, 2019, BWC completed the sale of its remaining 24,859,750 shares of FHI common stock in a public offering. FHI did not receive any of the proceeds from the sales of shares of FHI common stock in that 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.

Accounting Standards Adopted in 2019

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). This guidance provided that lessees would be required to recognize the following for all operating leases (with the exception of short-term leases): 1) a lease liability, which is the present value of 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 specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The Company adopted the provisions of ASU No. 2016-02 on January 1, 2019 and elected several practical expedients made available by the FASB. Specifically, the Company elected the transition practical expedient to not recast comparative periods upon the adoption of the new guidance. In addition, the Company elected the package of practical expedients which among other things, required no reassessment of whether existing contracts were or contained

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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 16. Leases” for required disclosures related to this new guidance.

In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities. Prior to the adoption of ASU No. 2017-08, entities typically amortized the premium as an adjustment of yield over the contractual life of debt securities. This guidance shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. The Company adopted the provisions of ASU No. 2017-08 on January 1, 2019, and it did not have a material impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. The objectives of the new guidance were to: (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities, and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. Historically, the Company has participated in limited activities in fair value and cash flow hedging relationships. As a result, the adoption of ASU No. 2017-12 on January 1, 2019, did not have a material impact on the Company’s consolidated financial statements. See “Note 12. Derivative Financial Instruments” for required disclosures related to this new guidance.

In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This guidance aligns the accounting for implementation costs related to a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing 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). 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 on January 1, 2019 due to the Company’s shift towards utilizing more hosting arrangements that are service contracts. For the nine months ended September 30, 2019, the Company capitalized $6.3 million related to hosting arrangements that are service contracts.

In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815), Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate 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. The Company adopted the provisions of ASU No. 2018-16 on January 1, 2019 and it did not have a material impact on the Company’s consolidated financial statements.

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Recent Accounting Pronouncements

The following ASUs have been issued by the FASB and are applicable to the Company in future reporting periods.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This guidance eliminates 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. In addition, this guidance modifies the other-than-temporary-impairment model for available-for-sale 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. This 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. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with earlier adoption permitted. 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 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. As permitted by ASU No. 2016-13, the Company expects to elect 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. Furthermore, as permitted by ASU No. 2019-04, the Company expects to 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 formed a working group comprised of teams from different disciplines, including credit, finance and information technology, to evaluate the requirements of the new standard and the impact it will have on the Company’s current processes. The Company also engaged a software vendor and has run several CECL parallel productions during 2019. Based on the Company’s portfolio balances and forecasted economic conditions as of September 30, 2019, management believes that the adoption of the CECL standard could result in an increase in the ACL of approximately 10% to 15%, as compared to the Company’s current reserve levels. The estimated impact of the implementation of the CECL standard is based on the current state of our end-to-end CECL process. However, certain processes are still under development, including refinement of certain models, the qualitative framework, internal control design, testing, model validation and the build-out of the operational control structure supporting the end-to-end process.

Federal banking regulatory agencies have also provided relief for an initial capital decrease at adoption by allowing for an election of the impact to be phased-in over three years on a straight-line basis. The change in the ACL to be recorded on January 1, 2020, may differ, possibly materially, from the Company’s current estimate due to further process refinement, as well as the loan portfolio composition quality at the adoption date, changes in the macroeconomic conditions and forecasts at that time, and additional accounting or supervisory guidance that may be issued prior to the effective date which could impact the Company’s practices for the sound application of the new standard.

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 fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of ASU No. 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.

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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 reporting date. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of ASU No. 2018-13 is not expected to have a material impact on the Company’s consolidated financial statements.

2. Investment Securities

As of September 30, 2019 and December 31, 2018, 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 agencies and 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 September 30, 2019 and December 31, 2018, all of the Company’s investment securities were classified as available-for-sale. Amortized cost and fair value of securities as of September 30, 2019 and December 31, 2018 were as follows:


	September 30, 2019								December 31, 2018
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
U.S. Treasury securities	$	29,653	$	85	$	—	$	29,738	$	389,470	$	—	$	—	$	389,470
Government agency debt securities		24,387		85		—		24,472		—		—		—		—
Government-sponsored enterprises debt securities		126,696		28		(75)		126,649		248,372		—		(6,778)		241,594
Government agency mortgage-backed securities		342,326		2,738		(1,159)		343,905		426,710		—		(15,174)		411,536
Government-sponsored enterprises mortgage-backed securities		366,346		6,831		(1,228)		371,949		156,056		85		(5,294)		150,847
Collateralized mortgage obligations:
Government agency		2,479,961		13,900		(7,337)		2,486,524		2,779,620		—		(97,171)		2,682,449
Government-sponsored enterprises		773,755		3,964		(3,874)		773,845		620,337		—		(17,745)		602,592
Debt securities issued by states and political subdivisions		—		—		—		—		19,854		—		—		19,854
Total available-for-sale securities	$	4,143,124	$	27,631	$	(13,673)	$	4,157,082	$	4,640,419	$	85	$	(142,162)	$	4,498,342

Proceeds from calls and sales of investment securities were $38.0 million and nil, respectively, for the three months ended September 30, 2019 and $38.0 million and $905.6 million, respectively, for the nine months ended September 30, 2019. Proceeds from both calls and sales of investment securities were nil for both the three and nine months ended September 30, 2018. The Company recorded 0 gross realized gains and 0 gross realized losses for the three months ended September 30, 2019 and gross realized gains of $0.1 million and gross realized losses of $2.7 million

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for the nine months ended September 30, 2019. The Company recorded 0 gross realized gains and 0 gross realized losses for the three and nine months ended September 30, 2018. The income tax expense related to the Company’s net realized gain on the sale of investment securities was nil for the three months ended September 30, 2019. The income tax benefit related to the Company’s net realized loss on the sale of investment securities was $0.7 million for the nine months ended September 30, 2019. NaN provision for income taxes related to net realized gains on the sale of investment securities was recorded for the three and nine months ended September 30, 2018. Gains and losses realized on sales of securities are determined using the specific identification method.

Interest income from taxable investment securities was $22.3 million and $25.1 million for the three months ended September 30, 2019 and 2018, respectively, and $71.5 million and $81.2 million for the nine months ended September 30, 2019 and 2018, respectively. Interest income from non-taxable investment securities was NaN and $0.1 million for the three months ended September 30, 2019 and 2018, respectively, and NaN and $0.4 million for the nine months ended September 30, 2019 and 2018, respectively.

The amortized cost and fair value of debt securities issued by the U.S. Treasury and government-sponsored enterprises as of September 30, 2019, by contractual maturity, are shown below. Debt securities issued by government agencies, 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.


	September 30, 2019
	Amortized		Fair
(dollars in thousands)	Cost		Value
Due in one year or less	$	29,653	$	29,738
Due after one year through five years		126,696		126,649
Due after five years through ten years		—		—
Due after ten years		—		—
		156,349		156,387

Government agency debt securities		24,387		24,472
Government agency mortgage-backed securities		342,326		343,905
Government-sponsored enterprises mortgage-backed securities		366,346		371,949
Collateralized mortgage obligations:
Government agency		2,479,961		2,486,524
Government-sponsored enterprises		773,755		773,845
Total collateralized mortgage obligations		3,253,716		3,260,369
Total available-for-sale securities	$	4,143,124	$	4,157,082

At September 30, 2019, pledged securities totaled $2.0 billion, of which $1.8 billion was pledged to secure public deposits and $239.1 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, taken in the aggregate, which were in excess of 10% of stockholders’ equity as of September 30, 2019 and December 31, 2018.

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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 90 and 154 individual securities in each category have been in a continuous loss position as of September 30, 2019 and December 31, 2018, respectively. The unrealized losses on investment securities were attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.

Time in Continuous Loss as of September 30, 2019

Less Than 12 Months

12 Months or More

Total

Unrealized

(dollars in thousands)

Losses

Fair Value

Losses

Fair Value

Losses

Fair Value

Government-sponsored enterprises debt securities

(75)

24,917

—

(75)

24,917

Government agency mortgage-backed securities

—

(1,159)

115,069

(1,159)

115,069

Government-sponsored enterprises mortgage-backed securities

—

(1,228)

115,456

(1,228)

115,456

Collateralized mortgage obligations:

Government agency

(820)

407,961

(6,517)

652,211

(7,337)

1,060,172

Government-sponsored enterprises

(161)

107,250

(3,713)

226,823

(3,874)

334,073

Total available-for-sale securities with unrealized losses

(1,056)

540,128

(12,617)

1,109,559

(13,673)

1,649,687


	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
Government agency mortgage-backed securities		—		—		(15,174)		373,891		(15,174)		373,891
Government-sponsored enterprises mortgage-backed securities		(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 (“OTTI”)

Unrealized losses for all investment securities are reviewed to determine whether the losses are other than temporary. Investment securities are evaluated for OTTI on at least a quarterly basis, and more frequently when economic and market conditions warrant such an evaluation, to determine whether the decline in fair value below amortized cost is other than temporary.

The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. The decline in value is not related to any issuer- or industry-specific credit event. At September 30, 2019, the Company did not have 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. As the Company has the intent and ability to hold securities in an unrealized loss position, each security with an unrealized loss position in the above 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, 2018, the Company had the intent to sell 48 securities with an aggregated amortized cost basis of $898.2 million. As a result, the Company recorded an OTTI write-down of $24.1 million in December 2018. The OTTI write-down represented the difference between the amortized cost basis and the 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.

Visa Class B Restricted Shares

In 2008, the Company received 394,000 Visa Class B restricted shares as part of Visa’s IPO. 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.

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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. As of September 30, 2019, the Company recorded an estimated $0.3 million liability to be paid to the buyer as a result of the reduction in the Visa Class B conversion rate. See “Note 12. Derivative Financial Instruments” for more information.

The Company held approximately 120,000 Visa Class B restricted shares as of both September 30, 2019 and December 31, 2018. These shares continued to be carried at $0 cost basis during each of the respective periods.

3. Loans and Leases

As of September 30, 2019 and December 31, 2018, loans and leases were comprised of the following:


	September 30,		December 31,
(dollars in thousands)	2019		2018
Commercial and industrial	$	2,654,077	$	3,208,760
Commercial real estate		3,309,389		2,990,783
Construction		486,977		626,757
Residential:
Residential mortgage		3,671,424		3,527,101
Home equity line		916,106		912,517
Total residential		4,587,530		4,439,618
Consumer		1,637,549		1,662,504
Lease financing		167,874		147,769
Total loans and leases	$	12,843,396	$	13,076,191

Outstanding loan balances are reported net of net deferred loan costs of $41.2 million and $36.3 million at September 30, 2019 and December 31, 2018, respectively.

As of September 30, 2019, residential real estate loans totaling $2.9 billion were pledged to collateralize the Company’s borrowing capacity at the Federal Home Loan Bank of Des Moines (“FHLB”), and consumer and commercial and industrial loans totaling $675.3 million were pledged to collateralize the Company’s borrowing capacity at the Federal Reserve Bank of San Francisco (“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 Company’s borrowing capacity at the FRB. Residential real estate loans collateralized by properties that were in the process of foreclosure totaled $4.6 million at both September 30, 2019 and December 31, 2018.

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 Company’s 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.

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At September 30, 2019 and December 31, 2018, remaining loan and lease commitments were comprised of the following:


	September 30,		December 31,
(dollars in thousands)	2019		2018
Commercial and industrial	$	2,452,918	$	2,484,857
Commercial real estate		126,033		114,186
Construction		627,675		526,938
Residential:
Residential mortgage		327		121
Home equity line		1,045,455		913,636
Total residential		1,045,782		913,757
Consumer		1,561,670		1,509,853
Total loan and lease commitments	$	5,814,078	$	5,549,591

4. Allowance for Loan and Lease Losses

The Company must maintain an allowance for loan and lease losses (the “Allowance”) 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 pools of loans and leases, and an unallocated portion.

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 classes 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 and class taking into consideration portfolio segment-specific and class-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 the 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 requires an analysis to determine the appropriate level of reserve for that specific loan. Impaired loans below 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 of reserve for that specific loan, generally based on the value of the underlying collateral less estimated costs to sell. The specific allocation will be 0 for impaired loans in which the value of the underlying collateral, less estimated costs to sell, exceeds the unpaid principal balance of the loan.

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.

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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 unaudited interim consolidated balance sheet 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 periods indicated:

Three Months Ended September 30, 2019

Commercial Lending

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 period

31,688

22,204

5,014

446

43,420

33,638

2,125

138,535

Charge-offs

(514)

—

(7)

(8,015)

—

(8,536)

Recoveries

241

—

425

2,269

—

2,965

Increase (decrease) in Provision

(4,098)

(358)

(361)

(54)

241

5,838

(1,208)

—

Balance at end of period

27,317

21,876

4,653

392

44,079

33,730

917

132,964

Nine Months Ended September 30, 2019

Commercial Lending

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 period

34,501

19,725

5,813

432

44,906

35,813

528

141,718

Charge-offs

(2,514)

—

(24)

(7)

(24,118)

—

(26,663)

Recoveries

303

—

860

7,103

—

8,359

Increase (decrease) in Provision

(4,973)

2,058

(1,160)

(16)

(1,680)

14,932

389

9,550

Balance at end of period

27,317

21,876

4,653

392

44,079

33,730

917

132,964


	Three Months Ended September 30, 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 period	$	35,239	$	20,507	$	7,606	$	557	$	43,925	$	31,509	$	1,258	$	140,601
Charge-offs		(303)		—		—		—		(125)		(5,700)		—		(6,128)
Recoveries		51		21		—		—		442		1,803		—		2,317
Increase (decrease) in Provision		(1,551)		286		(1,388)		(29)		147		6,381		614		4,460
Balance at end of period	$	33,436	$	20,814	$	6,218	$	528	$	44,389	$	33,993	$	1,872	$	141,250

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	Nine Months Ended September 30, 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 period	$	34,006	$	18,044	$	6,817	$	611	$	42,852	$	31,249	$	3,674	$	137,253
Charge-offs		(778)		—		—		—		(159)		(18,615)		—		(19,552)
Recoveries		154		175		—		—		684		6,106		—		7,119
Increase (decrease) in Provision		54		2,595		(599)		(83)		1,012		15,253		(1,802)		16,430
Balance at end of period	$	33,436	$	20,814	$	6,218	$	528	$	44,389	$	33,993	$	1,872	$	141,250

The disaggregation of the Allowance and recorded investment in loans by impairment methodology as of September 30, 2019 and December 31, 2018 were as follows:


	September 30, 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:
Individually evaluated for impairment	$	106	$	25	$	—	$	—	$	284	$	—	$	—	$	415
Collectively evaluated for impairment		27,211		21,851		4,653		392		43,795		33,730		917		132,549
Balance at end of period	$	27,317	$	21,876	$	4,653	$	392	$	44,079	$	33,730	$	917	$	132,964
Loans and leases:
Individually evaluated for impairment	$	8,239	$	3,577	$	—	$	—	$	14,539	$	200	$	—	$	26,555
Collectively evaluated for impairment		2,645,838		3,305,812		486,977		167,874		4,572,991		1,637,349		—		12,816,841
Balance at end of period	$	2,654,077	$	3,309,389	$	486,977	$	167,874	$	4,587,530	$	1,637,549	$	—	$	12,843,396


	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:
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
Balance at end of period	$	34,501	$	19,725	$	5,813	$	432	$	44,906	$	35,813	$	528	$	141,718
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 period	$	3,208,760	$	2,990,783	$	626,757	$	147,769	$	4,439,618	$	1,662,504	$	—	$	13,076,191

Credit Quality

The Company performs an internal loan review and grading on an ongoing basis. The review provides management with periodic information as to the quality of the loan portfolio and effectiveness of the Company’s lending policies and procedures. The objective of the loan review and grading procedures is to identify, in a timely manner, existing or emerging credit quality problems so that appropriate steps can be initiated to avoid or minimize future losses.

Loans subject to grading include: commercial and industrial loans, commercial and standby letters of credit, 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 which are not subject to grading include loans that are 100% sold with no recourse to the Company, consumer installment loans, indirect automobile loans, credit cards, home equity lines of credit and residential mortgage loans.

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.

A 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.

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Special Mention – Loans and leases that have potential weaknesses deserve 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.

The credit risk profiles by internally assigned grade for loans and leases as of September 30, 2019 and December 31, 2018 were as follows:

September 30, 2019

Commercial

and

Real

Lease

(dollars in thousands)

Industrial

Estate

Construction

Financing

Total

Grade:

Pass

2,498,746

3,139,428

483,535

166,880

6,288,589

Special mention

119,553

125,082

308

878

245,821

Substandard

35,778

44,879

3,134

116

83,907

Total

2,654,077

3,309,389

486,977

167,874

6,618,317


	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 September 30, 2019 and December 31, 2018.

The credit risk profiles based on payment activity for loans and leases that were not subject to loan grading as of September 30, 2019 and December 31, 2018 were as follows:

September 30, 2019

(dollars in thousands)

Residential Mortgage

Home Equity Line

Consumer

Consumer - Auto

Credit Cards

Total

Performing

3,663,274

910,032

230,849

1,029,124

343,814

6,177,093

Non-performing and delinquent

8,150

6,074

6,032

22,242

5,488

47,986

Total

3,671,424

916,106

236,881

1,051,366

349,302

6,225,079


	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

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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 loans is measured based on the estimated fair value of the collateral, less any selling costs. Management exercises significant judgment in developing these estimates.

The Company generally places a loan 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.

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 of September 30, 2019 and December 31, 2018 were as follows:

September 30, 2019

Accruing Loans and Leases

Greater

Total Non

Than or

Total

Accruing

30-59

60-89

Equal to

Total

Accruing

Loans

Days

90 Days

Past

Loans and

and

Total

(dollars in thousands)

Past Due

Due

Current

Leases

Outstanding

Commercial and industrial

1,426

1,204

750

3,380

2,650,685

2,654,065

2,654,077

Commercial real estate

699

—

779

3,308,577

3,309,356

3,309,389

Construction

—

3,169

—

3,169

483,808

486,977

—

486,977

Lease financing

—

167,874

—

167,874

Residential mortgage

2,499

1,553

139

4,191

3,663,274

3,667,465

3,959

3,671,424

Home equity line

1,933

949

3,192

6,074

910,032

916,106

—

916,106

Consumer

24,375

6,111

3,076

33,562

1,603,787

1,637,349

200

1,637,549

Total

30,932

13,066

7,157

51,155

12,788,037

12,839,192

4,204

12,843,396


	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
(dollars in thousands)	Past Due		Past Due		Past Due		Due		Current		Leases		Leases		Outstanding
Commercial and industrial	$	1,293	$	—	$	141	$	1,434	$	3,207,052	$	3,208,486	$	274	$	3,208,760
Commercial real estate		—		—		—		—		2,989,125		2,989,125		1,658		2,990,783
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
Home equity line		5,616		775		2,842		9,233		903,284		912,517		—		912,517
Consumer		32,406		8,712		3,373		44,491		1,618,013		1,662,504		—		1,662,504
Total	$	41,727	$	10,499	$	6,388	$	58,614	$	13,011,034	$	13,069,648	$	6,543	$	13,076,191

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The total carrying amounts and the total unpaid principal balances of impaired loans and leases as of September 30, 2019 and December 31, 2018 were as follows:


	September 30, 2019
			Unpaid
	Recorded		Principal		Related
(dollars in thousands)	Investment		Balance		Allowance
Impaired loans with no related allowance recorded:
Commercial and industrial	$	2,498	$	2,510	$	—
Commercial real estate		2,876		2,876		—
Residential mortgage		8,454		8,519		—
Consumer		200		632		—
Total	$	14,028	$	14,537	$	—
Impaired loans with a related allowance recorded:
Commercial and industrial	$	5,741	$	5,741	$	106
Commercial real estate		701		701		25
Residential mortgage		6,085		6,471		284
Total	$	12,527	$	12,913	$	415
Total impaired loans:
Commercial and industrial	$	8,239	$	8,251	$	106
Commercial real estate		3,577		3,577		25
Residential mortgage		14,539		14,990		284
Consumer		200		632		—
Total	$	26,555	$	27,450	$	415


	December 31, 2018
			Unpaid
	Recorded		Principal		Related
(dollars in thousands)	Investment		Balance		Allowance
Impaired loans with no related allowance recorded:
Commercial and industrial	$	4,449	$	4,498	$	—
Commercial real estate		5,016		5,016		—
Residential mortgage		9,112		9,426		—
Total	$	18,577	$	18,940	$	—
Impaired loans with a related allowance recorded:
Commercial and industrial	$	4,270	$	4,270	$	108
Commercial real estate		727		727		32
Residential mortgage		7,002		7,387		396
Total	$	11,999	$	12,384	$	536
Total impaired loans:
Commercial and industrial	$	8,719	$	8,768	$	108
Commercial real estate		5,743		5,743		32
Residential mortgage		16,114		16,813		396
Total	$	30,576	$	31,324	$	536

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The following tables provide information with respect to the Company’s average balances, and of interest income recognized from, impaired loans for the three and nine months ended September 30, 2019 and 2018:

Three Months Ended

Nine Months Ended

September 30, 2019

Average

Interest

Average

Interest

Recorded

Income

Recorded

Income

(dollars in thousands)

Investment

Recognized

Investment

Recognized

Impaired loans with no related allowance recorded:

Commercial and industrial

3,888

3,653

123

Commercial real estate

2,946

3,524

250

Residential mortgage

8,065

8,365

280

Consumer

100

—

Total

14,999

164

15,592

653

Impaired loans with a related allowance recorded:

Commercial and industrial

4,673

5,325

301

Commercial real estate

706

714

Residential mortgage

6,608

6,882

297

Total

11,987

202

12,921

628

Total impaired loans:

Commercial and industrial

8,561

132

8,978

424

Commercial real estate

3,652

4,238

280

Residential mortgage

14,673

186

15,247

577

Consumer

100

—

Total

26,986

366

28,513

1,281


	Three Months Ended				Nine Months Ended
	September 30, 2018				September 30, 2018
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(dollars in thousands)	Investment		Recognized		Investment		Recognized
Impaired loans with no related allowance recorded:
Commercial and industrial	$	8,830	$	38	$	13,149	$	141
Commercial real estate		7,671		47		8,587		116
Construction		2,120		12		1,560		12
Residential mortgage		10,069		132		9,416		399
Total	$	28,690	$	229	$	32,712	$	668
Impaired loans with a related allowance recorded:
Commercial and industrial	$	5,605	$	136	$	2,875	$	402
Commercial real estate		1,106		17		996		51
Residential mortgage		7,238		77		7,461		248
Total	$	13,949	$	230	$	11,332	$	701
Total impaired loans:
Commercial and industrial	$	14,435	$	174	$	16,024	$	543
Commercial real estate		8,777		64		9,583		167
Construction		2,120		12		1,560		12
Residential mortgage		17,307		209		16,877		647
Total	$	42,639	$	459	$	44,044	$	1,369

Modifications

Commercial and industrial loans modified in a troubled debt restructuring (“TDR”) may involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Modifications of commercial real estate and construction loans in a TDR may 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. Modifications of construction loans in a TDR may also involve extending the interest-only payment period. Interest continues to accrue on the missed payments and as a result, the effective yield on the loan 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 may be comprised of loans where monthly payments are lowered to accommodate the borrowers' financial needs for a period of time, normally two years. Generally, consumer loans are not classified as a TDR as they

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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 Allowance associated with the loan. An Allowance 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, 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 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 three and nine months ended September 30, 2019 and 2018:


	Three Months Ended					Nine Months Ended
	September 30, 2019					September 30, 2019
	Number of	Recorded		Related		Number of	Recorded		Related
(dollars in thousands)	Contracts	Investment⁽¹⁾		Allowance		Contracts	Investment⁽¹⁾		Allowance
Commercial and industrial	—	$	—	$	—	4	$	588	$	26
Residential mortgage	1		609		—	2		957		13
Total	1	$	609	$	—	6	$	1,545	$	39

(1)	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.


	Three Months Ended					Nine Months Ended
	September 30, 2018					September 30, 2018
	Number of	Recorded		Related		Number of	Recorded		Related
(dollars in thousands)	Contracts	Investment⁽¹⁾		Allowance		Contracts	Investment⁽¹⁾		Allowance
Commercial and industrial	—	$	—	$	—	1	$	450	$	12
Residential mortgage	3		883		30	3		883		30
Total	3	$	883	$	30	4	$	1,333	$	42

(1)	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 $6.0 billion and $5.8 billion as of September 30, 2019 and December 31, 2018. Of the $6.0 billion at September 30, 2019, there were commitments of $1.3 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.

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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:


	Three Months Ended			Nine Months Ended			Three Months Ended			Nine Months Ended
	September 30, 2019			September 30, 2019			September 30, 2018			September 30, 2018
	Number of	Recorded		Number of	Recorded		Number of	Recorded		Number of	Recorded
(dollars in thousands)	Contracts	Investment⁽¹⁾		Contracts	Investment⁽¹⁾		Contracts	Investment⁽¹⁾		Contracts	Investment⁽¹⁾
Commercial and industrial⁽²⁾	2	$	588	4	$	588	—	$	—	2	$	254
Residential mortgage⁽³⁾	—		—	1		348	—		—	—		—
Total	2	$	588	5	$	936	—	$	—	2	$	254

(1)	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.

(2)

For the three and nine months ended September 30, 2019, the commercial and industrial loans that subsequently defaulted were temporarily modified to interest-only payments. For the nine months ended September 30, 2018, the maturity dates for the commercial and industrial loans that subsequently defaulted were extended.

(3)	For the nine months ended September 30, 2019, the maturity date for the residential mortgage loan that subsequently defaulted was extended.

Foreclosure Proceedings

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 September 30, 2019 and December 31, 2018.

Foreclosed Property

Residential real estate property held from 1 foreclosed residential mortgage included in other real estate owned and repossessed personal property shown in the unaudited interim consolidated balance sheet was $0.1 million as of September 30, 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 unaudited interim consolidated balance sheets were $0.8 million as of December 31, 2018.

5. Mortgage Servicing Rights

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 $2.4 billion and $2.7 billion as of September 30, 2019 and December 31, 2018, respectively. Servicing fees include contractually specified fees, late charges, and ancillary fees, and were $1.6 million and $1.7 million for the three months ended September 30, 2019 and 2018, respectively, and $4.8 million and $5.3 million for the nine months ended September 30, 2019 and 2018, respectively.

Amortization of mortgage servicing rights (“MSRs”) was $1.0 million for both the three months ended September 30, 2019 and 2018, and $2.6 million and $3.0 million for the nine months ended September 30, 2019 and 2018, respectively. The estimated future amortization expenses for MSRs over the next five years are as follows:


	Estimated
(dollars in thousands)	Amortization
Under one year	$	2,467
One to two years		2,048
Two to three years		1,693
Three to four years		1,403
Four to five years		1,172

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The details of the Company’s MSRs are presented below:


	September 30,		December 31,
(dollars in thousands)	2019		2018
Gross carrying amount	$	63,401	$	63,342
Less: accumulated amortization		49,771		47,187
Net carrying value	$	13,630	$	16,155

The following table presents changes in amortized MSRs for the three and nine months ended September 30, 2019 and 2018:


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2019		2018		2019		2018
Balance at beginning of period	$	14,573	$	17,660	$	16,155	$	13,196
Originations		35		233		59		262
Purchases		—		—		—		6,444
Amortization		(978)		(956)		(2,584)		(2,965)
Balance at end of period	$	13,630	$	16,937	$	13,630	$	16,937
Fair value of amortized MSRs at beginning of period	$	23,398	$	28,344	$	27,662	$	21,697
Fair value of amortized MSRs at end of period	$	19,678	$	27,945	$	19,678	$	27,945

MSRs are evaluated for impairment if events and circumstances indicate a possible impairment. NaN impairment of MSRs was recorded for the nine months ended September 30, 2019 and 2018.

The quantitative assumptions used in determining the lower of cost or fair value of the Company’s MSRs as of September 30, 2019 and December 31, 2018 were as follows:


	September 30, 2019							December 31, 2018
						Weighted							Weighted
	Range					Average		Range					Average
Conditional prepayment rate	12.41	%	-	21.77	%	12.61	%	7.86	%	-	19.26	%	8.31	%
Life in years (of the MSR)	2.13		-	5.79		5.51		3.43		-	7.68		7.19
Weighted-average coupon rate	3.97	%	-	7.31	%	4.02	%	3.97	%	-	6.70	%	4.02	%
Discount rate	10.00	%	-	10.01	%	10.00	%	10.00	%	-	10.02	%	10.00	%

The sensitivities surrounding MSRs are expected to have an immaterial impact on fair value.

6. 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.

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The carrying amounts of the assets pledged as collateral to secure public deposits, borrowing arrangements and other transactions as of September 30, 2019 and December 31, 2018 were as follows:


(dollars in thousands)	September 30, 2019		December 31, 2018
Public deposits	$	1,775,871	$	1,749,726
Federal Home Loan Bank		2,858,513		2,497,030
Federal Reserve Bank		675,347		957,017
ACH transactions		151,014		150,903
Interest rate swaps		47,129		28,843
Total	$	5,507,874	$	5,383,519

As the Company did not enter into reverse repurchase agreements or repurchase agreements, 0 collateral was accepted or pledged as of September 30, 2019 and December 31, 2018. In addition, 0 debt was extinguished by in-substance defeasance.

7. Deposits

As of September 30, 2019 and December 31, 2018, deposits were categorized as interest-bearing or noninterest-bearing as follows:


(dollars in thousands)	September 30, 2019		December 31, 2018
U.S.:
Interest-bearing	$	10,352,703	$	10,393,449
Noninterest-bearing		5,067,812		5,368,729
Foreign:
Interest-bearing		783,721		748,678
Noninterest-bearing		653,010		639,212
Total deposits	$	16,857,246	$	17,150,068

The following table presents the maturity distribution of time certificates of deposit as of September 30, 2019:


	Under		$250,000
(dollars in thousands)	$250,000		or More		Total
Three months or less	$	241,794	$	548,437	$	790,231
Over three through six months		219,641		615,730		835,371
Over six through twelve months		353,128		241,884		595,012
One to two years		110,732		58,906		169,638
Two to three years		117,527		56,303		173,830
Three to four years		51,400		13,113		64,513
Four to five years		69,740		9,224		78,964
Thereafter		34		—		34
Total	$	1,163,996	$	1,543,597	$	2,707,593

Time certificates of deposit in denominations of $250,000 or more, in the aggregate, were $1.5 billion and $1.9 billion as of September 30, 2019 and December 31, 2018, respectively. Overdrawn deposit accounts are classified as loans and totaled $2.0 million and $2.4 million as of September 30, 2019 and December 31, 2018, respectively.

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8. Short-Term Borrowings

At September 30, 2019 and December 31, 2018, short-term borrowings were comprised of the following:


(dollars in thousands)	September 30, 2019		December 31, 2018
Short-term FHLB fixed-rate advances⁽¹⁾	$	400,000	$	—
Total short-term borrowings	$	400,000	$	—

(1)	Interest is payable monthly.

As of September 30, 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 require monthly interest-only payments with the principal amount due on the maturity date. See “Note 6. Transfers of Financial Assets” for more information.

9. Long-Term Borrowings

Long-term borrowings consisted of the following as of September 30, 2019 and December 31, 2018:



(dollars in thousands)	September 30, 2019		December 31, 2018
Finance lease	$	18	$	26
FHLB fixed-rate advances⁽¹⁾		200,000		600,000
Total long-term borrowings	$	200,018	$	600,026

(1)	Interest is payable monthly.

As of September 30, 2019 and December 31, 2018, the Company’s long-term borrowings included $200.0 million and $600.0 million, respectively, 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. As of September 30, 2019 and December 31, 2018, the available remaining borrowing capacity with the FHLB was $1.6 billion and $1.3 billion, respectively. The FHLB fixed-rate advances and remaining borrowing capacity were secured by residential real estate loan collateral as of September 30, 2019 and December 31, 2018. See “Note 6. Transfers of Financial Assets” for more information.

As of September 30, 2019 and December 31, 2018, the Company’s long-term borrowings included a finance lease obligation with a 6.78% annual interest rate that matures in 2022.

As of September 30, 2019, future contractual principal payments and maturities on long-term borrowings were as follows:


	Principal
(dollars in thousands)	Payments
2019	$	—
2020		9
2021		9
2022		—
2023⁽¹⁾		100,000
Thereafter⁽²⁾		100,000
Total	$	200,018

(1)	FHLB fixed-rate advance callable on December 4, 2020 with an interest rate of 2.80%.

(2)	FHLB fixed-rate advance callable on January 15, 2021 with an interest rate of 2.65%.

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10. Accumulated Other Comprehensive Loss

Accumulated other comprehensive 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 loss are pension and other benefits, net unrealized gains or losses on investment securities and net unrealized gains or losses on cash flow derivative hedges.

Changes in accumulated other comprehensive loss for the three and nine months ended September 30, 2019 and 2018 are presented below:


			Income
			Tax
	Pre-tax		Benefit		Net of
(dollars in thousands)	Amount		(Expense)		Tax
Accumulated other comprehensive loss at June 30, 2019	$	(43,772)	$	11,788	$	(31,984)
Three months ended September 30, 2019
Investment securities:
Unrealized net gains arising during the period		18,079		(4,869)		13,210
Net change in investment securities		18,079		(4,869)		13,210
Other comprehensive income		18,079		(4,869)		13,210
Accumulated other comprehensive loss at September 30, 2019	$	(25,693)	$	6,919	$	(18,774)


			Income
			Tax
	Pre-tax		Benefit		Net of
(dollars in thousands)	Amount		(Expense)		Tax
Accumulated other comprehensive loss at December 31, 2018	$	(180,915)	$	48,720	$	(132,195)
Nine months ended September 30, 2019
Pension and other benefits:
Net actuarial losses arising during the period		(813)		219		(594)
Net change in pension and other benefits		(813)		219		(594)
Investment securities:
Unrealized net gains arising during the period		153,443		(41,322)		112,121
Reclassification of net losses to net income:
Investment securities losses, net		2,592		(698)		1,894
Net change in investment securities		156,035		(42,020)		114,015
Other comprehensive income		155,222		(41,801)		113,421
Accumulated other comprehensive loss at September 30, 2019	$	(25,693)	$	6,919	$	(18,774)


			Income
			Tax
	Pre-tax		Benefit		Net of
(dollars in thousands)	Amount		(Expense)		Tax
Accumulated other comprehensive loss at June 30, 2018	$	(249,648)	$	67,238	$	(182,410)
Three months ended September 30, 2018
Investment securities:
Unrealized net losses arising during the period		(30,682)		8,262		(22,420)
Net change in investment securities		(30,682)		8,262		(22,420)
Cash flow derivative hedges:
Unrealized net gains on cash flow derivative hedges arising during the period		178		(47)		131
Net change in cash flow derivative hedges		178		(47)		131
Other comprehensive loss		(30,504)		8,215		(22,289)
Accumulated other comprehensive loss at September 30, 2018	$	(280,152)	$	75,453	$	(204,699)

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			Income
			Tax
	Pre-tax		Benefit		Net of
(dollars in thousands)	Amount		(Expense)		Tax
Accumulated other comprehensive loss at December 31, 2017	$	(159,423)	$	63,040	$	(96,383)
Nine months ended September 30, 2018
Early adoption of ASU No. 2018-02		—		(20,068)		(20,068)
Investment securities:
Unrealized net losses arising during the period		(122,070)		32,834		(89,236)
Net change in investment securities		(122,070)		32,834		(89,236)
Cash flow derivative hedges:
Unrealized net gains on cash flow derivative hedges arising during the period		1,341		(353)		988
Net change in cash flow derivative hedges		1,341		(353)		988
Other comprehensive loss		(120,729)		32,481		(88,248)
Accumulated other comprehensive loss at September 30, 2018	$	(280,152)	$	75,453	$	(204,699)

The following table summarizes changes in accumulated other comprehensive loss, net of tax, for the periods indicated:



	Pensions						Accumulated
	and						Other
	Other		Investment		Cash Flow		Comprehensive
(dollars in thousands)	Benefits		Securities		Derivative Hedges		Income (Loss)
Three Months Ended September 30, 2019
Balance at beginning of period	$	(28,973)	$	(3,011)	$	—	$	(31,984)
Other comprehensive income		—		13,210		—		13,210
Balance at end of period	$	(28,973)	$	10,199	$	—	$	(18,774)

Nine Months Ended September 30, 2019
Balance at beginning of period	$	(28,379)	$	(103,816)	$	—	$	(132,195)
Other comprehensive (loss) income		(594)		114,015		—		113,421
Balance at end of period	$	(28,973)	$	10,199	$	—	$	(18,774)

Three Months Ended September 30, 2018
Balance at beginning of period	$	(31,339)	$	(156,373)	$	5,302	$	(182,410)
Other comprehensive loss		—		(22,420)		131		(22,289)
Balance at end of period	$	(31,339)	$	(178,793)	$	5,433	$	(204,699)

Nine Months Ended September 30, 2018
Balance at beginning of period	$	(25,946)	$	(74,117)	$	3,680	$	(96,383)
Early adoption of ASU No. 2018-02		(5,393)		(15,440)		765		(20,068)
Other comprehensive loss		—		(89,236)		988		(88,248)
Balance at end of period	$	(31,339)	$	(178,793)	$	5,433	$	(204,699)

11. 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

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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 table below sets forth those ratios at September 30, 2019 and December 31, 2018:


					First Hawaiian				Minimum		Well-
	First Hawaiian, Inc.				Bank				Capital		Capitalized
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Ratio⁽¹⁾		Ratio⁽¹⁾
September 30, 2019:
Common equity tier 1 capital to risk-weighted assets	$	1,677,840	12.15	%	$	1,662,785	12.04	%	4.50	%	6.50	%
Tier 1 capital to risk-weighted assets		1,677,840	12.15	%		1,662,785	12.04	%	6.00	%	8.00	%
Total capital to risk-weighted assets		1,811,404	13.11	%		1,796,349	13.00	%	8.00	%	10.00	%
Tier 1 capital to average assets (leverage ratio)		1,677,840	8.68	%		1,662,785	8.61	%	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 Federal Deposit Insurance Corporation (“FDIC”).

A 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 2.5% on January 1, 2019. As a result the Company and the Bank are effectively required to maintain minimum ratios of (i) 7% CET1 capital 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 September 30, 2019, under the bank regulatory capital guidelines, the Company and Bank were both classified as well-capitalized. Management is not aware of any conditions or events that have occurred since September 30, 2019, to change the capital adequacy category of the Company or the Bank.

12. 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 unaudited interim 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.

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The following table summarizes notional amounts and fair values of derivatives held by the Company as of September 30, 2019 and December 31, 2018:


	September 30, 2019						December 31, 2018
			Fair Value						Fair Value
	Notional		Asset		Liability		Notional		Asset		Liability
(dollars in thousands)	Amount		Derivatives⁽¹⁾		Derivatives⁽²⁾		Amount		Derivatives⁽¹⁾		Derivatives⁽²⁾
Derivatives designated as hedging instruments:
Interest rate swaps	$	23,545	$	—	$	(927)	$	41,317	$	31	$	(44)
Derivatives not designated as hedging instruments:
Interest rate swaps		2,749,924		85,883		—		2,269,247		12,305		(12,007)
Funding swap		69,378		—		(584)		62,039		—		(2,607)
Foreign exchange contracts		2,514		—		(31)		1,191		—		(34)

(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 $11.9 million and $2.1 million as of September 30, 2019 and December 31, 2018, respectively.

In 2017 and 2018, each 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 (“STM”) as settlements of the derivative’s mark-to-market exposure and not collateral. Based on these changes, the Company has treated the CME and LCH variation margins as settlements, which treatment has resulted in a decrease in the Company’s cash collateral, and a corresponding decrease in the Company’s derivative asset and liability. As of September 30, 2019 and December 31, 2018, the CME variation margin was $1.3 million and $0.5 million, respectively. As of September 30, 2019 and December 31, 2018 the LCH variation margin was $84.6 million and $0.6 million, respectively.

As of September 30, 2019, the Company pledged $29.7 million in financial instruments and $17.4 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 September 30, 2019 and December 31, 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 September 30, 2019, the Company carried 1 interest rate swap with a notional amount of $23.5 million with a negative fair value of $0.9 million 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 NaN that were categorized as fair value hedges for commercial and industrial loans and commercial real estate loans.

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The following table shows the gains and losses recognized in income related to derivatives in fair value hedging relationships for the three and nine months ended September 30, 2019 and 2018:


	Gains (losses) recognized in	Three Months Ended				Nine Months Ended
	the consolidated statements	September 30,				September 30,
(dollars in thousands)	of income line item	2019		2018		2019		2018
Gains (losses) on fair value hedging relationships recognized in interest income⁽¹⁾:
Recognized on interest rate swap	Loans and lease financing	$	(151)	$	—	$	(917)	$	—
Recognized on hedged item	Loans and lease financing		255		—		944		—

Gains (losses) on fair value hedging relationships recognized in noninterest income⁽²⁾:
Recognized on interest rate swap	Other	$	—	$	273	$	—	$	1,231
Recognized on hedged item	Other		—		(261)		—		(1,348)

(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 September 30, 2019 and December 31, 2018, the following amounts were recorded in the unaudited interim consolidated balance sheets related to the cumulative basis adjustments for fair value hedges:

Cumulative Amount of Fair Value

Hedging Adjustment Included in the

Carrying Amount of the Hedged Asset

(dollars in thousands)

September 30, 2019

December 31, 2018

September 30, 2019

December 31, 2018

Line item in the consolidated balance sheets in which the hedged item is included

Loans and leases

24,797

42,496

1,226

293

Cash Flow Hedges

During 2018, 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 September 30, 2019 and December 31, 2018, the Company held 0 cash flow hedges. The interest rate swaps designated as cash flow hedges resulted in net interest expense of $0.2 million and $1.1 million during the three and nine months ended September 30, 2018, respectively.

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. There were 0 recognized expenses related to the ineffective portion of the change in fair value of derivatives designated as a cash flow hedge during the three and nine months ended September 30, 2018.

The following table summarizes the effect of cash flow hedging relationships for the three and nine months ended September 30, 2018:


	Three Months Ended		Nine Months Ended
(dollars in thousands)	September 30, 2018		September 30, 2018
Pretax gains recognized in other comprehensive income on derivatives (effective portion)	$	178	$	1,341

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There were 0 gains or losses reclassified from accumulated other comprehensive loss to earnings during the three and nine months ended September 30, 2018.

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 unaudited interim consolidated statements of income for the three and nine months ended September 30, 2019 and 2018.


	Net gains (losses) recognized	Three Months Ended				Nine Months Ended
	in the consolidated statements	September 30,				September 30,
(dollars in thousands)	of income line item	2019		2018		2019		2018
Derivatives Not Designated As Hedging Instruments:
Interest rate swaps	Other noninterest income	$	—	$	112	$	16	$	744
Funding swap	Other noninterest income		(417)		(43)		(659)		(123)
Foreign exchange contracts	Other noninterest income		30		34		29		(58)

As of September 30, 2019, the Company carried multiple interest rate swaps with notional amounts totaling $2.7 billion, all of which were related to the Company’s customer swap program, with a positive fair value of $85.9 million and a negative fair value of NaN. The Company received 1-month LIBOR and paid fixed rates ranging from 2.02% to 8.73%. The swaps mature between November 2019 and January 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 and $0.1 million for the three months ended September 30, 2019 and 2018, respectively, and NaN and $0.4 million for the nine months ended September 30, 2019 and 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 $1.9 million and $0.3 million for the three months ended September 30, 2019 and 2018, respectively, and $3.8 million and $5.3 million for the nine months ended September 30, 2019 and 2018, respectively. Interest rate swaps related to the program had asset fair values of $85.9 million and $12.3 million as of September 30, 2019 and December 31, 2018, respectively, and liability fair values of NaN and $11.2 million as of September 30, 2019 and December 31, 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. As of September 30, 2019, the Company recorded an estimated $0.3 million liability to be paid 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. A derivative liability (“Visa derivative”) of $0.6 million and $2.6 million was included in the unaudited interim consolidated balance sheets at September 30, 2019 and December 31, 2018, respectively, to provide for the fair value of this liability. There were 0 sales of these shares prior to 2016. See “Note 18. Fair Value” 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

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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 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 both the nine months ended September 30, 2019 and 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 $5.1 million and $0.8 million at September 30, 2019 and December 31, 2018, respectively, for which we posted $5.5 million and $0.5 million, respectively, in collateral in the normal course of business. If the Company’s credit rating had been downgraded as of September 30, 2019 and December 31, 2018, we may have been required to settle the contracts in an amount equal to their fair value.

13. Commitments and Contingent Liabilities

Contingencies

In January 2017, a putative class action lawsuit was filed by a Bank customer alleging that FHB improperly charged an overdraft fee in circumstances where an account had sufficient funds to cover the transaction at the time the transaction was authorized but not at the time the transaction was presented for payment, and that this practice constituted 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 constituted a usurious interest charge and an unfair and deceptive trade practice. In October 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 three months ended September 30, 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.

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 unaudited interim 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 unaudited interim 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 $100.6 million and $92.3 million at September 30, 2019 and December 31, 2018, respectively.

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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 $9.2 million and $17.3 million as of September 30, 2019 and December 31, 2018, 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 September 30, 2019 have maturities ranging from October 2019 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 September 30, 2019 and December 31, 2018 were as follows:


	September 30,		December 31,
(dollars in thousands)	2019		2018
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	5,814,078	$	5,549,591
Standby letters of credit		183,992		204,324
Commercial letters of credit		5,024		7,535

Guarantees

The Company sells residential mortgage loans in the secondary market primarily to The Federal National Mortgage Association (“Fannie Mae”) and The Federal Home Loan Mortgage Corporation (“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.

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 12. Derivative Financial Instruments” for more information.

Reorganization Transactions

On April 1, 2016, a series of reorganization transactions (the “Reorganization Transactions”) were undertaken to facilitate FHI’s IPO. In connection with the Reorganization Transactions, FHI distributed its interest in BancWest Holding Inc. (“BWHI”), including Bank of the West (“BOW”) to BNPP so that BWHI was held directly by BNPP. 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 BWC, 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.

14. Revenue from Contracts with Customers

Revenue Recognition

In accordance with Topic 606, 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

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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

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 periods indicated:

Three Months Ended September 30, 2019

Treasury

Retail

Commercial

and

(dollars in thousands)

Banking

Other

Total

Net interest income⁽¹⁾

111,529

29,359

2,193

143,081

Service charges on deposit accounts

8,073

478

8,554

Credit and debit card fees

—

14,623

1,718

16,341

Other service charges and fees

5,155

306

537

5,998

Trust and investment services income

8,698

—

8,698

Other

138

726

191

1,055

Not in scope of Topic 606⁽¹⁾

2,185

1,488

5,661

9,334

Total noninterest income

24,249

17,146

8,585

49,980

Total revenue

135,778

46,505

10,778

193,061

Nine Months Ended September 30, 2019

Treasury

Retail

Commercial

and

(dollars in thousands)

Banking

Other

Total

Net interest income⁽¹⁾

339,559

85,920

8,304

433,783

Service charges on deposit accounts

23,051

1,677

24,737

Credit and debit card fees

—

43,564

5,135

48,699

Other service charges and fees

15,429

1,543

1,659

18,631

Trust and investment services income

26,247

—

26,247

Other

493

2,996

729

4,218

Not in scope of Topic 606⁽¹⁾

6,887

5,533

10,873

23,293

Total noninterest income

72,107

53,645

20,073

145,825

Total revenue

411,666

139,565

28,377

579,608

(1)

Most of the Company’s revenue is not within the scope of ASU No. 2014-09, Revenue from Contracts with Customers. 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.

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		Three Months Ended September 30, 2018
					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Net interest income⁽¹⁾	$	111,804	$	29,639	$	(185)	$	141,258

Service charges on deposit accounts		7,494		4		435		7,933
Credit and debit card fees		—		19,602		1,783		21,385
Other service charges and fees		5,161		1,063		374		6,598
Trust and investment services income		7,487		—		—		7,487
Other		134		1,427		255		1,816
Not in scope of Topic 606⁽¹⁾		2,400		(4,295)		4,081		2,186
Total noninterest income		22,676		17,801		6,928		47,405
Total revenue	$	134,480	$	47,440	$	6,743	$	188,663


		Nine Months Ended September 30, 2018
					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Net interest income⁽¹⁾	$	332,731	$	86,320	$	3,282	$	422,333

Service charges on deposit accounts		22,077		11		1,521		23,609
Credit and debit card fees		—		58,409		5,380		63,789
Other service charges and fees		15,004		2,997		1,527		19,528
Trust and investment services income		23,429		—		—		23,429
Other		430		5,224		924		6,578
Not in scope of Topic 606⁽¹⁾		6,626		(7,377)		9,720		8,969
Total noninterest income		67,566		59,264		19,072		145,902
Total revenue	$	400,297	$	145,584	$	22,354	$	568,235

(1)

For the three and nine months ended September 30, 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 a 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 fees collected when the Company acts as agent or personal representative and executes security transactions, performs collection and disbursement of income, and completes investment management and other administrative tasks.

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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 September 30, 2019 and December 31, 2018, the Company had contract liabilities of $2.0 million and $2.6 million, respectively, which will be recognized over the remaining term of the respective contracts with the vendors. For the three and nine months ended September 30, 2019 and 2018, the Company’s recognized revenues and contract liabilities decreased by approximately $0.2 million and $0.6 million, respectively, 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 September 30, 2019 and December 31, 2018, there were 0 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 September 30, 2019 and December 31, 2018. 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.

15. Earnings per Share

For the three and nine months ended September 30, 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. For the three and nine months ended September 30, 2019 and 2018, the computations of basic and diluted earnings per share were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands, except shares and per share amounts)	2019		2018		2019		2018
Numerator:
Net income	$	74,199	$	67,388	$	216,556	$	204,399

Denominator:
Basic: weighted-average shares outstanding		132,583,902		135,466,669		133,957,192		137,643,005
Add: weighted-average equity-based awards		293,867		208,829		274,570		166,568
Diluted: weighted-average shares outstanding		132,877,769		135,675,498		134,231,762		137,809,573

Basic earnings per share	$	0.56	$	0.50	$	1.62	$	1.48
Diluted earnings per share	$	0.56	$	0.50	$	1.61	$	1.48

16. 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 44 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.

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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 three and nine months ended September 30, 2019 were as follows:



(dollars in thousands)	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating lease expense	$	2,284	$	6,887
Short-term lease expense		111		365
Variable lease expense		795		1,842
Finance lease expense:
Amortization of right-of-use assets		1		2
Interest on lease liabilities		—		1
Total finance lease expense		1		3
Less: Sublease income		(268)		(766)
Net lease expense	$	2,923	$	8,331

Other information related to the Company’s lease liabilities as of and for the nine months ended September 30, 2019 was as follows:


(dollars in thousands)	Nine Months Ended September 30, 2019
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows paid for operating leases	$	7,166
Operating cash flows paid for finance leases		89
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)		15.6
Finance leases (years)		2.8
Weighted Average Discount Rate
Operating leases		3.34	%
Finance leases		6.78	%

Operating lease right-of-use assets were $46.1 million and finance lease right-of-use assets were not material as of September 30, 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 September 30, 2019. Operating lease liabilities were $45.6 million and finance lease liabilities were not material as of September 30, 2019. Operating lease liabilities and finance lease liabilities were recorded as a component of other liabilities and long-term borrowings, respectively, as of September 30, 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.

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The following table sets forth future minimum rental payments under noncancelable operating leases with terms in excess of one year as of September 30, 2019:


	Net Operating
	Lease
(dollars in thousands)	Payments
Year ending December 31:
2019 (excluding the nine months ended September 30, 2019)	$	1,635
2020		8,799
2021		8,107
2022		5,477
2023		2,964
Thereafter		34,948
Total future minimum lease payments		61,930
Less: Imputed interest		(16,289)
Total	$	45,641

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 $0.1 million and $0.3 million for the three and nine months ended September 30, 2019, respectively. The future minimum rental payments due to related parties are not material (remainder of 2019), $0.3 million (2020), $0.3 million (2021), $0.2 million (2022), $0.2 million (2023), and $7.5 million thereafter.

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 $288.8 million and $139.3 million, respectively, as of September 30, 2019, and $289.2 million and $133.7 million, respectively, as of December 31, 2018. 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 $1.5 million and $4.4 million for the three and nine months ended September 30, 2019, respectively. In addition, the Company recognized $1.4 million and $4.0 million of lease income related to variable lease payments for the three and nine months ended September 30, 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 the three and nine months ended September 30, 2019 was $0.1 million and $0.3 million, respectively. The future minimum rental income from related parties as of September 30, 2019 was not material.

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The following table sets forth future minimum rental income under noncancelable operating leases with terms in excess of one year as of September 30, 2019:


	Minimum
	Rental
(dollars in thousands)	Income
Year ending December 31:
2019 (excluding the nine months ended September 30, 2019)	$	1,491
2020		5,997
2021		5,989
2022		4,268
2023		3,343
Thereafter		8,132
Total	$	29,220

17. Benefit Plans

The Company sponsors an unfunded supplemental executive retirement plan (“SERP”) for certain key executives. 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.

The following table sets forth the components of net periodic benefit cost for the Company’s pension and postretirement benefit plans for the three and nine months ended September 30, 2019 and 2018:


	Income line item where recognized in	Pension Benefits				Other Benefits
(dollars in thousands)	the consolidated statements of income	2019		2018		2019		2018
Three Months Ended September 30,
Service cost	Salaries and employee benefits	$	18	$	174	$	160	$	80
Interest cost	Other noninterest expense		2,044		1,840		203		293
Expected return on plan assets	Other noninterest expense		(1,195)		(1,318)		—		—
Prior service credit	Other noninterest expense		—		—		(107)		(108)
Recognized net actuarial loss (gain)	Other noninterest expense		1,564		1,829		(76)		—
Total net periodic benefit cost		$	2,431	$	2,525	$	180	$	265

Nine Months Ended September 30,
Service cost	Salaries and employee benefits	$	52	$	522	$	478	$	505
Interest cost	Other noninterest expense		6,132		5,429		615		662
Expected return on plan assets	Other noninterest expense		(3,585)		(3,797)		—		—
Prior service credit	Other noninterest expense		—		—		(321)		(322)
Recognized net actuarial loss (gain)	Other noninterest expense		4,692		5,049		(228)		—
Total net periodic benefit cost		$	7,291	$	7,203	$	544	$	845

18. Fair Value

The Company determines the fair values of its financial instruments based on the requirements established in Accounting Standards Codification Topic 820 (“Topic 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. Topic 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

Topic 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.

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◾

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.

Topic 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 September 30, 2019 and December 31, 2018, 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.

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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. 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. The Visa derivative of $0.6 million and $2.6 million was included in the unaudited interim consolidated balance sheets at September 30, 2019 and December 31, 2018, 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 September 30, 2019 and December 31, 2018 are summarized below:

Fair Value Measurements as of September 30, 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

—

29,738

—

29,738

Government agency debt securities

—

24,472

—

24,472

Government-sponsored enterprises debt securities

—

126,649

—

126,649

Government agency mortgage-backed securities⁽¹⁾

—

343,905

—

343,905

Government-sponsored enterprises mortgage-backed securities⁽¹⁾

—

371,949

—

371,949

Collateralized mortgage obligations:

Government agency

—

2,486,524

—

2,486,524

Government-sponsored enterprises

—

773,845

—

773,845

Total available-for-sale securities

—

4,157,082

—

4,157,082

Other assets⁽²⁾

—

85,883

—

85,883

Liabilities

Other liabilities⁽³⁾

—

(958)

(584)

(1,542)

Total

—

4,242,007

(584)

4,241,423

(1)	Backed by residential real estate.

(2)	Other assets include derivative assets.

(3)	Other liabilities include derivative liabilities.

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	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
Government agency mortgage-backed securities⁽¹⁾		—		411,536		—		411,536
Government-sponsored enterprises mortgage-backed securities⁽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

(1)	Backed by residential real estate.

(2)	Other assets include derivative assets.

(3)	Other liabilities include derivative liabilities.

Changes in Fair Value Levels

For the three and nine months ended September 30, 2019, 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 three and nine months ended September 30, 2019 and 2018 are summarized below.


	Visa Derivative
(dollars in thousands)	2019		2018
Three Months Ended September 30,
Balance as of July 1,	$	(1,179)	$	(4,114)
Total net losses included in other noninterest income		(417)		(43)
Settlements		1,012		772
Balance as of September 30,	$	(584)	$	(3,385)
Total net losses included in net income attributable to the change in unrealized gains or losses related to liabilities still held as of September 30,	$	(417)	$	(43)

Nine Months Ended September 30,
Balance as of January 1,	$	(2,607)	$	(5,439)
Total net losses included in other noninterest income		(659)		(123)
Settlements		2,682		2,177
Balance as of September 30,	$	(584)	$	(3,385)
Total net losses included in net income attributable to the change in unrealized gains or losses related to liabilities still held as of September 30,	$	(659)	$	(123)

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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.

September 30, 2019

Fair Value Measurements

Quoted Prices in

Significant

Active Markets

Other

Unobservable

for Identical

Observable

Inputs

(dollars in thousands)

Book Value

Assets (Level 1)

Inputs (Level 2)

(Level 3)

Total

Financial assets:

Cash and cash equivalents

1,344,017

358,863

985,154

—

1,344,017

Loans held for sale

1,594

—

1,594

—

1,594

Loans⁽¹⁾

12,675,522

—

12,844,384

Financial liabilities:

Time deposits⁽²⁾

2,707,593

—

2,699,798

—

2,699,798

Short-term borrowings

400,000

—

402,133

—

402,133

Long-term borrowings⁽³⁾

200,000

—

209,149

—

209,149


	December 31, 2018
			Fair Value Measurements
			Quoted Prices in		Significant		Significant
			Active Markets		Other		Unobservable
			for Identical		Observable		Inputs
(dollars in thousands)	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
Loans held for sale		432		—		432		—		432
Loans⁽¹⁾		12,928,422		—		—		12,664,170		12,664,170

Financial liabilities:
Time deposits⁽²⁾	$	3,092,164	$	—	$	3,058,792	$	—	$	3,058,792
Long-term borrowings⁽³⁾		600,000		—		602,088		—		602,088

(1)	Excludes financing leases of $167.9 million at September 30, 2019 and $147.8 million at December 31, 2018.

(2)	Excludes deposit liabilities with no defined or contractual maturity of $14.1 billion as of both September 30, 2019 and December 31, 2018.

(3)	Excludes capital lease obligations of $18 thousand and $26 thousand at September 30, 2019 and December 31, 2018, respectively.

Unfunded loan and lease commitments and letters of credit are not included in the tables above. As of September 30, 2019 and December 31, 2018, the Company had $6.0 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 $13.7 million and $14.2 million at September 30, 2019 and December 31, 2018, 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.

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Impaired loans

A large portion of the Company’s impaired 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. The Company measures the impairment on certain loans and leases by performing a lower-of-cost-or-fair-value analysis. If impairment is determined by the value of the collateral or an observable market price, it is written down to fair value on a nonrecurring basis as Level 3.

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 September 30, 2019 and December 31, 2018:


(dollars in thousands)	Level 1		Level 2		Level 3
September 30, 2019
Impaired loans	$	—	$	—	$	882
December 31, 2018
Impaired loans	$	—	$	—	$	402

Total losses on impaired loans were $0.5 million and $0.1 million for the three months ended September 30, 2019 and 2018, respectively and $0.5 million and $0.6 million for the nine months ended September 30, 2019 and 2018, respectively.

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, 2019 and December 31, 2018, the significant unobservable inputs used in the fair value measurements were as follows:


	Quantitative Information about Level 3 Fair Value Measurements at September 30, 2019
				Significant	Range
(dollars in thousands)	Fair value		Valuation Technique	Unobservable Input	(Weighted Average)
Impaired loans	$	882	Appraisal Value	Appraisal Value	n/m⁽¹⁾
Visa derivative	$	(584)	Discounted Cash Flow	Expected Conversion Rate	1.6228
				Expected Term	4 years
				Growth Rate	15%


	Quantitative Information about Level 3 Fair Value Measurements at December 31, 2018
					Range
(dollars in thousands)	Fair value		Valuation Technique	Unobservable Input	(Weighted Average)
Impaired loans	$	402	Appraisal Value	Appraisal Value	n/m⁽¹⁾
Visa derivative	$	(2,607)	Discounted Cash Flow	Expected Conversion Rate	1.6298
				Expected Term	4 years
				Growth Rate	15%

(1)	The fair value of these assets is determined based on appraised values of collateral or broker price opinions, the range of which is not meaningful to disclose.

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19. 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 lease 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 loan and lease losses to each segment based on management’s estimate of the inherent loss content in each of the specific loan and lease portfolios.

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. Income tax expense is allocated to each business segment based on the consolidated effective income tax rate for the 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 58 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.

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The following tables present selected business segment financial information for the periods indicated.

Treasury

Retail

Commercial

and

(dollars in thousands)

Banking

Other

Total

Three Months Ended September 30, 2019

Net interest income

111,529

29,359

2,193

143,081

Provision for loan and lease losses

—

Net interest income after provision for loan and lease losses

111,529

29,359

2,193

143,081

Noninterest income

24,249

17,146

8,585

49,980

Noninterest expense

(57,280)

(20,073)

(16,113)

(93,466)

Income (loss) before (provision) benefit for income taxes

78,498

26,432

(5,335)

99,595

(Provision) benefit for income taxes

(19,941)

(6,781)

1,326

(25,396)

Net income (loss)

58,557

19,651

(4,009)

74,199

Treasury

Retail

Commercial

and

(dollars in thousands)

Banking

Other

Total

Nine Months Ended September 30, 2019

Net interest income

339,559

85,920

8,304

433,783

Provision for loan and lease losses

(4,324)

(5,226)

—

(9,550)

Net interest income after provision for loan and lease losses

335,235

80,694

8,304

424,233

Noninterest income

72,107

53,645

20,073

145,825

Noninterest expense

(173,938)

(59,299)

(46,142)

(279,379)

Income (loss) before (provision) benefit for income taxes

233,404

75,040

(17,765)

290,679

(Provision) benefit for income taxes

(59,338)

(19,278)

4,493

(74,123)

Net income (loss)

174,066

55,762

(13,272)

216,556


					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Three Months Ended September 30, 2018
Net interest income (expense)	$	111,804	$	29,639	$	(185)	$	141,258
Provision for loan and lease losses		(1,760)		(2,700)		—		(4,460)
Net interest income (expense) after provision for loan and lease losses		110,044		26,939		(185)		136,798

Noninterest income		22,676		17,801		6,928		47,405
Noninterest expense		(58,069)		(19,731)		(15,347)		(93,147)
Income (loss) before (provision) benefit for income taxes		74,651		25,009		(8,604)		91,056

(Provision) benefit for income taxes		(19,450)		(6,435)		2,217		(23,668)
Net income (loss)	$	55,201	$	18,574	$	(6,387)	$	67,388

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					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Nine Months Ended September 30, 2018
Net interest income	$	332,731	$	86,320	$	3,282	$	422,333
Provision for loan and lease losses		(6,484)		(9,946)		—		(16,430)
Net interest income after provision for loan and lease losses		326,247		76,374		3,282		405,903

Noninterest income		67,566		59,264		19,072		145,902
Noninterest expense		(170,114)		(60,575)		(44,910)		(275,599)
Income (loss) before (provision) benefit for income taxes		223,699		75,063		(22,556)		276,206

(Provision) benefit for income taxes		(58,291)		(19,329)		5,813		(71,807)
Net income (loss)	$	165,408	$	55,734	$	(16,743)	$	204,399

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including the documents incorporated by reference herein, contains, and from time to time our management may make, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “projection,” “would,” “annualized” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including the following: the geographic concentration of our business; current and future economic and market conditions in the United States generally or in Hawaii, Guam and Saipan in particular; 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; the replacement of LIBOR and changes to the method that other benchmark rates are determined, as well as our program relating to the transition from LIBOR to alternative rates, the possibility we might underestimate the credit losses inherent in our loan and lease portfolio; our inability to receive dividends from the Bank, pay dividends to our common stockholders and satisfy obligations as they become due; the effects of geopolitical instability, including war, terrorist attacks, pandemics and man-made and natural disasters; our ability to maintain the Bank’s reputation; 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; our ability to successfully develop and commercialize new or enhanced products and services; changes in the demand for our products and services; the effectiveness of our risk management and internal disclosure controls and procedures; any failure or interruption of our information and communications systems; our ability to identify and address cybersecurity risks; the 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; our ability to keep pace with technological changes; our ability to attract and retain customer deposits; 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; the potential for environmental liability; 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 impact of, and changes in, applicable laws, regulations and accounting standards and policies; 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 effected by BNPP; the incremental costs of operating as a stand-alone public company; our ability to meet our obligations as a public company, including our obligations under Section 404 of the Sarbanes-Oxley Act of 2002; and damage to our reputation from any of the factors described above.

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Statements about the estimated impact of the current expected credit loss approach, including any anticipated increase in the allowance for credit losses as a result thereof, are subject to the risk that the actual impact may differ, possibly materially, from that currently expected due to, among other things, further process refinement, as well as the loan portfolio composition quality at the adoption date, macroeconomic conditions and forecasts at that time, and additional accounting or supervisory guidance that may be issued prior to the effective date which could impact the Company’s practices for the sound application of the new standard.

The foregoing factors should not be considered an exhaustive list and should be read together with the other cautionary statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law.

Company Overview

FHI is a bank holding company, which owns 100% of the outstanding common stock of FHB, its only direct, wholly owned subsidiary. FHB was founded in 1858 under the name Bishop & Company and was the first successful banking partnership in the Kingdom of Hawaii and the second oldest bank formed west of the Mississippi River. The Bank operates its business through three operating segments: Retail Banking, Commercial Banking and Treasury and Other.

References to “we,” “our,” “us,” or the “Company” refer to the Parent and its subsidiary that are consolidated for financial reporting purposes.

Transition to an Independent Public Company

On July 1, 2016, FHI became a direct wholly owned subsidiary of BWC, a Delaware corporation and an indirect wholly owned subsidiary of BNPP. In connection with FHI’s initial public offering in August 2016, 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.

Following a series of secondary offerings completed in 2017 and 2018, on February 1, 2019, BWC completed the sale of its remaining 24,859,750 shares of FHI common stock in a public offering (“IPO”). FHI did not receive any of the proceeds from the sales of shares of FHI common stock in that offering, 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.

Following the completion of the February 2019 offering, each of the remaining BNPP designees to the FHI board of directors, resigned from the board of directors. As a result, all directors designated by BNPP have resigned from the FHI board of directors.

Basis of Presentation

The accompanying unaudited interim consolidated financial statements of the Company reflect the results of operations, financial position and cash flows of FHI and its wholly owned subsidiary, FHB. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited interim consolidated financial statements of the Company have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect normal recurring adjustments necessary for a fair presentation of the results for the interim periods.

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The accompanying unaudited interim consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and filed with the U.S. Securities and Exchange Commission (the “SEC”).

Hawaii Economy

Hawaii’s economy continued to reflect growth during the three and nine months ended September 30, 2019, led in large part by a steady tourism industry, real estate market, and growth in tax revenues. Visitor arrivals for the first eight months in 2019 increased by 5.2% compared to the same period in 2018, while total visitor spending for the first eight months in 2019 decreased by 0.5% compared to the same period in 2018, according to the Hawaii Tourism Authority. The statewide seasonally-adjusted unemployment rate was 2.7% in September 2019 compared to 2.2% in September 2018, according to the Bureau of Labor Statistics of the U.S. Department of Labor. The national seasonally-adjusted unemployment rate was 3.5% in September 2019 compared to 3.7% in September 2018. With regards to housing on Oahu, the volume of single-family home sales slightly increased by 0.8%, while condominium sales decreased by 6.7%, for the nine months ended September 30, 2019 compared to the same period in 2018 according to the Honolulu Board of Realtors. The median price of single-family home sales and condominium sales on Oahu was $785,000 and $425,000, respectively, or a decrease of 0.5% and 1.0%, respectively, for the nine months ended September 30, 2019 as compared to the same period in 2018. As of September 30, 2019, months of inventory of single family homes and condominiums on Oahu remained low at approximately 3.5 and 3.9 months, respectively. Lastly, state general excise and use tax revenues increased by 6.3% for the first eight months of 2019 as compared to the same period in 2018, according to the Hawaii Department of Taxation.

Although Hawaii’s economy continued to reflect growth during the three and nine months ended September 30, 2019, we are significantly dependent on U.S. mainland economic conditions as well as key international economies, and in particular, Japan, along with monetary policies that impact the shape of the Treasury yield curve. In addition, we continue to monitor construction activity and tourism in Hawaii and the local economy’s ability to absorb further planned expansion, given deteriorating home affordability. Locally, an ordinance recently enacted affecting vacation rentals on Oahu could impact the tourism industry. Nationally and globally, we are monitoring the potential for a lower federal funds rate in the U.S., the uncertainties related to trade tensions and the strength of the global economy as well as the agenda of the U.S. administration and its impact on existing banking regulations. These factors could impact our profitability in future reporting periods.

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Selected Financial Data

Our financial highlights for the periods indicated are presented in Table 1:


Financial Highlights											Table 1
	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(dollars in thousands, except per share data)	2019			2018			2019			2018
Income Statement Data:
Interest income	$	170,181		$	164,052		$	516,560		$	478,007
Interest expense		27,100			22,794			82,777			55,674
Net interest income		143,081			141,258			433,783			422,333
Provision for loan and lease losses		—			4,460			9,550			16,430
Net interest income after provision for loan and lease losses		143,081			136,798			424,233			405,903
Noninterest income		49,980			47,405			145,825			145,902
Noninterest expense		93,466			93,147			279,379			275,599
Income before provision for income taxes		99,595			91,056			290,679			276,206
Provision for income taxes		25,396			23,668			74,123			71,807
Net income	$	74,199		$	67,388		$	216,556		$	204,399
Basic earnings per share	$	0.56		$	0.50		$	1.62		$	1.48
Diluted earnings per share	$	0.56		$	0.50		$	1.61		$	1.48
Basic weighted-average outstanding shares		132,583,902			135,466,669			133,957,192			137,643,005
Diluted weighted-average outstanding shares		132,877,769			135,675,498			134,231,762			137,809,573
Dividends declared per share	$	0.26		$	0.24		$	0.78		$	0.72
Dividend payout ratio		46.43	%		48.00	%		48.45	%		48.65	%
Supplemental Income Statement Data (non-GAAP)⁽¹⁾:
Core net interest income	$	143,081		$	141,258		$	433,783		$	422,333
Core noninterest income		49,980			47,405			148,417			145,902
Core noninterest expense		91,222			88,511			276,613			269,642
Core net income		75,871			70,818			220,535			208,797
Core basic earnings per share		0.57			0.52			1.65			1.52
Core diluted earnings per share		0.57			0.52			1.64			1.52
Other Financial Information / Performance Ratios⁽²⁾:
Net interest margin		3.19	%		3.11	%		3.22	%		3.14	%
Core net interest margin (non-GAAP)^(1),(3)		3.19	%		3.11	%		3.22	%		3.14	%
Efficiency ratio		48.41	%		49.36	%		48.20	%		48.49	%
Core efficiency ratio (non-GAAP)^(1),(4)		47.25	%		46.90	%		47.51	%		47.44	%
Return on average total assets		1.45	%		1.31	%		1.42	%		1.35	%
Core return on average total assets (non-GAAP)^(1),(5)		1.48	%		1.38	%		1.44	%		1.37	%
Return on average tangible assets (non-GAAP)⁽¹¹⁾		1.52	%		1.38	%		1.49	%		1.42	%
Core return on average tangible assets (non-GAAP)^(1),(6)		1.56	%		1.45	%		1.52	%		1.45	%
Return on average total stockholders' equity		11.12	%		11.01	%		11.13	%		11.09	%
Core return on average total stockholders' equity (non-GAAP)^(1),(7)		11.37	%		11.57	%		11.34	%		11.33	%
Return on average tangible stockholders' equity (non-GAAP)⁽¹¹⁾		17.81	%		18.66	%		18.04	%		18.60	%
Core return on average tangible stockholders' equity (non-GAAP)^(1),(8)		18.21	%		19.61	%		18.37	%		19.00	%
Noninterest expense to average assets		1.82	%		1.81	%		1.83	%		1.81	%
Core noninterest expense to average assets (non-GAAP)^(1),(9)		1.78	%		1.72	%		1.81	%		1.78	%

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	September 30,			December 31,
	2019			2018
Balance Sheet Data:
Cash and cash equivalents	$	1,344,017		$	1,003,637
Investment securities		4,157,082			4,498,342
Loans and leases		12,843,396			13,076,191
Allowance for loan and lease losses		132,964			141,718
Goodwill		995,492			995,492
Total assets		20,598,220			20,695,678
Total deposits		16,857,246			17,150,068
Short-term borrowings		400,000			—
Long-term borrowings		200,018			600,026
Total liabilities		17,943,662			18,170,839
Total stockholders' equity		2,654,558			2,524,839
Book value per share	$	20.22		$	18.72
Tangible book value per share (non-GAAP)⁽¹¹⁾	$	12.64		$	11.34

Asset Quality Ratios:
Non-accrual loans and leases / total loans and leases		0.03	%		0.05	%
Allowance for loan and lease losses / total loans and leases		1.04	%		1.08	%
Net charge-offs / average total loans and leases⁽¹⁰⁾		0.19	%		0.14	%


	September 30,			December 31,
Capital Ratios:	2019			2018
Common Equity Tier 1 Capital Ratio		12.15	%		11.97	%
Tier 1 Capital Ratio		12.15	%		11.97	%
Total Capital Ratio		13.11	%		12.99	%
Tier 1 Leverage Ratio		8.68	%		8.72	%
Total stockholders' equity to total assets		12.89	%		12.20	%
Tangible stockholders' equity to tangible assets (non-GAAP)⁽¹¹⁾		8.46	%		7.76	%

(1)

We present net interest income, noninterest income, noninterest expense, net income, basic earnings per share, diluted earnings per share and the related ratios described below, on an adjusted, or “core,” basis, each a non-GAAP financial measure. These core measures exclude from the corresponding GAAP measure the impact of certain items that we do not believe are representative of our financial results. We believe that the presentation of these non-GAAP measures helps identify underlying trends in our business from period to period that could otherwise be distorted by the effect of certain expenses, gains and other items included in our operating results. We believe that these core measures provide useful information about our operating results and enhance the overall understanding of our past performance and future performance. Investors should consider our performance and financial condition as reported under GAAP and all other relevant information when assessing our performance or financial condition. Non-GAAP measures have limitations as analytical tools and investors should not consider them in isolation or as a substitute for analysis of our financial results or financial condition as reported under GAAP.

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The following table provides a reconciliation of net interest income, noninterest income, noninterest expense and net income to their “core” non-GAAP financial measures:


GAAP to Non-GAAP Reconciliation											Table 2
	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(dollars in thousands, except per share data)	2019			2018			2019			2018
Net interest income	$	143,081		$	141,258		$	433,783		$	422,333
Core net interest income (non-GAAP)	$	143,081		$	141,258		$	433,783		$	422,333

Noninterest income	$	49,980		$	47,405		$	145,825		$	145,902
Loss on sale of securities		—			—			2,592			—
Core noninterest income (non-GAAP)	$	49,980		$	47,405		$	148,417		$	145,902

Noninterest expense	$	93,466		$	93,147		$	279,379		$	275,599
Loss on litigation settlement^(a)		—			(4,125)			—			(4,125)
One-time items^(b)		(2,244)			(511)			(2,766)			(1,832)
Core noninterest expense (non-GAAP)	$	91,222		$	88,511		$	276,613		$	269,642

Net income	$	74,199		$	67,388		$	216,556		$	204,399
Loss on sale of securities		—			—			2,592			—
Loss on litigation settlement^(a)		—			4,125			—			4,125
One-time noninterest expense items^(b)		2,244			511			2,766			1,832
Tax adjustments^(c)		(572)			(1,206)			(1,379)			(1,559)
Total core adjustments		1,672			3,430			3,979			4,398
Core net income (non-GAAP)	$	75,871		$	70,818		$	220,535		$	208,797

Basic earnings per share	$	0.56		$	0.50		$	1.62		$	1.48
Diluted earnings per share	$	0.56		$	0.50		$	1.61		$	1.48
Efficiency ratio		48.41	%		49.36	%		48.20	%		48.49	%

Core basic earnings per share (non-GAAP)	$	0.57		$	0.52		$	1.65		$	1.52
Core diluted earnings per share (non-GAAP)	$	0.57		$	0.52		$	1.64		$	1.52
Core efficiency ratio (non-GAAP)		47.25	%		46.90	%		47.51	%		47.44	%

(a)

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 settlement agreement, the Company recorded an expense of approximately $4.1 million during the three and nine months ended September 30, 2018.

(b)

One-time items for the three and nine months ended September 30, 2019 included costs related to 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 three and nine months ended September 30, 2018 included nonrecurring offering costs and public company transition-related costs. Additionally, one-time items for the nine months ended September 30, 2018 also included the loss on our funding swap as a result of a 2018 decrease in the conversion rate of our Visa Class B restricted shares sold in 2016.

(c)

Represents the adjustments to net income, tax effected at the Company’s effective tax rate for the respective period.

(2)	Except for the efficiency ratio and the core efficiency ratio, amounts are annualized for the three and nine months ended September 30, 2019 and 2018.

(3)

Core net interest margin is a non-GAAP financial measure. We compute our core net interest margin as the ratio of core net interest income to average earning assets. For a reconciliation to the most directly comparable GAAP financial measure for core net interest income, see Table 2, GAAP to Non-GAAP Reconciliation.

(4)

Core efficiency ratio is a non-GAAP financial measure. We compute our core efficiency ratio as the ratio of core noninterest expense to the sum of core net interest income and core noninterest income. For a reconciliation to the most directly comparable GAAP financial measure for core noninterest expense, core net interest income and core noninterest income, see Table 2, GAAP to Non-GAAP Reconciliation.

(5)

Core return on average total assets is a non-GAAP financial measure. We compute our core return on average total assets as the ratio of core net income to average total assets. For a reconciliation to the most directly comparable GAAP financial measure for core net income, see Table 2, GAAP to Non-GAAP Reconciliation.

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(6)

Core return on average tangible assets is a non-GAAP financial measure. We compute our core return on average tangible assets as the ratio of core net income to average tangible assets, which is calculated by subtracting (and thereby effectively excluding) amounts related to the effect of goodwill from our average total assets. For a reconciliation to the most directly comparable GAAP financial measure for core net income, see Table 2, GAAP to Non-GAAP Reconciliation.

(7)

Core return on average total stockholders’ equity is a non-GAAP financial measure. We compute our core return on average total stockholders’ equity as the ratio of core net income to average total stockholders’ equity. For a reconciliation to the most directly comparable GAAP financial measure for core net income, see Table 2, GAAP to Non-GAAP Reconciliation.

(8)

Core return on average tangible stockholders’ equity is a non-GAAP financial measure. We compute our core return on average tangible stockholders’ equity as the ratio of core net income to average tangible stockholders’ equity, which is calculated by subtracting (and thereby effectively excluding) amounts related to the effect of goodwill from our average total stockholders’ equity. For a reconciliation to the most directly comparable GAAP financial measure for core net income, see Table 2, GAAP to Non-GAAP Reconciliation.

(9)

Core noninterest expense to average assets is a non-GAAP financial measure. We compute our core noninterest expense to average assets as the ratio of core noninterest expense to average total assets. For a reconciliation to the most directly comparable GAAP financial measure for core noninterest expense, see Table 2, GAAP to Non-GAAP Reconciliation.

(10)	Net charge-offs / average total loans and leases are annualized for the nine months ended September 30, 2019.

(11)

Return on average tangible assets, return on average tangible stockholders’ equity, tangible book value per share and tangible stockholders’ equity to tangible assets are non-GAAP financial measures. We compute our return on average tangible assets as the ratio of net income to average tangible assets. We compute our return on average tangible stockholders’ equity as the ratio of net income to average tangible stockholders’ equity. We compute our tangible book value per share as the ratio of tangible stockholders’ equity to outstanding shares. We compute our tangible stockholders’ equity to tangible assets as the ratio of tangible stockholders’ equity to tangible assets. We believe that these financial measures are useful for investors, regulators, management and others to evaluate financial performance and capital adequacy relative to other financial institutions. Although these non-GAAP financial measures are frequently used by shareholders in the evaluation of a company, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP.

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The following table provides a reconciliation of these non-GAAP financial measures with their most closely related GAAP measures for the periods indicated:


GAAP to Non-GAAP Reconciliation											Table 3
	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(dollars in thousands, except per share data)	2019			2018			2019			2018
Income Statement Data:
Noninterest expense	$	93,466		$	93,147		$	279,379		$	275,599
Core noninterest expense	$	91,222		$	88,511		$	276,613		$	269,642

Net income	$	74,199		$	67,388		$	216,556		$	204,399
Core net income	$	75,871		$	70,818		$	220,535		$	208,797

Average total stockholders' equity	$	2,648,428		$	2,427,907		$	2,600,259		$	2,464,601
Less: average goodwill		995,492			995,492			995,492			995,492
Average tangible stockholders' equity	$	1,652,936		$	1,432,415		$	1,604,767		$	1,469,109

Average total assets	$	20,332,457		$	20,391,456		$	20,405,261		$	20,306,833
Less: average goodwill		995,492			995,492			995,492			995,492
Average tangible assets	$	19,336,965		$	19,395,964		$	19,409,769		$	19,311,341

Return on average total stockholders' equity^(a)		11.12	%		11.01	%		11.13	%		11.09	%
Core return on average total stockholders' equity (non-GAAP)^(a)		11.37	%		11.57	%		11.34	%		11.33	%
Return on average tangible stockholders' equity (non-GAAP)^(a)		17.81	%		18.66	%		18.04	%		18.60	%
Core return on average tangible stockholders' equity (non-GAAP)^(a)		18.21	%		19.61	%		18.37	%		19.00	%

Return on average total assets^(a)		1.45	%		1.31	%		1.42	%		1.35	%
Core return on average total assets (non-GAAP)^(a)		1.48	%		1.38	%		1.44	%		1.37	%
Return on average tangible assets (non-GAAP)^(a)		1.52	%		1.38	%		1.49	%		1.42	%
Core return on average tangible assets (non-GAAP)^(a)		1.56	%		1.45	%		1.52	%		1.45	%

Noninterest expense to average assets^(a)		1.82	%		1.81	%		1.83	%		1.81	%
Core noninterest expense to average assets (non-GAAP)^(a)		1.78	%		1.72	%		1.81	%		1.78	%


	As of			As of
	September 30,			December 31,
	2019			2018
Balance Sheet Data:
Total stockholders' equity	$	2,654,558		$	2,524,839
Less: goodwill		995,492			995,492
Tangible stockholders' equity	$	1,659,066		$	1,529,347

Total assets	$	20,598,220		$	20,695,678
Less: goodwill		995,492			995,492
Tangible assets	$	19,602,728		$	19,700,186

Shares outstanding		131,260,900			134,874,302

Total stockholders' equity to total assets		12.89	%		12.20	%
Tangible stockholders' equity to tangible assets (non-GAAP)		8.46	%		7.76	%

Book value per share	$	20.22		$	18.72
Tangible book value per share (non-GAAP)	$	12.64		$	11.34

(a)

Annualized for the three and nine months ended September 30, 2019 and 2018.

Financial Highlights

Net income was $74.2 million for the three months ended September 30, 2019, an increase of $6.8 million or 10% as compared to the same period in 2018. Basic and diluted earnings per share were $0.56 per share for the three months ended September 30, 2019, an increase of $0.06 per share or 12% as compared to the same period in 2018. The increase in net income was primarily due a $4.5 million decrease in the provision for loan and lease losses (the “Provision”), a $2.6 million increase in noninterest income and a $1.8 million increase in net interest income, partially offset by a $1.7 million increase in the provision for income taxes and a $0.3 million increase in noninterest expense for the three months ended September 30, 2019.

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Our return on average total assets was 1.45% for the three months ended September 30, 2019, an increase of 14 basis points from the same period in 2018, and our return on average total stockholders’ equity was 11.12% for the three months ended September 30, 2019, an increase of 11 basis points from the same period in 2018. Our return on average tangible assets was 1.52% for the three months ended September 30, 2019, an increase of 14 basis points from the same period in 2018, and our return on average tangible stockholders’ equity was 17.81% for the three months ended September 30, 2019, a decrease of 85 basis points from the same period in 2018. We continued to prudently manage our expenses, as our efficiency ratio was 48.41% for the three months ended September 30, 2019 compared to 49.36% for the same period in 2018.

Our results for the three months ended September 30, 2019 were highlighted by the following:

●

Net interest income was $143.1 million for the three months ended September 30, 2019, an increase of $1.8 million or 1% as compared to the same period in 2018. Our net interest margin was 3.19% for the three months ended September 30, 2019, an increase of eight 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, partially offset by lower average balances in our investment securities portfolio, higher deposit funding costs and higher average balances in total borrowings during the three months ended September 30, 2019.

●

The Provision was nil for the three months ended September 30, 2019, a decrease of $4.5 million, 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 three months ended September 30, 2019. 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 $50.0 million for the three months ended September 30, 2019, an increase of $2.6 million or 5% as compared to the same period in 2018. The increase was primarily due to a $2.1 million increase in bank-owned life insurance (“BOLI”) income and a $1.2 million increase in trust and investment services income, partially offset by a $0.9 million decrease in other noninterest income.

●

Noninterest expense was $93.5 million for the three months ended September 30, 2019, an increase of $0.3 million compared to the same period in 2018. The increase in noninterest expense was primarily due to a $3.2 million increase in contracted services and professional fees, a $3.0 million increase in salaries and employee benefits expense, a $1.1 million increase in card rewards program expense, a $0.6 million increase in advertising and marketing expenses and a $0.5 million increase in occupancy expense. This was partially offset by a $5.9 million decrease in other noninterest expense and a $2.0 million decrease in regulatory assessment and fees.

Net income was $216.6 million for the nine months ended September 30, 2019, an increase of $12.2 million or 6% as compared to the same period in 2018. Basic earnings per share was $1.62 per share for the nine months ended September 30, 2019, an increase of $0.14 per share or 9% as compared to the same period in 2018. Diluted earnings per share was $1.61 per share for the nine months ended September 30, 2019, an increase of $0.13 per share or 9% as compared to the same period in 2018. The increase in net income was primarily due to a $11.5 million increase in net interest income and a $6.9 million decrease in the Provision, partially offset by a $3.8 million increase in noninterest expense and a $2.3 million increase in the provision for income taxes for the nine months ended September 30, 2019.

Our return on average total assets was 1.42% for the nine months ended September 30, 2019, an increase of seven basis points from the same period in 2018, and our return on average total stockholders’ equity was 11.13% for the nine months ended September 30, 2019, an increase of four basis points from the same period in 2018. Our return on average tangible assets was 1.49% for the nine months ended September 30, 2019, an increase of seven basis points from the same period in 2018, and our return on average tangible stockholders’ equity was 18.04% for the nine months ended September 30, 2019, a decrease of 56 basis points from the same period in 2018. We continued to prudently manage our expenses as our efficiency ratio was 48.20% for the nine months ended September 30, 2019 compared to 48.49% for the same period in 2018. The efficiency ratio during the nine months ended September 30, 2019 reflected a nonrecurring net loss on available-for-sale debt securities of $2.6 million.

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Our results for the nine months ended September 30, 2019 were highlighted by the following:

●

Net interest income was $433.8 million for the nine months ended September 30, 2019, an increase of $11.5 million or 3% as compared to the same period in 2018. Our net interest margin was 3.22% for the nine months ended September 30, 2019, an increase of eight 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.

●

The Provision was $9.6 million for the nine months ended September 30, 2019, a decrease of $6.9 million or 42% 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 nine months ended September 30, 2019. 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 $145.8 million for the nine months ended September 30, 2019, a decrease of $0.1 million as compared to the same period in 2018. The decrease was primarily due to a $6.3 million decrease in other noninterest income, a $2.6 million net loss on the sale of available-for-sale debt securities and a $1.1 million decrease in other service charges and fees, partially offset by a $4.8 million gain in BOLI income, a $2.8 million increase in trust and investment services income, a $1.2 million increase in credit and debit card fees and a $1.1 million increase in service charges on deposit accounts.

●

Noninterest expense was $279.4 million for the nine months ended September 30, 2019, an increase of $3.8 million or 1% as compared to the same period in 2018. The increase in noninterest expense was primarily due to a $6.2 million increase in salaries and employee benefits expense, a $5.8 million increase in contracted services and professional fees, a $3.4 million increase in card rewards program expense, a $2.5 million increase in advertising and marketing expenses and a $1.4 million increase in occupancy expense, partially offset by a $8.7 million decrease in other noninterest expense and a $6.6 million decrease in regulatory assessment and fees.

During the nine months ended September 30, 2019, we continued to benefit from a steady 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 $12.8 billion as of September 30, 2019, a decrease of $232.8 million or 2% from December 31, 2018. This decrease was primarily due to the sale of $408.9 million commercial and industrial loans during the nine months ended September 30, 2019. This was partially offset by continued strong growth in our commercial real estate and residential real estate portfolios. This was a reflection of the demand by both investors and owner occupants to acquire new real estate assets in a low interest rate environment.

●

The Allowance was $133.0 million as of September 30, 2019, a decrease of $8.8 million or 6% from December 31, 2018. The ratio of our Allowance to total loans and leases outstanding was 1.04% as of September 30, 2019, a decrease of four basis points compared to December 31, 2018. The decrease related to our aforementioned sale of commercial and industrial loans. The overall level of the Allowance was commensurate with our stable credit risk profile and a steady 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 $4.2 billion as of September 30, 2019, a decrease of $341.3 million compared to December 31, 2018. This decrease was primarily due to the sale of 48 securities in January 2019.

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●

Total deposits were $16.9 billion as of September 30, 2019, a decrease of $292.8 million or 2% as compared to December 31, 2018. The decrease in total deposits was primarily due to a $384.6 million decrease in time deposit balances and a $287.1 million decrease in demand deposit balances, partially offset by a $332.7 million increase in money market deposit balances.

●

Total stockholders’ equity was $2.7 billion as of September 30, 2019, an increase of $129.7 million or 5% from December 31, 2018. The increase in stockholders’ equity was primarily due to earnings for the period of $216.6 million and a net change in the fair value of our investment securities of $114.0 million. This was partially offset by dividends declared and paid to the Company’s stockholders of $104.4 million and common stock repurchased of $98.8 million during the nine months ended September 30, 2019.

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Analysis of Results of Operations

Net Interest Income

For the three months ended September 30, 2019 and 2018, average balances, related income and expenses, on a fully taxable-equivalent basis, and resulting yields and rates are presented in Table 4. An analysis of the change in net interest income, on a fully taxable-equivalent basis, is presented in Table 5.


Average Balances and Interest Rates												Table 4
	Three Months Ended							Three Months Ended
	September 30, 2019							September 30, 2018
						Average							Average
	Average			Income/		Yield/		Average		Income/			Yield/
(dollars in millions)	Balance			Expense		Rate		Balance		Expense			Rate
Earning Assets
Interest-Bearing Deposits in Other Banks	$	447.8		$	2.3	2.02	%	$	656.7	$	3.3		1.99	%
Available-for-Sale Investment Securities		4,296.3			22.3	2.07			4,737.3		25.2		2.11
Loans Held for Sale		1.4			—	2.36			1.8		—		3.83
Loans and Leases ⁽¹⁾
Commercial and industrial		2,885.9			30.0	4.12			3,019.9		31.0		4.08
Commercial real estate		3,294.7			37.3	4.49			2,975.3		31.0		4.13
Construction		477.2			5.6	4.67			629.5		6.7		4.20
Residential:
Residential mortgage		3,644.9			38.6	4.23			3,288.4		34.9		4.21
Home equity line		912.8	��		8.6	3.74			870.6		8.2		3.72
Consumer		1,651.4			23.3	5.61			1,649.7		22.4		5.39
Lease financing		165.4			1.3	3.14			162.3		1.2		3.00
Total Loans and Leases		13,032.3			144.7	4.41			12,595.7		135.4		4.26
Other Earning Assets		84.8			0.9	4.47			50.0		0.2		1.29
Total Earning Assets⁽²⁾		17,862.6			170.2	3.79			18,041.5		164.1		3.61
Cash and Due from Banks		341.7							336.5
Other Assets		2,128.2							2,013.5
Total Assets	$	20,332.5						$	20,391.5

Interest-Bearing Liabilities
Interest-Bearing Deposits
Savings	$	4,891.5		$	4.6	0.37	%	$	4,727.2	$	3.3		0.28	%
Money Market		3,067.4			7.1	0.92			2,871.0		4.6		0.63
Time		2,872.6			11.1	1.54			3,705.7		12.3		1.32
Total Interest-Bearing Deposits		10,831.5			22.8	0.83			11,303.9		20.2		0.71
Short-Term Borrowings		370.0			2.6	2.84			3.3		—		1.30
Long-Term Borrowings		239.1			1.7	2.82			358.7		2.6		2.85
Total Interest-Bearing Liabilities		11,440.6			27.1	0.94			11,665.9		22.8		0.78
Net Interest Income				$	143.1					$	141.3
Interest Rate Spread						2.85	%						2.83	%
Net Interest Margin						3.19	%						3.11	%
Noninterest-Bearing Demand Deposits		5,742.3							5,854.9
Other Liabilities		501.2							442.8
Stockholders' Equity		2,648.4							2,427.9
Total Liabilities and Stockholders' Equity	$	20,332.5						$	20,391.5

(1)	Non-performing loans and leases are included in the respective average loan and lease balances. Income, if any, on such loans and leases is recognized on a cash basis.

(2)	For the three months ended September 30, 2019 and 2018, the taxable-equivalent basis adjustments made to the table above were not material.

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Analysis of Change in Net Interest Income						Table 5
	Three Months Ended September 30, 2019
	Compared to September 30, 2018
(dollars in millions)	Volume		Rate		Total ⁽¹⁾
Change in Interest Income:
Interest-Bearing Deposits in Other Banks	$	(1.0)	$	—	$	(1.0)
Available-for-Sale Investment Securities		(2.4)		(0.5)		(2.9)
Loans and Leases
Commercial and industrial		(1.4)		0.4		(1.0)
Commercial real estate		3.5		2.8		6.3
Construction		(1.7)		0.6		(1.1)
Residential:
Residential mortgage		3.5		0.2		3.7
Home equity line		0.4		—		0.4
Consumer		—		0.9		0.9
Lease financing		—		0.1		0.1
Total Loans and Leases		4.3		5.0		9.3
Other Earning Assets		0.1		0.6		0.7
Total Change in Interest Income		1.0		5.1		6.1

Change in Interest Expense:
Interest-Bearing Deposits
Savings		0.1		1.2		1.3
Money Market		0.3		2.2		2.5
Time		(3.0)		1.8		(1.2)
Total Interest-Bearing Deposits		(2.6)		5.2		2.6
Short-term Borrowings		2.6		—		2.6
Long-term Borrowings		(0.9)		—		(0.9)
Total Change in Interest Expense		(0.9)		5.2		4.3
Change in Net Interest Income	$	1.9	$	(0.1)	$	1.8

(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 $143.1 million for the three months ended September 30, 2019, an increase of $1.8 million or 1% compared to the same period in 2018. Our net interest margin was 3.19% for the three months ended September 30, 2019, an increase of eight basis points from 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, partially offset by lower average balances in our investment securities portfolio, higher deposit funding costs and higher average balances in total borrowings during the three months ended September 30, 2019. For the three months ended September 30, 2019, the average balance of our loans and leases was $13.0 billion, an increase of $436.6 million or 3% compared to the same period in 2018. The higher average balance in loans and leases was primarily due to growth in our residential real estate and commercial real estate portfolios, partially offset by lower balances in our construction and commercial and industrial portfolios. Yields on our loans and leases were 4.41% for the three months ended September 30, 2019, an increase of 15 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 and construction loans, which are typically based on the LIBOR. Average balances of our investment securities portfolio were $4.3 billion for the three months ended September 30, 2019, a decrease of $441.0 million or 9% from the same period in 2018. Deposit funding costs were $22.8 million for the three months ended September 30, 2019, an increase of $2.6 million compared to the same period in 2018. Rates paid on our interest-bearing deposits were 83 basis points for the three months ended September 30, 2019, an increase of 12 basis points compared to the same period in 2018. While we experienced higher rates paid on all interest-bearing deposit categories in the three months ended September 30, 2019, particularly high rates were paid on our money market deposits with an increase of 29 basis points compared to the same period in 2018. For the three months ended September 30, 2019, the average balance of our total borrowings was $609.1 million, an increase of $247.1 million from the same period in 2018. This was due to increases in FHLB fixed-rate advances held during the three months ended September 30, 2019 compared to the same period in 2018.

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For the nine months ended September 30, 2019 and 2018, average balances, related income and expenses, on a fully taxable-equivalent basis, and resulting yields and rates are presented in Table 6. An analysis of the change in net interest income, on a fully taxable-equivalent basis, is presented in Table 7.


Average Balances and Interest Rates													Table 6
	Nine Months Ended							Nine Months Ended
	September 30, 2019							September 30, 2018
	Average		Income/		Yield/			Average		Income/			Yield/
(dollars in millions)	Balance		Expense		Rate			Balance		Expense			Rate
Earning Assets								��
Interest-Bearing Deposits in Other Banks	$	400.6	$	6.9		2.31	%	$	518.4	$	6.9		1.77	%
Available-for-Sale Investment Securities		4,383.6		71.5		2.18			4,951.4		81.6		2.20
Loans Held for Sale		0.8		—		2.52			1.3		—		3.60
Loans and Leases⁽¹⁾
Commercial and industrial		3,094.8		97.5		4.21			3,100.1		89.2		3.85
Commercial real estate		3,129.8		108.1		4.62			2,886.7		86.3		4.00
Construction		565.2		20.0		4.73			623.9		18.6		4.00
Residential:
Residential mortgage		3,590.2		112.4		4.17			3,221.7		102.4		4.25
Home equity line		912.4		25.9		3.79			864.0		23.6		3.65
Consumer		1,658.7		68.5		5.52			1,625.0		65.5		5.38
Lease financing		154.0		3.6		3.15			161.3		3.6	��	2.98
Total Loans and Leases		13,105.1		436.0		4.44			12,482.7		389.2		4.17
Other Earning Assets		84.3		2.2		3.37			28.6		0.3		1.58
Total Earning Assets⁽²⁾		17,974.4		516.6		3.84			17,982.4		478.0		3.55
Cash and Due from Banks		348.1							324.4
Other Assets		2,082.8							2,000.0
Total Assets	$	20,405.3						$	20,306.8

Interest-Bearing Liabilities
Interest-Bearing Deposits
Savings	$	4,806.0	$	12.8		0.35	%	$	4,615.1	$	7.4		0.21	%
Money Market		3,125.5		22.1		0.95			2,769.9		9.1		0.44
Time		2,999.0		34.8		1.55			3,985.2		36.3		1.22
Total Interest-Bearing Deposits		10,930.5		69.7		0.85			11,370.2		52.8		0.62
Short-Term Borrowings		145.7		3.0		2.76			15.3		0.2		1.81
Long-Term Borrowings		476.2		10.1		2.84			123.1		2.7		2.87
Total Interest-Bearing Liabilities		11,552.4		82.8		0.96			11,508.6		55.7		0.65
Net Interest Income			$	433.8						$	422.3
Interest Rate Spread						2.88	%						2.90	%
Net Interest Margin						3.22	%						3.14	%
Noninterest-Bearing Demand Deposits		5,769.9							5,916.0
Other Liabilities		482.7							417.6
Stockholders' Equity		2,600.3							2,464.6
Total Liabilities and Stockholders' Equity	$	20,405.3						$	20,306.8

(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)	For the nine months ended September 30, 2019 and 2018, the taxable-equivalent basis adjustments made to the table above were not material.

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Analysis of Change in Net Interest Income						Table 7
	Nine Months Ended September 30, 2019
	Compared to September 30, 2018
(dollars in millions)	Volume		Rate		Total⁽¹⁾
Change in Interest Income:
Interest-Bearing Deposits in Other Banks	$	(1.8)	$	1.8	$	—
Available-for-Sale Investment Securities		(9.2)		(0.9)		(10.1)
Loans and Leases
Commercial and industrial		(0.2)		8.5		8.3
Commercial real estate		7.7		14.1		21.8
Construction		(1.8)		3.2		1.4
Residential:
Residential mortgage		11.9		(1.9)		10.0
Home equity line		1.4		0.9		2.3
Consumer		1.3		1.7		3.0
Lease financing		(0.2)		0.2		—
Total Loans and Leases		20.1		26.7		46.8
Other Earning Assets		1.2		0.7		1.9
Total Change in Interest Income		10.3		28.3		38.6

Change in Interest Expense:
Interest-Bearing Deposits
Savings		0.3		5.1		5.4
Money Market		1.3		11.7		13.0
Time		(10.1)		8.6		(1.5)
Total Interest-Bearing Deposits		(8.5)		25.4		16.9
Short-Term Borrowings		2.6		0.2		2.8
Long-Term Borrowings		7.5		(0.1)		7.4
Total Change in Interest Expense		1.6		25.5		27.1
Change in Net Interest Income	$	8.7	$	2.8	$	11.5

(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 $433.8 million for the nine months ended September 30, 2019, an increase of $11.5 million or 3% compared to the same period in 2018. Our net interest margin was 3.22% for the nine months ended September 30, 2019, an increase of eight basis points from 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 nine months ended September 30, 2019, the average balance of our loans and leases was $13.1 billion, an increase of $622.4 million or 5% compared to the same period in 2018. The higher average balance in loans and leases was primarily due to growth in our residential real estate and commercial real estate portfolios. Yields on our loans and leases were 4.44% for the nine months ended September 30, 2019, an increase of 27 basis points as compared to the same period in 2018. We experienced an increase in our yield from total loans primarily due to increases in adjustable rate construction, commercial real estate and commercial and industrial loans, which are typically based on LIBOR. For the nine months ended September 30, 2019, the average balance of our investment securities portfolio was $4.4 billion, a decrease of $567.8 million or 11% compared to the same period in 2018. Deposit funding costs were $69.7 million for the nine months ended September 30, 2019, an increase of $16.9 million compared to the same period in 2018. Rates paid on our interest-bearing deposits were 85 basis points for the nine months ended September 30, 2019, an increase of 23 basis points compared to the same period in 2018. While we experienced higher rates paid on all interest-bearing deposit categories in the nine months ended September 30, 2019, particularly high rates were paid on our money market deposits with an increase of 51 basis points compared to the same period in 2018. For the nine months ended September 30, 2019, the average balance of our total borrowings was $621.9 million, an increase of $483.5 million from the same period in 2018. This was due to increases in FHLB fixed-rate advances during the nine months ended September 30, 2019 compared to the same period in 2018.

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Provision for Loan and Lease Losses

The Provision was nil for the three months ended September 30, 2019, which represented a decrease of $4.5 million 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 three months ended September 30, 2019. We recorded net charge-offs of loans and leases of $5.6 million and $3.8 million for the three months ended September 30, 2019 and 2018, respectively. This represented net charge-offs of 0.17% and 0.12% of average loans and leases, on an annualized basis, for the three months ended September 30, 2019 and 2018, respectively. The Provision was $9.6 million for the nine months ended September 30, 2019, which represented a decrease of $6.9 million compared to the same period in 2018. We recorded net charge-offs of loans and leases of $18.3 million and $12.4 million for the nine months ended September 30, 2019 and 2018, respectively. This represented net charge-offs of 0.19% and 0.13% of average loans and leases, on an annualized basis, for the nine months ended September 30, 2019 and 2018, respectively. The Allowance was $133.0 million as of September 30, 2019, a decrease of $8.8 million or 6% from December 31, 2018 and represented 1.04% of total outstanding loans and leases as of September 30, 2019, compared to 1.08% of total outstanding loans and leases as of December 31, 2018. The Provision is recorded to maintain the Allowance at levels deemed adequate by management based on the factors noted in the “Risk Governance and Quantitative and Qualitative Disclosures About Market Risk — Credit Risk” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

Noninterest Income

Table 8 presents the major components of noninterest income for the three months ended September 30, 2019 and 2018 and Table 9 presents the major components of noninterest income for the nine months ended September 30, 2019 and 2018:


Noninterest Income							Table 8
	Three Months Ended
	September 30,				Dollar		Percent
(dollars in thousands)	2019		2018		Change		Change
Service charges on deposit accounts	$	8,554	$	7,933	$	621	8	%
Credit and debit card fees		16,839		16,535		304	2
Other service charges and fees		8,903		9,578		(675)	(7)
Trust and investment services income		8,698		7,487		1,211	16
Bank-owned life insurance		5,743		3,692		2,051	56
Other		1,243		2,180		(937)	(43)
Total noninterest income	$	49,980	$	47,405	$	2,575	5	%


Noninterest Income							Table 9
	Nine Months Ended
	September 30,				Dollar		Percent
(dollars in thousands)	2019		2018		Change		Change
Service charges on deposit accounts	$	24,737	$	23,609	$	1,128	5	%
Credit and debit card fees		50,123		48,961		1,162	2
Other service charges and fees		27,435		28,553		(1,118)	(4)
Trust and investment services income		26,247		23,429		2,818	12
Bank-owned life insurance		12,946		8,131		4,815	59
Investment securities losses, net		(2,592)		—		(2,592)	n/m
Other		6,929		13,219		(6,290)	(48)
Total noninterest income	$	145,825	$	145,902	$	(77)	—	%

n/m – Denotes a variance that is not a meaningful metric to inform the change in noninterest income for the nine months ended September 30, 2019 to the same period in 2018.

Total noninterest income was $50.0 million for the three months ended September 30, 2019, an increase of $2.6 million or 5% as compared to the same period in 2018. Total noninterest income was $145.8 million for the nine months ended September 30, 2019, a decrease of $0.1 million or less than 1% as compared to the same period in 2018.

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Service charges on deposit accounts were $8.6 million for the three months ended September 30, 2019, an increase of $0.6 million or 8% as compared to the same period in 2018. This increase was primarily due to a $0.3 million increase in overdraft and checking account fees and a $0.2 million increase in checking account service fees. Service charges on deposit accounts were $24.7 million for the nine months ended September 30, 2019, an increase of $1.1 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 and a $0.3 million increase in account analysis service charges.

Credit and debit card fees were $16.8 million for the three months ended September 30, 2019, an increase of $0.3 million or 2% as compared to the same period in 2018. Credit and debit card fees were $50.1 million for the nine months ended September 30, 2019, an increase of $1.2 million or 2% as compared to the same period in 2018. This increase was primarily due to a $2.0 million increase in interchange settlement fees, partially offset by a $0.9 million decrease in merchant service revenues.

Other service charges and fees were $8.9 million for the three months ended September 30, 2019, a decrease of $0.7 million or 7% as compared to the same period in 2018. This decrease was primarily due to a $0.5 million decrease in fee income from our cash management services and a $0.1 million decrease in residential mortgage loan servicing fees. Other service charges and fees were $27.4 million for the nine months ended September 30, 2019, a decrease of $1.1 million or 4% as compared to the same period in 2018. This decrease was primarily due to a $1.6 million decrease in fee income from our cash management services, partially offset by a $0.7 million increase in miscellaneous service fees.

Trust and investment services income was $8.7 million for the three months ended September 30, 2019, an increase of $1.2 million or 16% as compared to the same period in 2018. This increase was primarily due to a $0.8 million increase in business cash management fees and a $0.5 million increase in investment management fees. Trust and investment services income was $26.2 million for the nine months ended September 30, 2019, an increase of $2.8 million or 12% as compared to the same period in 2018. This increase was primarily due to a $2.3 million increase in business cash management fees and a $0.5 million increase in investment management fees.

BOLI income was $5.7 million for the three months ended September 30, 2019, an increase of $2.1 million or 56% as compared to the same period in 2018. This increase was due to a $1.2 million increase in BOLI earnings and a $0.9 million increase in death benefit proceeds from life insurance policies. BOLI income was $12.9 million for the nine months ended September 30, 2019, an increase of $4.8 million or 59% as compared to the same period in 2018. This increase was due to a $3.5 million increase in BOLI earnings and a $1.3 million increase in death benefit proceeds from life insurance policies.

Net gains on the sale of investment securities were nil for both the three months ended September 30, 2019 and 2018. Net losses on the sale of investment securities were $2.6 million for the nine months ended September 30, 2019, a decrease of $2.6 million as compared to the same period in 2018. The net loss of $2.6 million was due to the investment portfolio restructuring and sale of the 48 investment securities. In addition to this net loss, a non-credit related other-than-temporary-impairment (“OTTI”) write-down was recorded in December 2018 as a result of our intent to sell these securities as of December 31, 2018.

Other noninterest income was $1.2 million for the three months ended September 30, 2019, a decrease of $0.9 million or 43% as compared to the same period in 2018. This decrease was primarily due to a $1.2 million loss on the sale of loans sold, a $0.5 million decrease in volume-based incentives and a $0.5 million decrease in net gains recognized in income related to derivative contracts. This was partially offset by a $1.6 million increase in customer-related interest rate swap fees. Other noninterest income was $6.9 million for the nine months ended September 30, 2019, a decrease of $6.3 million or 48% as compared to the same period in 2018. This decrease was primarily due to a $1.7 million decrease in volume-based incentives, a $1.4 million decrease in customer-related interest rate swap fees, a $1.2 million loss on the sale of loans sold, a $1.2 million decrease in net gains recognized in income related to derivative contracts and a $1.1 million gain on sale of leased equipment in 2018.

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Noninterest Expense

Table 10 presents the major components of noninterest expense for the three months ended September 30, 2019 and 2018 and Table 11 presents the major components of noninterest expense for the nine months ended September 30, 2019 and 2018:


Noninterest Expense							Table 10
	Three Months Ended
	September 30,					Dollar	Percentage
(dollars in thousands)	2019		2018			Change	Change
Salaries and employee benefits	$	44,955	$	41,959	$	2,996	7	%
Contracted services and professional fees		14,649		11,478		3,171	28
Occupancy		7,250		6,757		493	7
Equipment		4,024		4,181		(157)	(4)
Regulatory assessment and fees		1,992		3,966		(1,974)	(50)
Advertising and marketing		1,647		1,060		587	55
Card rewards program		6,930		5,805		1,125	19
Other		12,019		17,941		(5,922)	(33)
Total noninterest expense	$	93,466	$	93,147	$	319	—	%


Noninterest Expense							Table 11
	Nine Months Ended
	September 30,				Dollar		Percentage
(dollars in thousands)	2019		2018		Change		Change
Salaries and employee benefits	$	132,000	$	125,755	$	6,245	5	%
Contracted services and professional fees		42,597		36,770		5,827	16
Occupancy		21,522		20,149		1,373	7
Equipment		12,852		13,104		(252)	(2)
Regulatory assessment and fees		5,588		12,164		(6,576)	(54)
Advertising and marketing		5,593		3,126		2,467	79
Card rewards program		21,326		17,882		3,444	19
Other		37,901		46,649		(8,748)	(19)
Total noninterest expense	$	279,379	$	275,599	$	3,780	1	%

Total noninterest expense was $93.5 million for the three months ended September 30, 2019, an increase of $0.3 million or less than 1% as compared to the same period in 2018. Total noninterest expense was $279.4 million for the nine months ended September 30, 2019, an increase of $3.8 million or 1% as compared to the same period in 2018.

Salaries and employee benefits expense was $45.0 million for the three months ended September 30, 2019, an increase of $3.0 million or 7% as compared to the same period in 2018. This increase was primarily due to a $2.0 million increase in other compensation, largely related to costs incurred for a nonrecurring payment to a former executive of the Company pursuant to the Bank’s Executive Change-in-Control Retention Plan, and a $2.0 million increase in incentive compensation. This was partially offset by a $0.8 million increase in deferred loan origination costs. Salaries and employee benefits expense was $132.0 million for the nine months ended September 30, 2019, an increase of $6.2 million or 5% as compared to the same period in 2018. This increase was primarily due to a $4.0 million increase in incentive compensation and a $2.7 million increase in other compensation, partially offset by a $0.8 million decrease in retirement plan expenses.

Contracted services and professional fees were $14.6 million for the three months ended September 30, 2019, an increase of $3.2 million or 28% as compared to the same period in 2018. This increase was primarily due to a $1.4 million increase in contracted data processing expenses, primarily related to system upgrades and product enhancements, a $1.1 million increase in outside services, primarily attributable to marketing and new customer services, and a $0.6 million increase in audit, legal and consultant fees. Contracted services and professional fees were $42.6 million for the nine months ended September 30, 2019, an increase of $5.8 million or 16% as compared to the same period in 2018. This increase was primarily due to a $3.8 million increase in contracted data processing expenses, primarily related to system upgrades and product enhancements, a $1.7 million increase in outside services, primarily attributable to marketing and new customer services, and a $0.2 million increase in audit, legal and consultant fees.

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Occupancy expense was $7.3 million for the three months ended September 30, 2019, an increase of $0.5 million or 7% as compared to the same period in 2018. Occupancy expense was $21.5 million for the nine months ended September 30, 2019, an increase of $1.4 million or 7% as compared to the same period in 2018. This increase was primarily due to a $0.9 million increase in rent expense and a $0.5 million increase in real property tax expense.

Equipment expense was $4.0 million for the three months ended September 30, 2019, a decrease of $0.2 million or 4% as compared to the same period in 2018. Equipment expense was $12.9 million for the nine months ended September 30, 2019, a decrease of $0.3 million or 2% as compared to the same period in 2018.

Regulatory assessment and fees were $2.0 million for the three months ended September 30, 2019, a decrease of $2.0 million or 50% as compared to the same period in 2018. Starting in the third quarter of 2016, there was a change in the calculation of the FDIC insurance assessment and the adoption of 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 and fees for the three months ended September 30, 2019 as compared to the same period in 2018 is due to the exclusion of the additional surcharge for the three months ended September 30, 2019. Regulatory assessment and fees were $5.6 million for the nine months ended September 30, 2019, a decrease of $6.6 million or 54% as compared to the same period in 2018. This decrease is primarily due to the termination of the additional surcharge.

Advertising and marketing expense was $1.6 million for the three months ended September 30, 2019, an increase of $0.6 million or 55% as compared to the same period in 2018. This increase was primarily due to a $0.4 million decrease in vendor reimbursements and a $0.2 million increase in advertising costs. Advertising and marketing expense was $5.6 million for the nine months ended September 30, 2019, an increase of $2.5 million or 79% as compared to the same period in 2018. This increase was primarily due to a $1.9 million decrease in vendor reimbursements and a $0.5 million increase in advertising costs.

Card rewards program expense was $6.9 million for the three months ended September 30, 2019, an increase of $1.1 million or 19% as compared to the same period in 2018. This increase was primarily due to a $0.8 million increase in priority rewards card redemptions and a $0.2 million increase in credit card cash reward redemptions. Card rewards program expense was $21.3 million for the nine months ended September 30, 2019, an increase of $3.4 million or 19% as compared to the same period in 2018. This increase was primarily due to a $2.0 million increase in priority rewards card redemptions, a $0.9 million increase in interchange fees paid to our credit card partners and a $0.5 million increase in credit card cash reward redemptions.

Other noninterest expense was $12.0 million for the three months ended September 30, 2019, a decrease of $5.9 million or 33% 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 $0.9 million decrease in other tax expense and a $0.6 million decrease in operational losses (which includes losses as a result of bank error, fraud, items processing, or theft). Other noninterest expense was $37.9 million for the nine months ended September 30, 2019, a decrease of $8.7 million or 19% as compared to the same period in 2018. This decrease was primarily due to a $4.1 million settlement recorded in connection with the class action lawsuit noted above, a $1.7 million decrease in operational losses, a $0.8 million decrease in other tax expense, a $0.6 million decrease in software amortization expense, a $0.6 million decrease in charitable contributions and a $0.5 million decrease in expenses related to the safekeeping and handling of securities-related transactions.

Provision for Income Taxes

The provision for income taxes was $25.4 million (an effective tax rate of 25.50%) for the three months ended September 30, 2019, compared with the provision for income taxes of $23.7 million (an effective tax rate of 25.99%) for the same period in 2018. The provision for income taxes was $74.1 million (an effective tax rate of 25.50%) for the nine months ended September 30, 2019, compared with the provision for income taxes of $71.8 million (an effective tax rate of 26.00%) for the same period in 2018.

Analysis of Business Segments

Our business segments are Retail Banking, Commercial Banking and Treasury and Other. Table 12 summarizes net income from our business segments for the three and nine months ended September 30, 2019 and 2018. Additional

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information about operating segment performance is presented in “Note 19. Reportable Operating Segments” contained in our unaudited interim consolidated financial statements.


Business Segment Net Income								Table 12
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	2019		2018		2019		2018
Retail Banking	$	58,557	$	55,201	$	174,066	$	165,408
Commercial Banking		19,651		18,574		55,762		55,734
Treasury and Other		(4,009)		(6,387)		(13,272)		(16,743)
Total	$	74,199	$	67,388	$	216,556	$	204,399

Retail Banking. Our Retail Banking segment includes the financial products and services we provide to consumers, small businesses and certain commercial customers. Loan and lease products offered include residential and commercial mortgage loans, home equity lines of credit, automobile loans and leases, personal lines of credit, installment loans and small business loans and leases. Deposit products offered include checking, savings and time deposit accounts. Our Retail Banking segment also includes our wealth management services.

Net income for the Retail Banking segment was $58.6 million for the three months ended September 30, 2019, an increase of $3.4 million or 6% as compared to the same period in 2018. The increase in net income for the Retail Banking segment was primarily due to a $1.8 million decrease in the provision for loan and lease losses and a $1.6 million increase in noninterest income. The decrease in the provision for loan and lease losses was partially due to the sale of $408.9 million commercial and industrial loans during the three months ended September 30, 2019. The increase in noninterest income was primarily due to an increase in trust and investment services income and service charges on deposit accounts. Net income for the Retail Banking segment was $174.1 million for the nine months ended September 30, 2019, an increase of $8.7 million or 5% as compared to the same period in 2018. The increase in net income for the Retail Banking segment was primarily due to a $6.8 million increase in net interest income, a $4.5 million increase in noninterest income and a $2.2 million decrease in the provision for loan and lease losses, partially offset by a $3.8 million increase in noninterest expense. The increase in net interest income was primarily due to higher spreads on our deposit portfolio, partially offset by lower spreads on our loan portfolio. The increase in noninterest income was primarily due to an increase in trust and investment services income, service charges on deposit accounts and gains on foreign exchange transactions. The decrease in the provision for loan and lease losses was partially due to the sale of $408.9 million commercial and industrial loans during the nine months ended September 30, 2019. The increase in noninterest expense was primarily due to higher overall expenses that were allocated to the Retail Banking segment, partially offset by a decrease in expense related to a settlement agreement that was recorded in 2018 and lower regulatory assessment and fees.

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.

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Net income for the Commercial Banking segment was $19.7 million for the three months ended September 30, 2019, an increase of $1.1 million or 6% as compared to the same period in 2018. The increase in net income for the Commercial Banking segment was primarily due to a $2.7 million decrease in the provision for loan and lease losses, partially offset by a $0.7 million decrease in noninterest income and a $0.3 million increase in noninterest expense. The decrease in the provision for loan and lease losses was partially due to the sale of $408.9 million commercial and industrial loans during the three months ended September 30, 2019. The decrease in noninterest income was primarily due to losses on the sale of our commercial and industrial loans, lower merchant services revenues and cash management fees, partially offset by an increase in customer-related swap fee income. The increase in noninterest expense was primarily due to higher overall expenses that were allocated to the Commercial Banking segment and an increase in card rewards program expenses, partially offset by lower losses and charge-offs and regulatory assessment fees. Net income for the Commercial Banking segment was $55.8 million for the nine months ended September 30, 2019, relatively flat compared to the same period in 2018. The slight increase in net income for the Commercial Banking segment was primarily due to a $4.7 million decrease in the provision for loan and lease losses and a $1.3 million decrease in noninterest expense, partially offset by a $5.6 million decrease in noninterest income. The decrease in the provision for loan and lease losses was partially due to the sale of $408.9 million commercial and industrial loans during the nine months ended September 30, 2019. The decrease in noninterest expense was primarily due to lower regulatory assessment fees and losses and charge-offs, partially offset by higher card rewards program expenses. The decrease in noninterest income was primarily due to lower cash management fees, customer-related swap fee income, merchant services revenues and losses on the sale of our commercial and industrial loans, partially offset by an increase in interchange settlement fees.

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

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

Net loss for the Treasury and Other segment was $4.0 million for the three months ended September 30, 2019, a decrease in loss of $2.4 million or 37% as compared to the same period in 2018. The decrease in the net loss was primarily due to a $2.4 million increase in net interest income, a $1.7 million increase in noninterest income, partially offset by a $0.9 million decrease in the benefit for income taxes. 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 lower average balances in our investment securities portfolio. The increase in noninterest income was primarily due to higher BOLI income. The decrease in the benefit for income taxes was primarily due to the decrease in net loss. Net loss for the Treasury and Other segment was $13.3 million for the nine months ended September 30, 2019, a decrease in loss of $3.5 million or 21% as compared to the same period in 2018. The decrease in the net loss was primarily due to a $5.0 million increase in net interest income, partially offset by a $1.3 million decrease in the benefit for income taxes and a $1.2 million increase in noninterest expense. 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 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.

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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 FRB. As of September 30, 2019 and December 31, 2018, cash and cash equivalents were $1.3 billion and $1.0 billion, respectively. Potential sources of liquidity also include investment securities in our available-for-sale portfolio. The carrying value of our available-for-sale investment securities was $4.2 billion and $4.5 billion as of September 30, 2019 and December 31, 2018. As of September 30, 2019 and December 31, 2018, we maintained our excess liquidity primarily in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac. As of September 30, 2019, our available-for-sale investment securities portfolio was comprised of securities with a weighted average life of approximately 3.4 years. These funds offer substantial resources to meet either new loan demand or to help offset reductions in our deposit funding base. Liquidity is further enhanced by our ability to pledge loans to access secured borrowings from the FHLB and the FRB. As of September 30, 2019, we have borrowing capacity of $1.6 billion from the FHLB and $489.0 million from the FRB based on the amount of collateral pledged.

Our core deposits have historically provided us with a long term source of stable and relatively lower cost of funding. Our core deposits, defined as all deposits exclusive of time deposits exceeding $250,000, totaled $15.3 billion as of both September 30, 2019 and December 31, 2018, which represented 91% and 89%, 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 dividends to be paid to our stockholders. We expect to meet these obligations primarily from dividends paid by the Bank to the Parent. Additional sources of liquidity available to us include selling residential real estate loans in the secondary market, short- and long-term borrowings and the issuance of long-term debt and equity securities.

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Investment Securities

Table 13 presents the book value, which is also the estimated fair value, of our available-for-sale investment securities portfolio as of September 30, 2019 and December 31, 2018:


Investment Securities				Table 13
	September 30,		December 31,
(dollars in thousands)	2019		2018
U.S. Treasury securities	$	29,738	$	389,470
Government agency debt securities		24,472		—
Government-sponsored enterprises debt securities		126,649		241,594
Government agency mortgage-backed securities		343,905		411,536
Government-sponsored enterprises mortgage-backed securities		371,949		150,847
Collateralized mortgage obligations:
Government agency		2,486,524		2,682,449
Government-sponsored enterprises		773,845		602,592
Debt securities issued by state and political subdivisions		—		19,854
Total available-for-sale securities	$	4,157,082	$	4,498,342

Table 14 presents the maturity distribution at amortized cost and weighted-average yield to maturity of our available-for-sale investment securities portfolio as of September 30, 2019:

Maturities and Weighted-Average Yield on Securities⁽¹⁾

Table 14

1 Year or Less

After 1 Year - 5 Years

After 5 Years - 10 Years

Over 10 Years

Total

Weighted

Average

Fair

(dollars in millions)

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Value

As of September 30, 2019

Available-for-Sale Securities

U.S. Treasury securities

29.7

2.40

—

29.7

2.40

29.7

Government agency debt securities⁽²⁾

—

9.1

2.71

15.3

2.70

—

24.4

2.70

24.5

Government-sponsored enterprises debt securities⁽³⁾

101.7

1.97

25.0

1.86

—

126.7

1.95

126.7

Mortgage-Backed Securities⁽²⁾:

Government agency

—

151.3

2.80

191.0

2.41

—

342.3

2.58

343.9

Government-sponsored enterprises

—

366.3

3.10

—

366.3

3.10

372.0

Collateralized mortgage obligations⁽²⁾:

Government agency

—

2,404.7

2.17

75.3

2.17

—

2,480.0

2.17

2,486.5

Government-sponsored enterprises

—

773.7

2.31

—

773.7

2.31

773.8

Total available-for-sale securities as of September 30, 2019

131.4

2.07

3,730.1

2.31

281.6

2.36

—

4,143.1

2.31

4,157.1

(1)	Weighted-average yields were computed on a fully taxable-equivalent basis.

(2)	Maturities for government agency debt securities, 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 $4.2 billion as of September 30, 2019, a decrease of $341.3 million or 8% compared to December 31, 2018. 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.

As of September 30, 2019, we maintained all of our investment securities in the available-for-sale category recorded at fair value in the unaudited interim consolidated balance sheets, with $3.3 billion invested in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac. Our available-for-sale portfolio also included $715.9 million in mortgage backed securities issued by Ginnie Mae, Freddie Mac and Fannie Mae, $126.6 million in debt securities issued by government-sponsored enterprises (FHLB and Federal Farm Credit Banks Funding Corporation callable bonds), $29.7 million in U.S. Treasury securities and $24.5 million in debt securities issued by government agencies (Small Business Administration).

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 $27.6 million and $0.1 million as of September 30, 2019 and December 31, 2018, respectively. Gross unrealized losses in our investment securities portfolio

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were $13.7 million and $142.2 million as of September 30, 2019 and December 31, 2018, respectively. Lower unrealized losses in our investment securities portfolio were primarily due to lower market interest rates as of September 30, 2019, relative to December 31, 2018, resulting in a higher valuation. The lower gross unrealized loss positions were primarily related to our 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 consider the nature of the investment, the financial condition of the issuer, the extent and duration of unrealized losses, expected cash flows of underlying assets and market conditions. As of September 30, 2019, we had no plans to sell 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. As of December 31, 2018, we intended to sell 48 investment securities with an aggregate book value of $898.2 million, primarily comprised of U.S. Treasury securities and longer duration collateralized mortgage obligations. As a result, we recorded a non-credit related OTTI write-down of $24.1 million for the year ended December 31, 2018. In January 2019, the sale of these securities were executed and the proceeds were used to invest in securities to improve portfolio return, reposition interest rate risk, maintain liquidity and to diversify asset allocation.

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 September 30, 2019 and December 31, 2018, we held $34.1 million in FHLB stock, which is recorded as a component of other assets in our unaudited interim consolidated balance sheets.

See “Note 2. Investment Securities” contained in our unaudited interim consolidated financial statements for more information on our investment securities portfolio.

Loans and Leases

Table 15 presents the composition of our loan and lease portfolio by major categories as of September 30, 2019 and December 31, 2018:


Loans and Leases				Table 15
	September 30,		December 31,
(dollars in thousands)	2019		2018
Commercial and industrial	$	2,654,077	$	3,208,760
Commercial real estate		3,309,389		2,990,783
Construction		486,977		626,757
Residential:
Residential mortgage		3,671,424		3,527,101
Home equity line		916,106		912,517
Total residential		4,587,530		4,439,618
Consumer		1,637,549		1,662,504
Lease financing		167,874		147,769
Total loans and leases	$	12,843,396	$	13,076,191

Total loans and leases were $12.8 billion as of September 30, 2019, a decrease of $232.8 million or 2% from December 31, 2018 with decreases in commercial and industrial loans, construction loans and consumer loans.

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 billion as of September 30, 2019, a decrease of $554.7 million or 17% from December 31, 2018. This decrease was primarily due to the sale of $408.9 million in loans during the nine months ended September 30, 2019, and greater than expected prepayments.

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

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were $3.3 billion as of September 30, 2019, an increase of $318.6 million or 11% 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.

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 $487.0 million as of September 30, 2019, a decrease of $139.8 million or 22% from December 31, 2018.

Residential real estate loans are generally secured by 1-4 unit residential properties and are underwritten using traditional underwriting systems to assess the credit risks and financial capacity and repayment ability of the consumer. Decisions are primarily based on LTV ratios, debt-to-income (“DTI”) ratios, liquidity and credit scores. LTV ratios generally do not exceed 80%, although higher levels are permitted with mortgage insurance. We offer fixed rate mortgage products and variable rate mortgage products with interest rates that are subject to change every year after the first, third, fifth or tenth year, depending on the product and are based on LIBOR. Variable rate residential mortgage loans are underwritten at fully-indexed interest rates. We generally do not offer interest-only, payment-option facilities, Alt-A loans or any product with negative amortization. Residential real estate loans were $4.6 billion as of September 30, 2019, an increase of $147.9 million or 3% from December 31, 2018. Our portfolio of residential real estate loans continues to benefit from continued demand for new housing developments in the current low interest rate environment.

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 billion as of September 30, 2019, a decrease of $25.0 million or 2% from December 31, 2018. The decrease in consumer loans was primarily due to lower 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 $167.9 million as of September 30, 2019, an increase of $20.1 million or 14% from December 31, 2018.

See “Note 3. Loans and Leases” and “Note 4. Allowance for Loan and Lease Losses” contained in our unaudited interim consolidated financial statements and the discussion in “Analysis of Financial Condition — Allowance for Loan and Lease Losses” of this MD&A for more information on our loan and lease portfolio.

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The Company’s loan and lease portfolio includes adjustable-rate loans, primarily tied to Prime and LIBOR, hybrid-rate loans, for which the initial rate is fixed for a period from one year to as much as ten years, and fixed rate loans, for which the interest rate does not change through the life of the loan. Table 16 presents the recorded investment in our loan and lease portfolio as of September 30, 2019 by rate type:

Loans and Leases by Rate Type

Table 16

September 30, 2019

Adjustable Rate

Hybrid

Fixed

(dollars in thousands)

Prime

LIBOR

Treasury

Other

Total

Rate

Total

Commercial and industrial

246,066

1,986,831

—

2,874

2,235,771

11,858

406,448

2,654,077

Commercial real estate

44,288

1,908,746

—

1,016,317

2,969,351

75,282

264,756

3,309,389

Construction

43,199

316,210

—

30,224

389,633

1,047

96,297

486,977

Residential:

Residential mortgage

28,110

11,166

164

337,340

376,780

371,870

2,922,774

3,671,424

Home equity line

329,130

—

43,947

—

373,077

542,954

916,106

Total residential

357,240

11,166

44,111

337,340

749,857

914,824

2,922,849

4,587,530

Consumer

342,274

20,545

1,733

308

364,860

12,027

1,260,662

1,637,549

Lease financing

—

167,874

Total loans and leases

1,033,067

4,243,498

45,844

1,387,063

6,709,472

1,015,038

5,118,886

12,843,396

% by rate type at September 30, 2019

100

Tables 17 and 18 present the geographic distribution of our loan and lease portfolio as of September 30, 2019 and December 31, 2018:

Geographic Distribution of Loan and Lease Portfolio

Table 17

September 30, 2019

U.S.

Guam &

Foreign &

(dollars in thousands)

Hawaii

Mainland⁽¹⁾

Saipan

Other

Total

Commercial and industrial

1,300,045

1,172,977

128,718

52,337

2,654,077

Commercial real estate

2,201,525

678,087

429,360

417

3,309,389

Construction

236,867

245,362

4,748

—

486,977

Residential:

Residential mortgage

3,543,586

2,746

125,092

—

3,671,424

Home equity line

884,352

1,463

30,291

—

916,106

Total residential

4,427,938

4,209

155,383

—

4,587,530

Consumer

1,218,725

22,726

393,923

2,175

1,637,549

Lease financing

46,684

114,719

6,471

—

167,874

Total Loans and Leases

9,431,784

2,238,080

1,118,603

54,929

12,843,396

Percentage of Total Loans and Leases

73%

17%

100%

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

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Geographic Distribution of Loan and Lease Portfolio										Table 18
	December 31, 2018
			U.S.		Guam &		Foreign &
(dollars in thousands)	Hawaii		Mainland⁽¹⁾		Saipan		Other		Total
Commercial and industrial	$	1,289,171	$	1,707,713	$	130,477	$	81,399	$	3,208,760
Commercial real estate		2,003,997		615,364		370,546		876		2,990,783
Construction		326,006		272,709		28,042		—		626,757
Residential:
Residential mortgage		3,405,867		2,890		118,344		—		3,527,101
Home equity line		882,805		—		29,712		—		912,517
Total residential		4,288,672		2,890		148,056		—		4,439,618
Consumer		1,239,563		23,038		397,783		2,120		1,662,504
Lease financing		46,409		93,954		7,406		—		147,769
Total Loans and Leases	$	9,193,818	$	2,715,668	$	1,082,310	$	84,395	$	13,076,191
Percentage of Total Loans and Leases		70%		21%		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, limited participation in the Shared National Credits Program and selective commercial real estate projects based on existing customer relationships and participation in selective senior mortgage secured construction and term loans. Our lease financing portfolio includes leveraged lease financing activities on the U.S. mainland, but this portfolio continues to run off and no new leveraged leases are being added to the portfolio. Our consumer lending activities are concentrated primarily in Hawaii and, to a smaller extent, in Guam and Saipan.

Table 19 presents certain contractual loan maturity categories and sensitivities of those loans to changes in interest rates as of September 30, 2019:

Maturities for Selected Loan Categories⁽¹⁾

Table 19

September 30, 2019

Due in One

Due After One

Due After

(dollars in thousands)

Year or Less

to Five Years

Five Years

Total

Commercial and industrial

1,215,175

1,127,425

311,477

2,654,077

Construction

162,231

233,230

91,516

486,977

Total Loans and Leases

1,377,406

1,360,655

402,993

3,141,054

Total of loans with:

Adjustable interest rates

1,262,503

1,094,667

268,234

2,625,404

Hybrid interest rates

1,461

3,186

8,258

12,905

Fixed interest rates

113,442

262,802

126,501

502,745

Total Loans and Leases

1,377,406

1,360,655

402,993

3,141,054

(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 4. Allowance for Loan and Lease Losses” contained in our unaudited interim consolidated financial statements for more information about our credit quality indicators.

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For purposes of managing credit risk and estimating the Allowance, 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. The categorization of loans for the evaluation of credit risk is specific to our credit risk evaluation process and these loan categories are not necessarily the same as the loan categories used for other evaluations of our loan portfolio. See “Note 4. Allowance for Loan and Lease Losses” contained in our unaudited interim consolidated financial statements for more information about our approach to estimating the Allowance.

The following tables and discussion address non-performing assets, loans and leases that are 90 days past due but are still accruing interest, impaired loans and loans modified in a TDR.

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

Table 20 presents information on our non-performing assets and accruing loans and leases past due 90 days or more as of September 30, 2019 and December 31, 2018:


Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More					Table 20
	September 30,			December 31,
(dollars in thousands)	2019			2018
Non-Performing Assets
Non-Accrual Loans and Leases
Commercial Loans:
Commercial and industrial	$	12		$	274
Commercial real estate		33			1,658
Total Commercial Loans		45			1,932
Residential Loans:
Residential mortgage		3,959			4,611
Total Residential Loans		3,959			4,611
Consumer		200			—
Total Non-Accrual Loans and Leases		4,204			6,543
Other Real Estate Owned		82			751
Total Non-Performing Assets	$	4,286		$	7,294

Accruing Loans and Leases Past Due 90 Days or More
Commercial Loans:
Commercial and industrial	$	750		$	141
Total Commercial Loans		750			141
Residential Loans:
Residential mortgage		139			32
Home equity line		3,192			2,842
Total Residential Loans		3,331			2,874
Consumer		3,076			3,373
Total Accruing Loans and Leases Past Due 90 Days or More	$	7,157		$	6,388

Restructured Loans on Accrual Status and Not Past Due 90 Days or More		22,350			24,033
Total Loans and Leases	$	12,843,396		$	13,076,191

Ratio of Non-Accrual Loans and Leases to Total Loans and Leases		0.03	%		0.05	%
Ratio of Non-Performing Assets to Total Loans and Leases and Other Real Estate Owned		0.03	%		0.06	%
Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More to Total Loans and Leases and Other Real Estate Owned		0.09	%		0.10	%

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Table 21 presents the activity in Non-Performing Assets (“NPAs”) for the nine months ended September 30, 2019:


Non-Performing Assets				Table 21
	Nine Months Ended
	September 30,
(dollars in thousands)	2019		2018
Balance at beginning of period	$	7,294	$	10,154
Additions		2,590		7,051
Reductions
Payments		(2,423)		(3,919)
Return to accrual status		(1,910)		(1,014)
Sales of other real estate owned		(751)		(329)
Charge-offs/write-downs		(514)		(635)
Total Reductions		(5,598)		(5,897)
Balance at End of Period	$	4,286	$	11,308

The level of NPAs represents an indicator of the potential for future credit losses. NPAs consist of non-accrual loans and leases and other real estate owned. Changes in the level of non-accrual loans and leases typically represent increases for loans and leases that reach a specified past due status, offset by reductions for loans and leases that are charged-off, paid down, sold, transferred to other real estate owned or are no longer classified as non-accrual because they have returned to accrual status as a result of continued performance and an improvement in the borrower’s financial condition and loan repayment capabilities.

Total NPAs were $4.3 million as of September 30, 2019, a decrease of $3.0 million or 41% from December 31, 2018. The ratio of our NPAs to total loans and leases and other real estate owned was 0.03% as of September 30, 2019, a decrease of three basis points from December 31, 2018. The decrease in total NPAs was primarily due to a $1.6 million decrease in commercial real estate non-accrual loans, a $0.7 million decrease in residential mortgage non-accrual loans and a $0.7 million decrease in other real estate owned.

The largest component of our NPAs continues to be residential mortgage loans. The level of these NPAs can remain elevated due to a lengthy judicial foreclosure process in Hawaii. As of September 30, 2019, residential mortgage non-accrual loans were $4.0 million, a decrease of $0.7 million or 14% from December 31, 2018. As of September 30, 2019, our residential mortgage non-accrual loans were comprised of 25 loans with a weighted average current LTV ratio of 66%.

There was one commercial real estate non-accrual loans as of September 30, 2019, a decrease of $1.6 million or 98% from December 31, 2018. This decrease was attributable to payoffs of four commercial real estate non-accrual loans during the nine months ended September 30, 2019.

Other real estate owned represents property acquired as the result of borrower defaults on loans. Other real estate owned is recorded at fair value, less estimated selling costs, at the time of foreclosure. On an ongoing basis, properties are appraised as required by market conditions and applicable regulations. As of September 30, 2019, other real estate owned was $0.1 million which was comprised of one residential real estate property. As of December 31, 2018, other real estate owned was $0.8 million which was comprised of two residential real estate properties.

NPAs continue to remain at relatively low levels due to steady general economic conditions in Hawaii, led by steady tourism and construction industries, low unemployment and a continued strong real estate market. 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.

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 $7.2 million as of September 30, 2019, an increase of $0.8 million or 12% as compared to December 31, 2018. Commercial and industrial loans and home equity lines that were past due 90 days or more and still accruing interest increased by $0.6 million and $0.4 million, respectively, during the nine months ended September 30, 2019. This was partially offset by a decrease of $0.3 million

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in consumer loans that were past due 90 days or more and still accruing interest during the nine months ended September 30, 2019.

Impaired Loans. A loan is impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. For a loan that has been modified in a TDR, the contractual terms of the loan agreement refers to the contractual terms specified by the original loan agreement, not the contractual terms specified by the modified loan agreement.

Impaired loans were $26.6 million and $30.6 million as of September 30, 2019 and December 31, 2018, respectively. These impaired loans had a related Allowance of $0.4 million and $0.5 million as of September 30, 2019 and December 31, 2018, respectively. The decrease in impaired loans during the nine months ended September 30, 2019 was primarily due to a net decrease of three commercial real estate loans totaling $1.6 million and a net decrease of three residential mortgage loans totaling $1.4 million. The impaired loan balance is further decreased by charge-offs and paydowns. As of September 30, 2019 and December 31, 2018, we recorded charge-offs of $0.9 million and $0.7 million, respectively, related to our total impaired loans. Our impaired loans are considered in management’s assessment of the overall adequacy of the Allowance.

If interest due on the balances of all non-accrual loans as of September 30, 2019 had been accrued under the original terms, approximately nil and $0.1 million in additional interest income would have been recorded during the three and nine months ended September 30, 2019, respectively, compared to $0.2 million and $0.5 million in additional interest income that would have been recorded for the same periods in 2018, respectively. Actual interest income recorded on these loans was $0.4 million and $1.3 million, for the three and nine months ended September 30, 2019 compared to $0.5 million and $1.4 million, respectively, for the same periods in 2018.

Loans Modified in a Troubled Debt Restructuring

Table 22 presents information on loans whose terms have been modified in a TDR as of September 30, 2019 and December 31, 2018:


Loans Modified in a Troubled Debt Restructuring				Table 22
	September 30,		December 31,
(dollars in thousands)	2019		2018
Commercial and industrial	$	8,226	$	8,445
Commercial real estate		3,544		4,086
Total commercial		11,770		12,531
Residential mortgage		11,249		12,128
Total	$	23,019	$	24,659

Loans modified in a TDR were $23.0 million as of September 30, 2019, a decrease of $1.6 million or 7% from December 31, 2018. This decrease was primarily due to pay-offs of four residential mortgage loans of $1.7 million and paydowns of commercial and industrial loans and commercial real estate loans totaling $1.3 million, partially offset by two new residential mortgage loans and two new commercial and industrial loans modified in a TDR totaling $1.0 million and $0.6 million, respectively. As of September 30, 2019, $22.4 million or 97% of our loans modified in a TDR were performing in accordance with their modified contractual terms and were on accrual status.

Generally, loans modified in a TDR are returned to accrual status after the borrower has demonstrated performance under the modified terms by making six consecutive timely payments. See “Note 4. Allowance for Loan and Lease Losses” contained in our unaudited interim consolidated financial statements for more information and a description of the modification programs that we currently offer to our customers.

Allowance for Loan and Lease Losses

We maintain the Allowance at a level which, in our judgment, is adequate to absorb probable losses that have been incurred in our loan and lease portfolio as of the balance sheet date. The Allowance consists of two components, allocated and unallocated. The allocated portion of the Allowance includes reserves that are allocated based on impairment analyses of specific loans or pools of loans. The unallocated component of the Allowance incorporates our judgment of the determination of the risks inherent 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

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separately, the Allowance as a whole was considered appropriate by management as of September 30, 2019 and December 31, 2018 based on our ongoing analysis of estimated probable loan and lease losses, credit risk profiles, economic conditions, coverage ratios and other relevant factors.

Table 23 presents an analysis of our Allowance for the periods indicated:


Allowance for Loan and Lease Losses											Table 23
	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2019			2018			2019			2018
Balance at Beginning of Period	$	138,535		$	140,601		$	141,718		$	137,253
Loans and Leases Charged-Off
Commercial Loans:
Commercial and industrial		(514)			(303)			(2,514)			(778)
Lease financing		—			—			(24)			—
Total Commercial Loans		(514)			(303)			(2,538)			(778)
Residential		(7)			(125)			(7)			(159)
Consumer		(8,015)			(5,700)			(24,118)			(18,615)
Total Loans and Leases Charged-Off		(8,536)			(6,128)			(26,663)			(19,552)
Recoveries on Loans and Leases Previously Charged-Off
Commercial Loans:
Commercial and industrial		241			51			303			154
Commercial real estate		30			21			93			175
Total Commercial Loans		271			72			396			329
Residential		425			442			860			684
Consumer		2,269			1,803			7,103			6,106
Total Recoveries on Loans and Leases Previously Charged-Off		2,965			2,317			8,359			7,119
Net Loans and Leases Charged-Off		(5,571)			(3,811)			(18,304)			(12,433)
Provision for Loan and Lease Losses		—			4,460			9,550			16,430
Balance at End of Period	$	132,964		$	141,250		$	132,964		$	141,250
Average Loans and Leases Outstanding	$	13,032,349		$	12,595,668		$	13,105,086		$	12,482,747
Ratio of Net Loans and Leases Charged-Off to Average Loans and Leases Outstanding⁽¹⁾		0.17	%		0.12	%		0.19	%		0.13	%
Ratio of Allowance for Loan and Lease Losses to Loans and Leases Outstanding		1.04	%		1.12	%		1.04	%		1.12	%

⁽¹⁾ Annualized for the three and nine months ended September 30, 2019 and 2018.

Tables 24 and 25 present the allocation of the Allowance by loan and lease category, in both dollars and as a percentage of total loans and leases outstanding as of September 30, 2019 and December 31, 2018:


Allocation of the Allowance by Loan and Lease Category	Table 24
	September 30,		December 31,
(dollars in thousands)	2019		2018
Commercial and industrial	$	27,317	$	34,501
Commercial real estate		21,876		19,725
Construction		4,653		5,813
Lease financing		392		432
Total commercial		54,238		60,471
Residential		44,079		44,906
Consumer		33,730		35,813
Unallocated		917		528
Total Allowance for Loan and Lease Losses	$	132,964	$	141,718

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Allocation of the Allowance by Loan and Lease Category (as a percentage of total loans and leases outstanding)							Table 25
	September 30,				December 31,
	2019				2018
	Allocated		Loan		Allocated		Loan
	Allowance as		category as		Allowance as		category as
	% of loan or		% of total		% of loan or		% of total
	lease category		loans and leases		lease category		loans and leases
Commercial and industrial	1.03	%	20.66	%	1.08	%	24.54	%
Commercial real estate	0.66		25.77		0.66		22.87
Construction	0.96		3.79		0.93		4.79
Lease financing	0.23		1.31		0.29		1.13
Total commercial	0.82		51.53		0.87		53.33
Residential	0.96		35.72		1.01		33.96
Consumer	2.06		12.75		2.15		12.71
Total	1.04	%	100.00	%	1.08	%	100.00	%

As of September 30, 2019, the Allowance was $133.0 million or 1.04% 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. The level of the Allowance was commensurate with our stable credit risk profile, loan portfolio growth and composition and a steady Hawaii economy.

Net charge-offs of loans and leases were $5.6 million or 0.17% of total average loans and leases, on an annualized basis, for the three months ended September 30, 2019 compared to $3.8 million or 0.12% of total average loans and leases, on an annualized basis, for the three months ended September 30, 2018. Net charge-offs in our commercial lending portfolio were $0.2 million for both the three months ended September 30, 2019 and 2018. Net recoveries in our residential lending portfolio were $0.4 million and $0.3 million for the three months ended September 30, 2019 and 2018, respectively. Net charge-offs in our consumer lending portfolio were $5.7 million and $3.9 million for the three months ended September 30, 2019 and 2018, respectively. Net charge-offs in our consumer portfolio segment include those related to credit cards, automobile loans, installment loans and small business lines of credit and reflect the inherent risk associated with these loans.

Net charge-offs of loans and leases were $18.3 million or 0.19% of total average loans and leases, on an annualized basis, for the nine months ended September 30, 2019 compared to $12.4 million or 0.13% of total average loans and leases, on an annualized basis, for the nine months ended September 30, 2018. Net charge-offs in our commercial lending portfolio were $2.1 million and $0.4 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in net charge-offs in our commercial lending portfolio was primarily due to the full charge-off of one commercial and industrial loan of $2.0 million. Net recoveries in our residential lending portfolio were $0.9 million and $0.5 million for the nine months ended September 30, 2019 and 2018, respectively. Our net recovery position in this portfolio segment is largely attributable to rising real estate prices in Hawaii. Net charge-offs in our consumer lending portfolio were $17.0 million and $12.5 million for the nine months ended September 30, 2019 and 2018, respectively. Net charge-offs in our consumer portfolio segment include those related to credit card, automobile loans, installment loans and small business lines of credit and reflect the inherent risk associated with these loans.

As of September 30, 2019, the allocation of the Allowance to our commercial, residential and consumer loans was comparable to the respective allocations as of December 31, 2018. See “Note 4. Allowance for Loan and Lease Losses” contained in our unaudited interim consolidated financial statements for more information on the Allowance.

Goodwill

Goodwill was $995.5 million as of both September 30, 2019 and December 31, 2018. Our goodwill originated from the acquisition of BWC by BNPP in December 2001. Goodwill generated in that acquisition was recorded on the balance sheet of the Bank as a result of push down accounting treatment, and remains on our consolidated balance sheets. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment at a reporting unit level. Determining the amount of goodwill impairment, if any, includes assessing the current implied fair value of the reporting unit as if it were being acquired in a business combination and comparing it to the carrying amount of the reporting unit’s goodwill. There was no impairment in our goodwill for the three and nine months ended September 30, 2019. Future events 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.

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Other Assets

Other assets were $562.5 million as of September 30, 2019, an increase of $116.1 million or 26% from December 31, 2018. This increase was primarily due to a $73.6 million increase in interest rate swap agreements, a $46.1 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, and a $36.9 million increase in affordable housing and other tax credit investment partnership interests. This was partially offset by a $38.1 million decrease in current tax receivables and deferred tax assets.

Deposits

Deposits are the primary funding source for the Bank and are acquired from a broad base of local markets, including both individual and corporate customers. We obtain funds from depositors by offering a range of deposit types, including demand, savings, money market and time.

Table 26 presents the composition of our deposits as of September 30, 2019 and December 31, 2018:


Deposits				Table 26
	September 30,		December 31,
(dollars in thousands)	2019		2018
Demand	$	5,720,822	$	6,007,941
Savings		4,899,468		4,853,285
Money Market		3,529,363		3,196,678
Time		2,707,593		3,092,164
Total Deposits⁽¹⁾	$	16,857,246	$	17,150,068

(1)	Public deposits were $0.7 billion as of September 30, 2019, a decrease of $344.0 million or 34% compared to December 31, 2018.

Total deposits were $16.9 billion as of September 30, 2019, a decrease of $292.8 million or 2% from December 31, 2018. The decrease in deposit balances stemmed from a $344.0 million or 34% decrease in public time deposit balances and a $287.1 million or 5% decrease in demand deposit balances, partially offset by a $332.7 million or 10% increase in money market deposit balances.

Short-term and Long-term Borrowings

Short-term borrowings were $400.0 million as of September 30, 2019, an increase of $400.0 million from December 31, 2018. This increase 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. These short-term FHLB fixed-rate advances have a weighted average interest rate of 2.84% and maturity dates in 2020.

Table 27 below provides selected information for short-term borrowings for the nine months ended September 30, 2019 and 2018:


Short-term borrowings					Table 27
	Nine Months Ended September 30,
(dollars in thousands)	2019			2018
Federal funds purchased:
Weighted-average interest rate at September 30,		—	%		—	%
Highest month-end balance	$	110,000		$	30,000
Average outstanding balance	$	21,911		$	6,073
Weighted-average interest rate paid		1.83	%		1.26	%
Short-term FHLB fixed-rate advance:
Weighted-average interest rate at September 30,		2.84	%		—	%
Highest month-end balance	$	400,000		$	81,800
Average outstanding balance	$	123,810		$	9,265
Weighted-average interest rate paid		2.11	%		1.42	%

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Long-term borrowings were $200.0 million as of September 30, 2019, a decrease of $400.0 million from December 31, 2018. The Company's long-term borrowings included $200.0 million in FHLB fixed-rate advances with a weighted average interest rate of 2.73% and maturity dates ranging from 2023 to 2024. Long-term borrowings mature in excess of one year from the unaudited interim consolidated balance sheet date.

As of September 30, 2019, the available remaining borrowing capacity with the FHLB was $1.6 billion. The FHLB fixed rate advances and remaining borrowing capacity were secured by residential real estate loan collateral as of September 30, 2019 and December 31, 2018.

Pension and Postretirement Plan Obligations

We have a noncontributory qualified defined benefit pension plan, an unfunded supplemental executive retirement plan, a directors’ retirement plan (a non-qualified pension plan for eligible directors) and a postretirement benefit plan providing life insurance and healthcare benefits that we offer to our directors and employees, as applicable. The noncontributory qualified defined benefit pension plan, the unfunded supplemental executive retirement plan and the directors’ retirement plan are all frozen to new participants. On March 11, 2019, the Company’s board of directors approved an amendment to the SERP to freeze the SERP. As a result of such amendment, effective July 1, 2019, there are no new accruals of benefits, including service accruals. To calculate annual pension costs, we use the following key variables: (1) size of the employee population, length of service and estimated compensation increases; (2) actuarial assumptions and estimates; (3) expected long-term rate of return on plan assets; and (4) discount rate.

Pension and postretirement benefit plan obligations, net of pension plan assets, were $121.6 million as of September 30, 2019, an increase of $2.4 million or 2% from December 31, 2018. This increase was primarily due to net periodic benefit costs for the nine months ended September 30, 2019 of $7.8 million, partially offset by payments of $6.2 million.

See “Note 17. Benefit Plans” contained in our unaudited interim consolidated financial statements for more information on our pension and postretirement benefit plans.

Foreign Activities

Cross-border outstandings are defined as loans (including accrued interest), acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets which are denominated in dollars or other non-local currency. As of September 30, 2019, aggregate cross-border outstandings in countries which amounted to 0.75% to 1% of our total consolidated assets were approximately $175.6 million to Japan and $184.2 million to Canada. As of December 31, 2018, aggregate cross-border outstandings in countries which amounted to 0.75% to 1% of our total consolidated assets were approximately $186.3 million to Japan. There were no cross-border outstandings in excess of 1% of our total consolidated assets as of both September 30, 2019 and December 31, 2018.

Capital

In July 2013, the federal bank regulators approved final rules implementing 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”). Subject to a phase-in period for various provisions, the Capital Rules became effective for us and for the Bank on January 1, 2015. 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) introduced a capital measure called CET1 capital, (ii) specified that Tier 1 capital consists of CET1 capital and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defined CET1 capital narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 capital and not to the other components of capital and (iv) expanded the scope of the deductions/adjustments to capital as compared to prior regulations.

Under the Capital Rules, the minimum capital ratios that became effective on January 1, 2015 were as follows:

●

4.5% CET1 capital to risk-weighted assets,

●

6.0% Tier 1 capital (that is, CET1 capital plus Additional Tier 1 capital) to risk-weighted assets,

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●

8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets, and

●

4.0% Tier 1 capital to average quarterly assets.

On that date, the deductions from CET1 capital were limited to 40% of the final phased-in deductions. Implementation of the deductions and other adjustments to CET1 capital began on January 1, 2015 and were phased-in with full implementation beginning on January 1, 2019. Implementation of the capital conservation buffer began on January 1, 2016 at 0.625% and was phased-in in increments of 0.625% per year until it reached 2.5% on January 1, 2019.

As of September 30, 2019, the Company’s capital levels remained characterized as “well capitalized” under the Capital Rules. Our regulatory capital ratios, calculated in accordance with the Capital Rules, are presented in Table 28 below. There have been no conditions or events since September 30, 2019 that management believes have changed either the Company’s or the Bank’s capital classifications.


Regulatory Capital					Table 28
	September 30,			December 31,
(dollars in thousands)	2019			2018
Stockholders' Equity	$	2,654,558		$	2,524,839
Less:
Goodwill		995,492			995,492
Accumulated other comprehensive loss, net		(18,774)			(132,195)
Common Equity Tier 1 Capital and Tier 1 Capital	$	1,677,840		$	1,661,542
Add:
Allowable Reserve for Loan and Lease Losses and Unfunded Commitments		133,564			142,318
Total Capital	$	1,811,404		$	1,803,860
Risk-Weighted Assets	$	13,811,887		$	13,884,976

Key Regulatory Capital Ratios
Common Equity Tier 1 Capital Ratio		12.15	%		11.97	%
Tier 1 Capital Ratio		12.15	%		11.97	%
Total Capital Ratio		13.11	%		12.99	%
Tier 1 Leverage Ratio		8.68	%		8.72	%

In October 2019, the Company's Board of Directors declared a quarterly cash dividend of $0.26 per share on our outstanding shares. The dividend will be paid on December 6, 2019 to shareholders of record at the close of business on November 25, 2019.

Off-Balance Sheet Arrangements and Guarantees

Off-Balance Sheet Arrangements

We hold interests in several unconsolidated variable interest entities (“VIEs”). These unconsolidated VIEs are primarily low income housing tax credit investments in partnerships and limited liability companies. Variable interests are defined as contractual ownership or other interest in an entity that change with fluctuations in an entity’s net asset value. The primary beneficiary consolidates the VIE. Based on our analysis, we have determined that the Company is not the primary beneficiary of these entities. As a result, we do not consolidate these VIEs.

Guarantees

We sell residential mortgage loans 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

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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 September 30, 2019 and December 31, 2018, the unpaid principal balance of our portfolio of residential mortgage loans sold was $2.4 billion and $2.7 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 nine months ended September 30, 2019, there was one repurchase of a residential mortgage loan of $0.4 million and there were no pending repurchase requests.

In addition to servicing loans in our portfolio, substantially all of the loans we sell to investors are sold with servicing rights retained. We also service loans originated by other mortgage loan originators. As servicer, our primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans, or loan modifications or short sales. Each agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by the Company in such capacity and provides protection against expenses and liabilities incurred by the Company when acting in compliance with the respective servicing agreements. However, if we commit a material breach of obligations as servicer, we may be subject to termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards vary by investor. These standards and remedies are determined by servicing guides issued by the investors as well as the contract provisions established between the investors and the Company. Remedies could include repurchase of an affected loan. For the nine months ended September 30, 2019, we had no repurchase requests related to loan servicing activities, nor were there any pending repurchase requests as of September 30, 2019.

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 September 30, 2019, 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 September 30, 2019, 99% of our residential mortgage loans serviced for investors were current. We maintain ongoing communications with investors and continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in loans sold to investors.

Contractual Obligations

Our contractual obligations have not changed materially since previously reported as of December 31, 2018.

Future Application of Accounting Pronouncements

For a discussion of the expected impact of accounting pronouncements recently issued but not adopted by us as of September 30, 2019, see “Note 1. Organization and Basis of Presentation — Recent Accounting Pronouncements” to the unaudited interim consolidated financial statements 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

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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 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: 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’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 estate 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’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 $342,000. 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 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 options may be available post-closing. All lines are

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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 results 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 September 30, 2019 and December 31, 2018, 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 on a monthly basis 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

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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 29 presents, for the twelve months subsequent to September 30, 2019 and December 31, 2018, 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 and interest rates are generally unchanged. We evaluate the sensitivity by using a static forecast, where the balance sheets as of September 30, 2019 and December 31, 2018 are held constant.


Net Interest Income Sensitivity Profile - Estimated Percentage Change Over 12 Months			Table 29
	Static Forecast		Static Forecast
	As of September 30, 2019		As of December 31, 2018
Ramp Change in Interest Rates (basis points)
+100	4.3	%	2.4	%
+50	2.2		1.2
(50)	(2.2)		(1.2)
(100)	(4.4)		(2.5)

Immediate Change in Interest Rates (basis points)
+100	9.8	%	5.5	%
+50	4.9		2.7
(50)	(5.2)		(2.8)
(100)	(10.5)		(6.2)

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 September 30, 2019, our net interest income sensitivity profile is more sensitive as compared to similar forecasts as of December 31, 2018. The higher sensitivity is primarily due to lower market interest rates, which has the effect of higher prepayments of loans and investment securities and reinvestments which occur at lower interest rates. Also contributing to the higher net interest income sensitivity as of September 30, 2019, is lower balances in our interest rate sensitive deposit products.

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.

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

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.

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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.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

See “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Risk Governance and Quantitative and Qualitative Disclosures About Market Risk.”

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2019. 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 SEC’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 Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2019.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2019 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The Company operates in a highly regulated environment. From time to time, the Company is party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels. For additional information, see the discussion related to contingencies in “Note 13. Commitments and Contingent Liabilities” in our unaudited interim consolidated financial statements under “Part I, Item 1. Financial Statements.”

ITEM 1A. RISK FACTORS

Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 28, 2019, and Item 1A of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019, filed with the SEC on July 29, 2019, contain a discussion of our risk factors. Except to the extent that additional factual information disclosed in this Quarterly Report on Form 10-Q relates to such risk factors, there are no material changes from the risk factors as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 and the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides certain information with respect to our purchases of shares of the Company’s common stock during the three months ended September 30, 2019:


Issuer Purchases of Equity Securities
				Total Number of	Approximate Dollar
				Shares Purchased	Value of Shares
	Total Number	Average		as Part of Publicly	that May Yet Be
	of Shares	Price Paid		Announced Plans or	Purchased Under the
Period	Purchased¹	per Share		Programs	Plans or Programs²
July 1, 2019 through July 31, 2019	360,762	$	25.64	360,500	$	50,756,502
August 1, 2019 through August 31, 2019	1,245,751		25.11	1,241,092		69,598,513
September 1, 2019 through September 30, 2019	691,825		26.76	687,700		51,190,297
Total	2,298,338	$	25.69	2,289,292

(1)	Includes 9,046 shares acquired from employees to satisfy income tax withholding requirements in connection with vested restricted stock units during the three months ended September 30, 2019.

(2)

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. As of September 30, 2019, $51.2 million remained of the $150 million total repurchase amount authorized under the share repurchase program for 2019. The timing and amount of share repurchases are influenced by various internal and external factors.

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ITEM 6. EXHIBITS

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

Exhibit Index


Exhibit Number

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)

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Signatures

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


Date: October 24, 2019		First Hawaiian, Inc.



	By:	/s/ Robert S. Harrison
		Robert S. Harrison Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)



	By:	/s/ Ravi Mallela
		Ravi Mallela Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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First Hawaiian (FHB) 10-Q2019 Q3 Quarterly report

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