First Hawaiian (FHB) 10-Q 2021 Q3 Quarterly report

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, 2021

or

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

For the transition period from               to               

Commission File Number  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: 128,819,356 shares of Common Stock, par value $0.01 per share, were outstanding as of October 25, 2021.

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, 2021 and 2020		2
		Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020		3
		Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020		4
		Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, 2021 and 2020		5
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020		7
		Notes to Consolidated Financial Statements (unaudited)		8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		46
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		91
	Item 4.	Controls and Procedures		91
Part II Other Information				91
	Item 1.	Legal Proceedings		91
	Item 1A.	Risk Factors		91
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		92
	Item 6.	Exhibits		93
	Exhibit Index			93
	Signatures			94

1

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)	2021		2020		2021		2020
Interest income
Loans and lease financing	$	110,765	$	120,940	$	332,623	$	378,209
Available-for-sale securities		25,234		20,317		73,017		59,056
Other		1,205		670		2,362		3,813
Total interest income		137,204		141,927		408,002		441,078
Interest expense
Deposits		3,218		6,227		10,637		30,410
Short-term and long-term borrowings		1,393		1,698		4,133		10,161
Total interest expense		4,611		7,925		14,770		40,571
Net interest income		132,593		134,002		393,232		400,507
Provision for credit losses		(4,000)		5,072		(39,000)		101,718
Net interest income after provision for credit losses		136,593		128,930		432,232		298,789
Noninterest income
Service charges on deposit accounts		6,989		6,523		20,339		21,400
Credit and debit card fees		16,017		14,049		47,314		39,868
Other service charges and fees		10,233		9,021		29,382		25,472
Trust and investment services income		8,625		8,664		25,824		26,919
Bank-owned life insurance		4,841		4,903		10,334		11,595
Investment securities gains (losses), net		—		24		102		(102)
Other		3,399		5,714		10,048		18,630
Total noninterest income		50,104		48,898		143,343		143,782
Noninterest expense
Salaries and employee benefits		46,484		44,291		136,402		131,534
Contracted services and professional fees		15,042		15,073		48,746		46,606
Occupancy		6,790		6,921		21,274		21,466
Equipment		6,549		5,137		18,402		15,052
Regulatory assessment and fees		1,828		2,445		5,688		6,491
Advertising and marketing		1,469		1,374		4,529		4,599
Card rewards program		6,676		5,046		17,773		17,224
Other		16,198		11,342		43,916		36,573
Total noninterest expense		101,036		91,629		296,730		279,545
Income before provision for income taxes		85,661		86,199		278,845		163,026
Provision for income taxes		21,382		21,098		70,132		39,011
Net income	$	64,279	$	65,101	$	208,713	$	124,015
Basic earnings per share	$	0.50	$	0.50	$	1.61	$	0.95
Diluted earnings per share	$	0.50	$	0.50	$	1.61	$	0.95
Basic weighted-average outstanding shares		128,660,038		129,896,054		129,323,973		129,882,878
Diluted weighted-average outstanding shares		129,210,448		130,085,534		129,895,311		130,129,690

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

2

FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	2021		2020		2021		2020
Net income	$	64,279	$	65,101	$	208,713	$	124,015
Other comprehensive (loss) income, net of tax:
Net change in pensions and other benefits		—		—		—		(96)
Net change in investment securities		(31,761)		(1,477)		(93,067)		83,099
Other comprehensive (loss) income		(31,761)		(1,477)		(93,067)		83,003
Total comprehensive income	$	32,518	$	63,624	$	115,646	$	207,018

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

3

FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

	September 30,		December 31,
(dollars in thousands, except share amount)	2021		2020
Assets
Cash and due from banks	$	268,467	$	303,373
Interest-bearing deposits in other banks		2,130,615		737,571
Investment securities, at fair value (amortized cost: $7,994,266 as of September 30, 2021 and $5,985,031 as of December 31, 2020)		7,953,727		6,071,415
Loans held for sale		2,052		11,579
Loans and leases		12,834,339		13,279,097
Less: allowance for credit losses		161,246		208,454
Net loans and leases		12,673,093		13,070,643
Premises and equipment, net		317,272		322,401
Accrued interest receivable		64,855		69,626
Bank-owned life insurance		468,968		466,537
Goodwill		995,492		995,492
Mortgage servicing rights		9,107		10,731
Other assets		664,674		603,463
Total assets	$	25,548,322	$	22,662,831
Liabilities and Stockholders' Equity
Deposits:
Interest-bearing	$	13,246,579	$	11,705,609
Noninterest-bearing		8,873,424		7,522,114
Total deposits		22,120,003		19,227,723
Long-term borrowings		200,000		200,010
Retirement benefits payable		144,400		143,373
Other liabilities		372,185		347,621
Total liabilities		22,836,588		19,918,727
Commitments and contingent liabilities (Note 12)
Stockholders' equity
Common stock ($0.01 par value; authorized 300,000,000 shares; issued/outstanding: 140,563,799 / 128,255,570 as of September 30, 2021; issued/outstanding: 140,191,133 / 129,912,272 as of December 31, 2020)		1,406		1,402
Additional paid-in capital		2,524,168		2,514,014
Retained earnings		581,094		473,974
Accumulated other comprehensive (loss) income, net		(61,463)		31,604
Treasury stock (12,308,229 shares as of September 30, 2021 and 10,278,861 shares as of December 31, 2020)		(333,471)		(276,890)
Total stockholders' equity		2,711,734		2,744,104
Total liabilities and stockholders' equity	$	25,548,322	$	22,662,831

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

4

FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

	Three Months Ended September 30, 2021
								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, 2021	129,019,871	$	1,405	$	2,520,790	$	550,511	$	(29,702)	$	(311,663)	$	2,731,341
Net income	—		—		—		64,279		—		—		64,279
Cash dividends declared ($0.26 per share)	—		—		—		(33,441)		—		—		(33,441)
Equity-based awards	12,683		1		3,378		(255)		—		(241)		2,883
Common stock repurchased	(776,984)		—		—		—		—		(21,567)		(21,567)
Other comprehensive loss, net of tax	—		—		—		—		(31,761)		—		(31,761)
Balance as of September 30, 2021	128,255,570	$	1,406	$	2,524,168	$	581,094	$	(61,463)	$	(333,471)	$	2,711,734

	Nine Months Ended September 30, 2021
								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, 2020	129,912,272	$	1,402	$	2,514,014	$	473,974	$	31,604	$	(276,890)	$	2,744,104
Net income	—		—		—		208,713		—		—		208,713
Cash dividends declared ($0.78 per share)	—		—		—		(100,889)		—		—		(100,889)
Equity-based awards	252,593		4		10,154		(704)		—		(3,086)		6,368
Common stock repurchased	(1,909,295)		—		—		—		—		(53,495)		(53,495)
Other comprehensive loss, net of tax	—		—		—		—		(93,067)		—		(93,067)
Balance as of September 30, 2021	128,255,570	$	1,406	$	2,524,168	$	581,094	$	(61,463)	$	(333,471)	$	2,711,734

5

FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (continued)

(Unaudited)

	Three Months Ended September 30, 2020
								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, 2020	129,866,898	$	1,401	$	2,509,271	$	415,296	$	52,731	$	(276,802)	$	2,701,897
Net income	—		—		—		65,101		—		—		65,101
Cash dividends declared ($0.26 per share)	—		—		—		(33,775)		—		—		(33,775)
Equity-based awards	44,891		1		2,578		(307)		—		(84)		2,188
Other comprehensive loss, net of tax	—		—		—		—		(1,477)		—		(1,477)
Balance as of September 30, 2020	129,911,789	$	1,402	$	2,511,849	$	446,315	$	51,254	$	(276,886)	$	2,733,934

	Nine Months Ended September 30, 2020
								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, 2019	129,928,479	$	1,399	$	2,503,677	$	437,072	$	(31,749)	$	(270,141)	$	2,640,258
Cumulative-effect adjustment of a change in accounting principle, net of tax: ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments	—		—		—		(12,517)		—		—		(12,517)
Net income	—		—		—		124,015		—		—		124,015
Cash dividends declared ($0.78 per share)	—		—		—		(101,322)		—		—		(101,322)
Equity-based awards	201,069		3		8,172		(933)		—		(1,745)		5,497
Common stock repurchased	(217,759)		—		—		—		—		(5,000)		(5,000)
Other comprehensive income, net of tax	—		—		—		—		83,003		—		83,003
Balance as of September 30, 2020	129,911,789	$	1,402	$	2,511,849	$	446,315	$	51,254	$	(276,886)	$	2,733,934

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

6

FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended
	September 30,
(dollars in thousands)	2021		2020
Cash flows from operating activities
Net income	$	208,713	$	124,015
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		(39,000)		101,718
Depreciation, amortization and accretion, net		41,835		49,598
Deferred income tax provision (benefits)		7,321		(11,022)
Stock-based compensation		10,158		8,175
Other gains		(1,438)		(29)
Originations of loans held for sale		(83,050)		(232,682)
Proceeds from sales of loans held for sale		94,907		220,217
Net gains on sales of loans originated for investment and held for sale		(2,691)		(7,883)
Net (gains) losses on investment securities		(102)		102
Change in assets and liabilities:
Net increase in other assets		(38,108)		(25,094)
Net increase (decrease) in other liabilities		98,108		(126,178)
Net cash provided by operating activities		296,653		100,937
Cash flows from investing activities
Available-for-sale securities:
Proceeds from maturities and principal repayments		1,371,213		1,022,539
Proceeds from calls and sales		3,555		644,703
Purchases		(3,403,074)		(3,187,042)
Other investments:
Proceeds from sales		16,790		26,348
Purchases		(70,797)		(48,603)
Loans:
Net decrease (increase) in loans and leases resulting from originations and principal repayments		652,354		(445,652)
Proceeds from sales of loans originated for investment		2,200		132,011
Purchases of loans		(238,445)		(40,611)
Proceeds from bank-owned life insurance		7,903		3,046
Purchases of premises, equipment and software		(15,174)		(27,717)
Proceeds from sales of premises and equipment		3,861		—
Proceeds from sales of other real estate owned		—		787
Other		(3,701)		(3,126)
Net cash used in investing activities		(1,673,315)		(1,923,317)
Cash flows from financing activities
Net increase in deposits		2,892,280		2,452,768
Repayment of short-term borrowings		—		(400,000)
Repayment of long-term borrowings		(10)		(9)
Dividends paid		(100,889)		(101,322)
Stock tendered for payment of withholding taxes		(3,086)		(1,745)
Common stock repurchased		(53,495)		(5,000)
Net cash provided by financing activities		2,734,800		1,944,692
Net increase in cash and cash equivalents		1,358,138		122,312
Cash and cash equivalents at beginning of period		1,040,944		694,017
Cash and cash equivalents at end of period	$	2,399,082	$	816,329
Supplemental disclosures
Interest paid	$	18,879	$	45,432
Income taxes paid, net of income tax refunds		53,742		48,271
Noncash investing and financing activities:
Transfers from loans and leases to other real estate owned		—		437
Operating lease right-of-use assets obtained in exchange for new lease obligations		29,632		1,965
Transfers from loans and leases to loans held for sale		1,839		145,428
Obligation to fund low-income housing partnerships		15,314		17,906

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

7

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, including loans, deposit products, wealth management, insurance, trust, retirement planning, credit card and merchant processing services, to consumer and commercial customers.

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, 2020.

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.

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 2021

In October 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-08, Codification Improvements to Subtopic 310-20, Receivables – Nonrefundable Fees and Other Costs. Prior to the adoption of ASU No. 2020-08, previous guidance shortened the amortization period for certain purchased callable debt securities held at a premium by requiring that entities amortize the premium associated with those callable debt securities to the earliest call date. The guidance in ASU No. 2020-08 changes the amortization period so that an entity shall amortize the premium to the next call date. The Company adopted the provisions of ASU No. 2020-08 on January 1, 2021 and it did not have a material impact on the Company’s consolidated financial statements.

Recent Accounting Pronouncements

The following ASU has been issued by the FASB and is applicable to the Company in future reporting periods.

In July 2021, the FASB issued ASU No. 2021-05, Leases (Topic 842), Lessors – Certain Leases with Variable Lease Payments. This guidance amends the Topic 842 lease classification requirements for lessors to align them with practice under Topic 840. Lessors should classify and account for a lease with variable lease payments that do not depend on a reference index or a rate as an operating lease if both of the following criteria are met: 1) the lease would have been classified as a sales-type lease or a direct financing lease in accordance with the Topic 842 lease classification criteria, and 2) the lessor would have otherwise recognized a day-one loss. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. As the Company adopted Topic 842 before the issuance date of this ASU, the Company has the option to apply these amendments either 1) retrospectively to leases that commenced or were modified on or after the adoption of Topic 842, or 2) prospectively to leases that commence or are modified on or after the date that

8

the Company adopts ASU No. 2021-05. Early adoption is permitted. The adoption of ASU No. 2021-05 is not expected to have a material impact on the Company’s consolidated financial statements.

2. Investment Securities

As of September 30, 2021 and December 31, 2020, investment securities consisted predominantly of the following investment categories:

U.S. Treasury and debt securities – includes U.S. Treasury notes and debt securities issued by government agencies.

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.

As of September 30, 2021 and December 31, 2020, all of the Company’s investment securities were classified as available-for-sale. Amortized cost and fair value of securities as of September 30, 2021 and December 31, 2020 were as follows:

	September 30, 2021								December 31, 2020
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
U.S. Treasury and government agency debt securities	$	188,861	$	552	$	(1,552)	$	187,861	$	170,123	$	1,359	$	(61)	$	171,421
Mortgage-backed securities:
Residential - Government agency		95,337		2,797		—		98,134		155,169		5,293		—		160,462
Residential - Government-sponsored enterprises		1,455,375		9,944		(6,441)		1,458,878		434,282		13,643		(725)		447,200
Commercial - Government agency		449,147		4,653		(5,206)		448,594		583,232		16,537		(119)		599,650
Commercial - Government-sponsored enterprises		1,337,925		4,008		(40,684)		1,301,249		931,095		9,045		(7,983)		932,157
Collateralized mortgage obligations:
Government agency		2,053,171		16,316		(9,623)		2,059,864		1,902,326		32,246		(1,019)		1,933,553
Government-sponsored enterprises		2,414,450		7,506		(22,809)		2,399,147		1,808,804		18,991		(823)		1,826,972
Total available-for-sale securities	$	7,994,266	$	45,776	$	(86,315)	$	7,953,727	$	5,985,031	$	97,114	$	(10,730)	$	6,071,415

Accrued interest receivable related to available-for-sale investment securities was $12.8 million and $10.6 million as of September 30, 2021 and December 31, 2020, respectively, and is recorded separately from the amortized cost basis of investment securities on the Company’s unaudited interim consolidated balance sheets.

Proceeds from calls and sales of investment securities were $0.7 million and NaN, respectively, for the three months ended September 30, 2021, and $1.1 million and $2.5 million, respectively, for the nine months ended September 30, 2021. Proceeds from calls and sales of investment securities were NaN for the three months ended September 30, 2020, and $101.7 million and $543.0 million, respectively, for the nine months ended September 30, 2020. The Company recorded gross realized gains of NaN and gross realized losses of NaN for the three months ended September 30, 2021 and gross realized gains of $0.1 million and gross realized losses of NaN for the nine months ended September 30, 2021. The Company recorded gross realized gains of NaN and gross realized losses of NaN for the three months ended September 30, 2020 and gross realized gains of $0.6 million and gross realized losses of $0.7 million for the nine months ended September 30, 2020. The income tax expense related to the Company’s net realized gains on the sale of investment securities was NaN during both the three and nine months ended September 30, 2021. The income tax benefit related to the net realized loss on the sale of investment securities was NaN during both the three and nine months ended September 30, 2020. Gains and losses realized on sales of securities are determined using the specific identification method.

Interest income from taxable investment securities was $22.9 million and $20.2 million, respectively, for the three months ended September 30, 2021 and 2020, and $67.5 million and $59.0 million, respectively, for the nine months ended September 30, 2021 and 2020. Interest income from non-taxable investment securities was $2.3 million and $0.1 million, respectively, for the three months ended September 30, 2021 and 2020, and $5.5 million and $0.1 million, respectively, during the nine months ended September 30, 2021 and 2020.

9

The amortized cost and fair value of debt securities issued by the U.S. Treasury and government agencies as of September 30, 2021, by contractual maturity, are shown below. Mortgage-backed securities and collateralized mortgage obligations are disclosed separately in the table below as remaining expected maturities will differ from contractual maturities as borrowers have the right to prepay obligations.

	September 30, 2021
	Amortized		Fair
(dollars in thousands)	Cost		Value
Due in one year or less	$	—	$	—
Due after one year through five years		41,481		41,777
Due after five years through ten years		83,227		82,733
Due after ten years		64,153		63,351
		188,861		187,861
Mortgage-backed securities:
Residential - Government agency		95,337		98,134
Residential - Government-sponsored enterprises		1,455,375		1,458,878
Commercial - Government agency		449,147		448,594
Commercial - Government-sponsored enterprises		1,337,925		1,301,249
Total mortgage-backed securities		3,337,784		3,306,855
Collateralized mortgage obligations:
Government agency		2,053,171		2,059,864
Government-sponsored enterprises		2,414,450		2,399,147
Total collateralized mortgage obligations		4,467,621		4,459,011
Total available-for-sale securities	$	7,994,266	$	7,953,727

At September 30, 2021, pledged securities totaled $3.6 billion, of which $3.4 billion was pledged to secure public deposits and $193.1 million was pledged to secure other financial transactions. At December 31, 2020, pledged securities totaled $2.4 billion, of which $2.3 billion was pledged to secure public deposits and $186.1 million was pledged to secure other financial transactions.

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, 2021 or December 31, 2020.

The following tables present the unrealized gross losses and fair values of securities in the available-for-sale portfolio by length of time that the 230 and 50 individual securities in each category have been in a continuous loss position as of September 30, 2021 and December 31, 2020, 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, 2021
	Less Than 12 Months				12 Months or More				Total
	Unrealized				Unrealized				Unrealized
(dollars in thousands)	Losses		Fair Value		Losses		Fair Value		Losses		Fair Value
U.S. Treasury and government agency debt securities	$	(1,552)	$	128,093	$	—	$	—	$	(1,552)	$	128,093
Mortgage-backed securities:
Residential - Government-sponsored enterprises		(5,799)		818,313		(642)		20,693		(6,441)		839,006
Commercial - Government agency		(4,960)		230,013		(246)		6,901		(5,206)		236,914
Commercial - Government-sponsored enterprises		(27,869)		874,759		(12,815)		159,985		(40,684)		1,034,744
Collateralized mortgage obligations:
Government agency		(9,623)		936,557		—		—		(9,623)		936,557
Government-sponsored enterprises		(22,809)		1,611,979		—		—		(22,809)		1,611,979
Total available-for-sale securities with unrealized losses	$	(72,612)	$	4,599,714	$	(13,703)	$	187,579	$	(86,315)	$	4,787,293

10

	Time in Continuous Loss as of December 31, 2020
	Less Than 12 Months				12 Months or More				Total
	Unrealized				Unrealized				Unrealized
(dollars in thousands)	Losses		Fair Value		Losses		Fair Value		Losses		Fair Value
U.S. Treasury and government agency debt securities	$	(61)	$	38,507	$	—	$	—	$	(61)	$	38,507
Mortgage-backed securities:
Residential - Government-sponsored enterprises		(725)		64,987		—		—		(725)		64,987
Commercial - Government agency		(119)		32,346		—		—		(119)		32,346
Commercial - Government-sponsored enterprises		(7,983)		427,759		—		—		(7,983)		427,759
Collateralized mortgage obligations:
Government agency		(994)		209,124		(25)		6,190		(1,019)		215,314
Government-sponsored enterprises		(823)		296,160		—		—		(823)		296,160
Total available-for-sale securities with unrealized losses	$	(10,705)	$	1,068,883	$	(25)	$	6,190	$	(10,730)	$	1,075,073

At September 30, 2021 and December 31, 2020, the Company did not have any securities with the intent to sell and determined it was more likely than not that the Company would not be required to sell the securities prior to recovery of the amortized cost basis. As the Company had the intent and ability to hold the remaining securities in an unrealized loss position as of September 30, 2021 and December 31, 2020, each security with an unrealized loss position in the above tables has been further assessed to determine if a credit loss exists. As of September 30, 2021 and December 31, 2020, the Company did not expect any credit losses in its debt securities and 0 credit losses were recognized on securities during the three and nine months ended September 30, 2021 and for the year ended December 31, 2020.

As of September 30, 2021 and December 31, 2020, the Company’s available-for-sale investment securities were comprised entirely of debt, mortgage-backed securities and collateralized mortgage obligations issued by the U.S. Government, its agencies and government-sponsored enterprises. Management has concluded that the long history with 0 credit losses from these issuers indicates an expectation that nonpayment of the amortized cost basis is 0. The Company’s available-for-sale investment securities are explicitly or implicitly fully guaranteed by the U.S. government. The U.S. government can print its own currency and its currency is routinely held by central banks and other major financial institutions. The dollar is used in international commerce, and commonly is viewed as a reserve currency, all of which qualitatively indicates that historical credit loss information should be minimally affected by current conditions and reasonable and supportable forecasts. Thus, the Company has not recorded an allowance for credit losses for its available-for-sale debt securities as of September 30, 2021 and December 31, 2020.

The Company holds approximately 120,000 Visa Class B restricted shares as of both September 30, 2021 and December 31, 2020. These shares continued to be carried at $0 cost basis as of both September 30, 2021 and December 31, 2020.

3. Loans and Leases

As of September 30, 2021 and December 31, 2020, loans and leases were comprised of the following:

	September 30,		December 31,
(dollars in thousands)	2021		2020
Commercial and industrial	$	2,195,384	$	3,019,507
Commercial real estate		3,569,768		3,392,676
Construction		826,078		735,819
Residential:
Residential mortgage		3,914,632		3,690,218
Home equity line		852,074		841,624
Total residential		4,766,706		4,531,842
Consumer		1,238,714		1,353,842
Lease financing		237,689		245,411
Total loans and leases	$	12,834,339	$	13,279,097

Outstanding loan balances are reported net of deferred loan costs and fees of $29.6 million and $26.1 million at September 30, 2021 and December 31, 2020, respectively.

11

Accrued interest receivable related to loans and leases was $52.0 million and $59.0 million as of September 30, 2021 and December 31, 2020, respectively, and is recorded separately from the amortized cost basis of loans and leases on the Company’s unaudited interim consolidated balance sheets.

As of September 30, 2021, residential real estate loans totaling $2.5 billion were pledged to collateralize the Company’s borrowing capacity at the Federal Home Loan Bank of Des Moines (“FHLB”), and consumer, commercial and industrial, commercial real estate and residential real estate loans totaling $1.9 billion were pledged to collateralize the Company’s borrowing capacity at the Federal Reserve Bank of San Francisco (“FRB”). As of December 31, 2020, residential real estate loans totaling $2.9 billion were pledged to collateralize the Company’s borrowing capacity at the FHLB, and consumer, commercial and industrial, commercial real estate and residential mortgage loans totaling $1.9 billion were pledged to collateralize the Company’s borrowing capacity at the FRB. Residential real estate loans collateralized by properties that were in the process of foreclosure totaled $4.4 million and $2.3 million as of September 30, 2021 and December 31, 2020, respectively.

In the course of evaluating the credit risk presented by a customer and the pricing that will adequately compensate the Company for assuming that risk, management may require a certain amount of collateral support. The type of collateral held varies, but may include accounts receivable, inventory, land, buildings, equipment, income-producing commercial properties and residential real estate. The Company applies the same collateral policy for loans whether they are funded immediately or on a delayed basis. The loan and lease portfolio is principally located in Hawaii and, to a lesser extent, on the U.S. Mainland, Guam and Saipan. The risk inherent in the portfolio depends upon both the economic strength and stability of the state or territories, which affects property values, and the financial strength and creditworthiness of the borrowers.

4. Allowance for Credit Losses

The Company maintains the allowance for credit losses for loans and leases (the “ACL”) that is deducted from the amortized cost basis of loans and leases to present the net carrying value of loans and leases expected to be collected. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount of loans and leases.

The Company also maintains an estimated reserve for unfunded commitments on the unaudited interim consolidated balance sheets. The reserve for unfunded commitments is reduced in the period in which the off-balance sheet financial instruments expire, loan funding occurs, or is otherwise settled.

In response to the COVID-19 pandemic, on March 27, 2020, the CARES Act was signed into law. The CARES Act creates a forbearance program for federally backed mortgage loans, protects borrowers from negative credit reporting due to loan accommodations related to the National Emergency, and provides financial institutions the option to temporarily suspend certain requirements under GAAP related to troubled debt restructurings (“TDRs”) for a limited period of time to account for the effects of COVID-19. Financial institutions accounting for eligible loans under the CARES Act are not required to report such loans as TDRs in accordance with GAAP. In addition, Interagency Statements were issued on March 22, 2020 and April 7, 2020 to encourage financial institutions to work prudently with borrowers and to describe the agencies’ interpretation of how current accounting rules under GAAP apply to certain COVID-19 related modifications. The agencies confirmed with the FASB that short-term modifications (e.g., six months or less) for payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant and made on a good faith basis in response to borrowers impacted by COVID-19 who were current prior to any relief are not TDRs under GAAP. The agencies also confirmed that these short-term modifications should not be reported as being on nonaccrual status and should not be considered past due during the period of the deferral. The Company has adopted the provisions of both the CARES Act and Interagency Statements. The Company is first applying the CARES Act guidance in determining if certain loan modifications are not required to be reported as TDRs. If the loan modification does not qualify under the CARES Act, then the Interagency Statement guidance is applied. On December 27, 2020, the Consolidated Appropriations Act – 2021 (the “CAA”) was signed into law, which extends the temporary relief from the accounting and disclosure requirements for TDRs. To qualify for TDR accounting and disclosure relief under the CARES Act, as amended by the CAA, the applicable loan must not have been more than 30 days past due as of December 31, 2019, and the modification must be executed during the period beginning on March 1, 2020, and ending on the earlier of January 1, 2022, or the date that is 60 days after the termination date of the national emergency declared by the President on March 13, 2020, under the National Emergencies Act related to the outbreak of COVID-19. The interim consolidated financial information below reflects the application of this guidance.

12

Rollforward of the Allowance for Credit Losses

The following presents the activity in the ACL by class of loans and leases for the three and nine months ended September 30, 2021 and 2020:

	Three Months Ended September 30, 2021
	Commercial Lending								Residential Lending
	Commercial		Commercial								Home
	and		Real				Lease		Residential		Equity
(dollars in thousands)	Industrial		Estate		Construction		Financing		Mortgage		Line		Consumer		Total
Allowance for credit losses:
Balance at beginning of period	$	23,063	$	47,033	$	10,152	$	3,067	$	34,208	$	6,250	$	45,375	$	169,148
Charge-offs		(224)		—		—		—		—		(235)		(2,926)		(3,385)
Recoveries		121		15		—		—		215		27		2,405		2,783
Increase (decrease) in Provision		796		(3,449)		(398)		(833)		(655)		(325)		(2,436)		(7,300)
Balance at end of period	$	23,756	$	43,599	$	9,754	$	2,234	$	33,768	$	5,717	$	42,418	$	161,246

	Nine Months Ended September 30, 2021
	Commercial Lending								Residential Lending
	Commercial		Commercial								Home
	and		Real				Lease		Residential		Equity
(dollars in thousands)	Industrial		Estate		Construction		Financing		Mortgage		Line		Consumer		Total
Allowance for credit losses:
Balance at beginning of period	$	24,711	$	58,123	$	10,039	$	3,298	$	40,461	$	7,163	$	64,659	$	208,454
Charge-offs		(1,517)		(66)		—		—		(98)		(235)		(13,384)		(15,300)
Recoveries		623		30		166		—		246		89		7,857		9,011
Decrease in Provision		(61)		(14,488)		(451)		(1,064)		(6,841)		(1,300)		(16,714)		(40,919)
Balance at end of period	$	23,756	$	43,599	$	9,754	$	2,234	$	33,768	$	5,717	$	42,418	$	161,246

	Three Months Ended September 30, 2020
	Commercial Lending								Residential Lending
	Commercial		Commercial								Home
	and		Real				Lease		Residential		Equity
(dollars in thousands)	Industrial		Estate		Construction		Financing		Mortgage		Line		Consumer		Total
Allowance for credit losses:
Balance at beginning of period	$	21,299	$	53,122	$	5,276	$	3,837	$	33,874	$	7,635	$	67,077	$	192,120
Charge-offs		(598)		—		—		—		—		—		(4,238)		(4,836)
Recoveries		1,699		—		30		—		27		16		3,148		4,920
Increase (decrease) in Provision		(1,129)		(1,389)		(372)		214		8,316		(50)		(1,918)		3,672
Balance at end of period	$	21,271	$	51,733	$	4,934	$	4,051	$	42,217	$	7,601	$	64,069	$	195,876

	Nine Months Ended September 30, 2020
	Commercial Lending								Residential Lending
	Commercial		Commercial								Home
	and		Real				Lease		Residential		Equity
(dollars in thousands)	Industrial		Estate		Construction		Financing		Mortgage		Line		Consumer		Unallocated		Total
Allowance for credit losses:
Balance at beginning of period	$	28,975	$	22,325	$	4,844	$	424	$	29,303	$	9,876	$	34,644	$	139	$	130,530
Adoption of ASU No. 2016-13		(16,105)		10,559		(1,803)		207		(2,793)		(4,731)		15,575		(139)		770
Charge-offs		(14,773)		(2,723)		(379)		—		(14)		(8)		(21,742)		—		(39,639)
Recoveries		2,019		—		170		—		179		146		7,687		—		10,201
Increase in Provision		21,155		21,572		2,102		3,420		15,542		2,318		27,905		—		94,014
Balance at end of period	$	21,271	$	51,733	$	4,934	$	4,051	$	42,217	$	7,601	$	64,069	$	—	$	195,876

Rollforward of the Reserve for Unfunded Commitments

The following presents the activity in the Reserve for Unfunded Commitments for the three and nine months ended September 30, 2021:

	Three Months Ended September 30, 2021
	Commercial Lending								Residential Lending
	Commercial		Commercial								Home
	and		Real				Lease		Residential		Equity
(dollars in thousands)	Industrial		Estate		Construction		Financing		Mortgage		Line		Consumer		Total
Reserve for unfunded commitments:
Balance at beginning of period	$	12,808	$	978	$	7,873	$	—	$	—	$	7,521	$	42	$	29,222
Increase in Provision		446		255		902		—		—		1,669		28		3,300
Balance at end of period	$	13,254	$	1,233	$	8,775	$	—	$	—	$	9,190	$	70	$	32,522

13

	Nine Months Ended September 30, 2021
	Commercial Lending								Residential Lending
	Commercial		Commercial								Home
	and		Real				Lease		Residential		Equity
(dollars in thousands)	Industrial		Estate		Construction		Financing		Mortgage		Line		Consumer		Total
Reserve for unfunded commitments:
Balance at beginning of period	$	11,719	$	1,328	$	9,037	$	—	$	2	$	8,452	$	65	$	30,603
Increase (decrease) in Provision		1,535		(95)		(262)		—		(2)		738		5		1,919
Balance at end of period	$	13,254	$	1,233	$	8,775	$	—	$	—	$	9,190	$	70	$	32,522

	Three Months Ended September 30, 2020
	Commercial Lending								Residential Lending
	Commercial		Commercial								Home
	and		Real				Lease		Residential		Equity
(dollars in thousands)	Industrial		Estate		Construction		Financing		Mortgage		Line		Consumer		Total
Reserve for unfunded commitments:
Balance at beginning of period	$	8,181	$	1,168	$	5,908	$	—	$	3	$	7,890	$	54	$	23,204
Increase in Provision		1,212		(57)		(749)		—		1		996		(3)		1,400
Balance at end of period	$	9,393	$	1,111	$	5,159	$	—	$	4	$	8,886	$	51	$	24,604

	Nine Months Ended September 30, 2020
	Commercial Lending								Residential Lending
	Commercial		Commercial								Home
	and		Real				Lease		Residential		Equity
(dollars in thousands)	Industrial		Estate		Construction		Financing		Mortgage		Line		Consumer		Total
Reserve for unfunded commitments:
Balance at beginning of period	$	—	$	—	$	—	$	—	$	—	$	—	$	600	$	600
Adoption of ASU No. 2016-13		5,390		778		4,119		—		7		6,587		(581)		16,300
Increase (decrease) in Provision		4,003		333		1,040		—		(3)		2,299		32		7,704
Balance at end of period	$	9,393	$	1,111	$	5,159	$	—	$	4	$	8,886	$	51	$	24,604

Credit Quality Information

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

Loans and leases subject to grading primarily include: commercial and industrial loans, commercial real estate loans, construction loans and lease financing. Other loans subject to grading include installment loans to businesses or individuals for business and commercial purposes, overdraft lines of credit, commercial credit cards, and other credits as may be determined. Credit quality indicators for internally graded loans and leases are generally updated on an annual basis or on a quarterly basis for those loans and leases deemed to be of potentially higher risk.

An internal credit risk rating system is used to determine loan grade and is based on borrower credit risk and transactional risk. The loan grading process is a mechanism used to determine the risk of a particular borrower and is based on the following factors of a borrower: character, earnings and operating cash flow, asset and liability structure, debt capacity, management and controls, borrowing entity, and industry and operating environment.

Pass – “Pass” (uncriticized) loans and leases, are not considered to carry greater than normal risk. The borrower has the apparent ability to satisfy obligations to the Company, and therefore no loss in ultimate collection is anticipated.

Special Mention – Loans and leases that have potential weaknesses 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.

14

Loss – Loans and leases classified as loss are considered uncollectible and of such little value that their continuance as an asset is not warranted. This classification does not mean that the loan or lease has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be effected in the future.

Loans that are primarily monitored for credit quality using FICO scores include: residential mortgage loans, home equity lines and consumer loans. FICO scores are calculated primarily based on a consideration of payment history, the current amount of debt, the length of credit history available, a recent history of new sources of credit and the mix of credit type. FICO scores are updated on a monthly, quarterly or bi-annual basis, depending on the product type.

The amortized cost basis by year of origination and credit quality indicator of the Company’s loans and leases as of September 30, 2021 was as follows:

															Revolving
															Loans
															Converted
	Term Loans												Revolving		to Term
	Amortized Cost Basis by Origination Year												Loans		Loans
													Amortized		Amortized
(dollars in thousands)	2021		2020		2019		2018		2017		Prior		Cost Basis		Cost Basis		Total
Commercial Lending
Commercial and Industrial
Risk rating:
Pass	$	633,079	$	172,147	$	162,921	$	128,968	$	31,439	$	194,494	$	578,257	$	21,767	$	1,923,072
Special Mention		5,421		4,709		104,973		4,083		1,069		4,292		23,127		289		147,963
Substandard		371		1,663		2,102		13,874		97		8,285		19,162		1,307		46,861
Other (1)		10,257		7,897		8,955		5,364		2,740		573		41,702		—		77,488
Total Commercial and Industrial		649,128		186,416		278,951		152,289		35,345		207,644		662,248		23,363		2,195,384
Commercial Real Estate
Risk rating:
Pass		493,286		342,433		578,079		522,123		429,840		967,286		59,685		—		3,392,732
Special Mention		—		1,472		48,916		16,054		28,264		56,319		7,604		—		158,629
Substandard		—		—		—		1,907		258		15,578		502		—		18,245
Other (1)		—		—		—		—		—		162		—		—		162
Total Commercial Real Estate		493,286		343,905		626,995		540,084		458,362		1,039,345		67,791		—		3,569,768
Construction
Risk rating:
Pass		57,368		94,127		285,960		151,714		63,031		67,670		58,013		—		777,883
Special Mention		—		—		473		708		—		359		—		—		1,540
Substandard		—		—		—		369		—		850		—		—		1,219
Other (1)		19,268		10,753		4,367		4,955		2,710		2,581		802		—		45,436
Total Construction		76,636		104,880		290,800		157,746		65,741		71,460		58,815		—		826,078
Lease Financing
Risk rating:
Pass		26,419		64,989		53,457		10,371		15,819		58,940		—		—		229,995
Special Mention		523		282		501		182		27		201		—		—		1,716
Substandard		—		2,720		1,506		225		1,037		490		—		—		5,978
Total Lease Financing		26,942		67,991		55,464		10,778		16,883		59,631		—		—		237,689
Total Commercial Lending	$	1,245,992	$	703,192	$	1,252,210	$	860,897	$	576,331	$	1,378,080	$	788,854	$	23,363	$	6,828,919

(continued)

15

															Revolving
															Loans
															Converted
	Term Loans												Revolving		to Term
	Amortized Cost Basis by Origination Year												Loans		Loans
(continued)													Amortized		Amortized
(dollars in thousands)	2021		2020		2019		2018		2017		Prior		Cost Basis		Cost Basis		Total
Residential Lending
Residential Mortgage
FICO:
740 and greater	$	804,889	$	661,402	$	306,706	$	209,819	$	270,664	$	879,063	$	—	$	—	$	3,132,543
680 - 739		104,415		79,553		52,470		36,440		40,109		141,178		—		—		454,165
620 - 679		14,479		11,825		6,941		5,683		10,341		41,481		—		—		90,750
550 - 619		231		818		193		2,059		1,428		7,378		—		—		12,107
Less than 550		—		—		—		490		2,533		3,127		—		—		6,150
No Score (3)		13,307		8,559		15,727		20,112		18,265		46,312		—		—		122,282
Other (2)		18,701		17,823		10,835		11,779		18,988		17,737		625		147		96,635
Total Residential Mortgage		956,022		779,980		392,872		286,382		362,328		1,136,276		625		147		3,914,632
Home Equity Line
FICO:
740 and greater		—		—		—		—		—		—		637,131		2,220		639,351
680 - 739		—		—		—		—		—		—		150,452		3,485		153,937
620 - 679		—		—		—		—		—		—		38,987		1,709		40,696
550 - 619		—		—		—		—		—		—		10,433		1,473		11,906
Less than 550		—		—		—		—		—		—		2,260		70		2,330
No Score (3)		—		—		—		—		—		—		3,854		—		3,854
Total Home Equity Line		—		—		—		—		—		—		843,117		8,957		852,074
Total Residential Lending		956,022		779,980		392,872		286,382		362,328		1,136,276		843,742		9,104		4,766,706
Consumer Lending
FICO:
740 and greater		130,773		88,770		88,797		65,818		30,908		11,516		107,938		245		524,765
680 - 739		72,447		63,996		65,105		41,209		21,461		8,912		68,887		717		342,734
620 - 679		27,131		28,491		33,219		22,225		15,042		6,825		30,956		1,398		165,287
550 - 619		3,181		8,735		15,408		12,262		9,546		4,829		10,150		1,177		65,288
Less than 550		341		3,200		6,116		4,665		3,196		1,757		2,983		578		22,836
No Score (3)		1,155		60		81		46		77		3		34,234		420		36,076
Other (2)		709		368		1,735		30		2,183		38		76,665		—		81,728
Total Consumer Lending		235,737		193,620		210,461		146,255		82,413		33,880		331,813		4,535		1,238,714
Total Loans and Leases	$	2,437,751	$	1,676,792	$	1,855,543	$	1,293,534	$	1,021,072	$	2,548,236	$	1,964,409	$	37,002	$	12,834,339

(1) Other credit quality indicators used for monitoring purposes are primarily FICO scores. The majority of the loans in this population were originated to borrowers with a prime FICO score.

(2) Other credit quality indicators used for monitoring purposes are primarily internal risk ratings. The majority of the loans in this population were graded with a “Pass” rating.

(3) No FICO scores are primarily related to loans and leases extended to non-residents. Loans and leases of this nature are primarily secured by collateral and/or are closely monitored for performance.

16

The amortized cost basis by year of origination and credit quality indicator of the Company’s loans and leases as of December 31, 2020 was as follows:

															Revolving
															Loans
															Converted
	Term Loans												Revolving		to Term
	Amortized Cost Basis by Origination Year												Loans		Loans
													Amortized		Amortized
(dollars in thousands)	2020		2019		2018		2017		2016		Prior		Cost Basis		Cost Basis		Total
Commercial Lending
Commercial and Industrial
Risk rating:
Pass	$	873,639	$	324,030	$	183,329	$	73,000	$	49,886	$	94,360	$	1,058,786	$	28,853	$	2,685,883
Special Mention		20,937		10,370		20,164		2,099		279		8,316		101,183		1,549		164,897
Substandard		23,804		2,023		2,568		677		4,063		8,113		33,775		250		75,273
Other (1)		13,142		13,426		9,246		5,337		1,867		280		50,156		—		93,454
Total Commercial and Industrial		931,522		349,849		215,307		81,113		56,095		111,069		1,243,900		30,652		3,019,507
Commercial Real Estate
Risk rating:
Pass		342,845		611,243		541,104		447,366		295,426		814,398		47,604		323		3,100,309
Special Mention		1,500		63,617		26,187		33,482		37,841		61,279		2,999		—		226,905
Substandard		29		3,964		18,983		3,779		10,615		18,083		9,511		—		64,964
Other (1)		—		—		—		—		—		498		—		—		498
Total Commercial Real Estate		344,374		678,824		586,274		484,627		343,882		894,258		60,114		323		3,392,676
Construction
Risk rating:
Pass		53,931		233,730		202,808		83,792		23,171		41,536		28,386		—		667,354
Special Mention		—		508		707		4,717		—		9,172		—		—		15,104
Substandard		—		—		541		1,840		521		989		—		—		3,891
Other (1)		16,578		16,393		7,775		3,685		1,800		2,656		583		—		49,470
Total Construction		70,509		250,631		211,831		94,034		25,492		54,353		28,969		—		735,819
Lease Financing
Risk rating:
Pass		79,064		60,717		13,669		17,207		3,010		61,266		—		—		234,933
Special Mention		950		892		311		1,300		351		295		—		—		4,099
Substandard		2,708		1,677		327		1,141		—		526		—		—		6,379
Total Lease Financing		82,722		63,286		14,307		19,648		3,361		62,087		—		—		245,411
Total Commercial Lending	$	1,429,127	$	1,342,590	$	1,027,719	$	679,422	$	428,830	$	1,121,767	$	1,332,983	$	30,975	$	7,393,413

(continued)

17

															Revolving
															Loans
															Converted
	Term Loans												Revolving		to Term
	Amortized Cost Basis by Origination Year												Loans		Loans
(continued)													Amortized		Amortized
(dollars in thousands)	2020		2019		2018		2017		2016		Prior		Cost Basis		Cost Basis		Total
Residential Lending
Residential Mortgage
FICO:
740 and greater	$	728,807	$	384,248	$	290,484	$	361,297	$	314,971	$	830,795	$	—	$	—	$	2,910,602
680 - 739		85,151		53,090		44,616		50,703		39,230		144,537		—		—		417,327
620 - 679		15,767		7,604		11,460		9,628		7,982		43,393		—		—		95,834
550 - 619		—		1,971		2,818		2,920		4,474		10,144		—		—		22,327
Less than 550		—		861		593		2,916		594		2,138		—		—		7,102
No Score (3)		13,823		18,861		21,214		21,821		14,355		45,147		—		—		135,221
Other (2)		21,011		15,860		18,540		22,677		9,550		13,426		578		163		101,805
Total Residential Mortgage		864,559		482,495		389,725		471,962		391,156		1,089,580		578		163		3,690,218
Home Equity Line
FICO:
740 and greater		—		—		—		—		—		—		608,282		2,163		610,445
680 - 739		—		—		—		—		—		—		159,886		3,155		163,041
620 - 679		—		—		—		—		—		—		44,005		1,571		45,576
550 - 619		—		—		—		—		—		—		11,644		884		12,528
Less than 550		—		—		—		—		—		—		5,159		330		5,489
No Score (3)		—		—		—		—		—		—		4,545		—		4,545
Total Home Equity Line		—		—		—		—		—		—		833,521		8,103		841,624
Total Residential Lending		864,559		482,495		389,725		471,962		391,156		1,089,580		834,099		8,266		4,531,842
Consumer Lending
FICO:
740 and greater		113,373		122,965		99,678		54,691		24,029		6,034		114,748		275		535,793
680 - 739		83,316		90,853		66,143		36,426		16,358		4,985		76,391		773		375,245
620 - 679		40,469		48,904		33,917		24,705		11,144		3,788		36,622		1,221		200,770
550 - 619		9,125		20,274		17,693		15,126		7,825		2,883		12,980		1,458		87,364
Less than 550		3,017		10,139		9,189		6,517		3,123		1,118		5,261		799		39,163
No Score (3)		339		103		64		109		10		—		33,854		356		34,835
Other (2)		380		1,890		73		2,214		45		6,768		69,302		—		80,672
Total Consumer Lending		250,019		295,128		226,757		139,788		62,534		25,576		349,158		4,882		1,353,842
Total Loans and Leases	$	2,543,705	$	2,120,213	$	1,644,201	$	1,291,172	$	882,520	$	2,236,923	$	2,516,240	$	44,123	$	13,279,097

(1) Other credit quality indicators used for monitoring purposes are primarily FICO scores. The majority of the loans in this population were originated to borrowers with a prime FICO score.

(2) Other credit quality indicators used for monitoring purposes are primarily internal risk ratings. The majority of the loans in this population were graded with a “Pass” rating.

(3) No FICO scores are primarily related to loans and leases extended to non-residents. Loans and leases of this nature are primarily secured by collateral and/or are closely monitored for performance.

There were 0 loans and leases graded as Loss as of September 30, 2021 and December 31, 2020.

18

The amortized cost basis of revolving loans that were converted to term loans during the three and nine months ended September 30, 2021 and 2020 was as follows:

	Three Months Ended
(dollars in thousands)	September 30, 2021
Commercial and industrial	$	195
Home equity line		560
Consumer		422
Total Revolving Loans Converted to Term Loans During the Period	$	1,177

	Nine Months Ended
(dollars in thousands)	September 30, 2021
Commercial and industrial	$	454
Home equity line		2,177
Consumer		1,358
Total Revolving Loans Converted to Term Loans During the Period	$	3,989

	Three Months Ended
(dollars in thousands)	September 30, 2020
Commercial and industrial	$	5
Home equity line		8,843
Total Revolving Loans Converted to Term Loans During the Period	$	8,848

	Nine Months Ended
(dollars in thousands)	September 30, 2020
Commercial and industrial	$	28,527
Residential mortgage		296
Home equity line		12,771
Total Revolving Loans Converted to Term Loans During the Period	$	41,594

Past-Due Status

The Company continually updates its aging analysis for loans and leases to monitor the migration of loans and leases into past due categories. The Company considers loans and leases that are delinquent for 30 days or more to be past due. As of September 30, 2021, the aging analysis of the amortized cost basis of the Company’s past due loans and leases was as follows:

	September 30, 2021
	Past Due												Loans and
					Greater								Leases Past
					Than or								Due 90 Days
	30-59		60-89		Equal to								or More and
	Days		Days		90 Days		Total				Total Loans		Still Accruing
(dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Current		and Leases		Interest
Commercial and industrial	$	1,243	$	255	$	1,028	$	2,526	$	2,192,858	$	2,195,384	$	439
Commercial real estate		19,359		—		—		19,359		3,550,409		3,569,768		—
Construction		—		—		—		—		826,078		826,078		—
Lease financing		—		—		—		—		237,689		237,689		—
Residential mortgage		4,415		2,086		3,844		10,345		3,904,287		3,914,632		100
Home equity line		2,107		345		3,871		6,323		845,751		852,074		3,871
Consumer		12,904		1,923		1,376		16,203		1,222,511		1,238,714		1,376
Total	$	40,028	$	4,609	$	10,119	$	54,756	$	12,779,583	$	12,834,339	$	5,786

19

	December 31, 2020
	Past Due												Loans and
					Greater								Leases Past
					Than or								Due 90 Days
	30-59		60-89		Equal to								or More and
	Days		Days		90 Days		Total				Total Loans		Still Accruing
(dollars in thousands)	Past Due		Past Due		Past Due		Past Due		Current		and Leases		Interest
Commercial and industrial	$	2,585	$	604	$	2,626	$	5,815	$	3,013,692	$	3,019,507	$	2,108
Commercial real estate		75		2,568		963		3,606		3,389,070		3,392,676		882
Construction		779		376		2,137		3,292		732,527		735,819		93
Lease financing		—		—		—		—		245,411		245,411		—
Residential mortgage		3,382		4,125		3,372		10,879		3,679,339		3,690,218		—
Home equity line		1,375		743		4,818		6,936		834,688		841,624		4,818
Consumer		18,492		5,205		3,266		26,963		1,326,879		1,353,842		3,266
Total	$	26,688	$	13,621	$	17,182	$	57,491	$	13,221,606	$	13,279,097	$	11,167

Nonaccrual Loans and Leases

The Company generally places a loan or lease on nonaccrual status when management believes that collection of principal or interest has become doubtful or when a loan or lease becomes 90 days past due as to principal or interest, unless it is well secured and in the process of collection. The Company charges off a loan or lease when facts indicate that the loan or lease is considered uncollectible.

The amortized cost basis of loans and leases on nonaccrual status as of September 30, 2021 and December 31, 2020 and the amortized cost basis of loans and leases on nonaccrual status with no ACL as of September 30, 2021 and December 31, 2020 were as follows:

	September 30, 2021
	Nonaccrual
	Loans
	and Leases
	With No		Nonaccrual
	Allowance		Loans
(dollars in thousands)	for Credit Losses		and Leases
Commercial and industrial	$	—	$	746
Commercial real estate		745		745
Residential mortgage		1,851		7,137
Total Nonaccrual Loans and Leases	$	2,596	$	8,628

	December 31, 2020
	Nonaccrual
	Loans
	and Leases
	With No		Nonaccrual
	Allowance		Loans
(dollars in thousands)	for Credit Losses		and Leases
Commercial and industrial	$	—	$	518
Commercial real estate		—		80
Construction		1,840		2,043
Residential mortgage		1,316		6,441
Total Nonaccrual Loans and Leases	$	3,156	$	9,082

For the three and nine months ended September 30, 2021, the Company recognized interest income of $0.2 million and $0.4 million, respectively, on nonaccrual loans and leases, and for the three and nine months ended September 30, 2020, the Company recognized interest income of $0.1 million and $0.2 million, respectively, on nonaccrual loans and leases. Furthermore, for the three and nine months ended September 30, 2021, the amount of accrued interest receivables written off by reversing interest income was $0.2 million and $0.7 million, respectively, and for the three and nine months ended September 30, 2020, the amount of accrued interest receivables written off by reversing interest income was $0.2 million and $1.1 million, respectively.

20

Collateral-Dependent Loans and Leases

Collateral-dependent loans and leases are those for which repayment (on the basis of the Company’s assessment as of the reporting date) is expected to be provided substantially through the operation or sale of the collateral and the borrower is experiencing financial difficulty. As of September 30, 2021 and December 31, 2020, the amortized cost basis of collateral-dependent loans were $8.2 million and $21.0 million, respectively. As of September 30, 2021, these loans were primarily collateralized by residential real estate property. As of December 31, 2020, these loans were primarily collateralized by residential real estate property and borrower assets. As of September 30, 2021 and December 31, 2020, the fair value of collateral on substantially all collateral-dependent loans were significantly in excess of their amortized cost basis.

Modifications

Commercial and industrial loans modified in a TDR may involve temporary interest-only payments, term and amortization 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. 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, including extended interest-only periods and re-amortization of the balance. Modifications of consumer loans in a TDR may involve temporary or permanent reduced payments, temporary interest-only payments and below-market interest rates.

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 ACL associated with the loan. An ACL for impaired commercial loans, including commercial real estate and construction loans, that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or if the loan is collateral-dependent, the estimated fair value of the collateral, less any selling costs. An ACL for impaired residential real estate loans that have been modified in a TDR is measured based on the estimated fair value of the collateral, less any selling costs. Management exercises significant judgment in developing these estimates.

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

	Three Months Ended					Nine Months Ended
	September 30, 2021					September 30, 2021
	Number of	Recorded		Related		Number of	Recorded		Related
(dollars in thousands)	Contracts	Investment(1)		ACL		Contracts	Investment(1)		ACL
Commercial and industrial	—	$	—	$	—	13	$	1,946	$	127
Commercial real estate	—		—		—	1		365		75
Construction	—		—		—	2		699		79
Residential mortgage	—		—		—	13		5,582		213
Consumer	150		1,950		247	1,671		15,916		2,128
Total	150	$	1,950	$	247	1,700	$	24,508	$	2,622

	Three Months Ended					Nine Months Ended
	September 30, 2020					September 30, 2020
	Number of	Recorded		Related		Number of	Recorded		Related
(dollars in thousands)	Contracts	Investment(1)		Allowance		Contracts	Investment(1)		ACL
Commercial and industrial	—	$	—	$	—	1	$	500	$	30
Total	—	$	—	$	—	1	$	500	$	30

(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.

21

The above loans were modified in a TDR through an extension of maturity dates, temporary interest-only payments, temporary payment deferrals, reduced payments, converting revolving credit lines to term loans or below-market interest rates.

The Company had commitments to extend credit, standby letters of credit, and commercial letters of credit totaling $6.7 billion and $6.1 billion as of September 30, 2021 and December 31, 2020, respectively. Of the $6.7 billion at September 30, 2021, there were commitments of $0.2 million to lend additional funds related to borrowers who had loan terms modified in a TDR. Of the $6.1 billion at December 31, 2020, there were commitments of $0.2 million to lend additional funds related to borrowers who had loan terms modified in a TDR.

The following table presents, by class, loans modified in TDRs that have defaulted in the current period within 12 months of their permanent modification date for the periods indicated. The Company is reporting these defaulted TDRs based on a payment default definition of 30 days past due:

	Three Months Ended			Nine Months Ended			Three Months Ended			Nine Months Ended
	September 30, 2021			September 30, 2021			September 30, 2020			September 30, 2020
	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	$	265	3	$	613	1	$	500	1	$	500
Construction	—		—	1		359	—		—	—		—
Commercial real estate	1		500	1		500	—		—	—		—
Residential mortgage	2		596	3		884	—		—	—		—
Consumer	230		3,258	314		4,366	—		—	—		—
Total	235	$	4,619	322	$	6,722	1	$	500	1	$	500

(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.

Foreclosure Proceedings

As of September 30, 2021, there was one residential mortgage loan of $0.3 million collateralized by real estate property that was modified in a TDR that was in process of foreclosure. As of December 31, 2020, there were 0 residential mortgage loans collateralized by real estate property that was modified in a TDR that was in process of foreclosure.

Foreclosed Property

As of September 30, 2021 and December 31, 2020, there were 0 residential real estate properties held from foreclosed residential real estate loans.

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 $1.8 billion and $2.2 billion as of September 30, 2021 and December 31, 2020, respectively. Servicing fees include contractually specified fees, late charges, and ancillary fees, and were $1.1 million and $1.4 million for the three months ended September 30, 2021 and 2020, respectively, and $3.7 million and $4.4 million for the nine months ended September 30, 2021 and 2020, respectively.

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Amortization of mortgage servicing rights (“MSRs”) was $1.0 million and $1.4 million for the three months ended September 30, 2021 and 2020, respectively, and $2.8 million and $4.7 million for the nine months ended September 30, 2021 and 2020, respectively. The estimated future amortization expenses for MSRs over the next five years are as follows:

	Estimated
(dollars in thousands)	Amortization
Under one year	$	1,860
One to two years		1,434
Two to three years		1,142
Three to four years		926
Four to five years		763

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

	September 30,		December 31,
(dollars in thousands)	2021		2020
Gross carrying amount	$	69,062	$	67,856
Less: accumulated amortization		59,955		57,125
Net carrying value	$	9,107	$	10,731

The following table presents changes in amortized MSRs for the three and nine months ended September 30, 2021 and 2020:

	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2021		2020		2021		2020
Balance at beginning of period	$	10,007	$	11,595	$	10,731	$	12,668
Originations		101		729		1,206		2,935
Amortization		(1,001)		(1,402)		(2,830)		(4,681)
Balance at end of period	$	9,107	$	10,922	$	9,107	$	10,922
Fair value of amortized MSRs at beginning of period	$	13,480	$	15,159	$	14,029	$	20,329
Fair value of amortized MSRs at end of period	$	12,080	$	14,282	$	12,080	$	14,282

MSRs are evaluated for impairment if events and circumstances indicate a possible impairment. NaN impairment of MSRs was recorded for the three and nine months ended September 30, 2021 and 2020.

The quantitative assumptions used in determining the lower of cost or fair value of the Company’s MSRs as of September 30, 2021 and December 31, 2020 were as follows:

	September 30, 2021							December 31, 2020
						Weighted							Weighted
	Range					Average		Range					Average
Conditional prepayment rate	15.12	%	-	25.14	%	16.13	%	11.86	%	-	26.52	%	16.90	%
Life in years (of the MSR)	1.95		-	5.02		4.70		1.83		-	6.68		4.45
Weighted-average coupon rate	3.60	%	-	6.65	%	3.73	%	3.24	%	-	6.98	%	3.84	%
Discount rate	10.00	%	-	10.01	%	10.00	%	10.00	%	-	10.00	%	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

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should the Company be in default. The counterparty has the right to sell or repledge the investment securities. The Company is required by the counterparty to maintain adequate collateral levels. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional investment securities. For transfers of assets with the FHLB and the FRB, the Company enters into bilateral agreements to pledge loans as collateral to secure borrowing capacity. For ACH transactions, the Company enters into bilateral agreements to collateralize possible daylight overdrafts. For interest rate swaps, the Company enters into bilateral agreements to pledge collateral when either party is in a negative fair value position to mitigate counterparty credit risk. Counterparties to ACH transactions, certain interest rate swaps, the FHLB and the FRB do not have the right to sell or repledge the collateral.

The carrying amounts of the assets pledged as collateral to secure public deposits, borrowing arrangements and other transactions as of September 30, 2021 and December 31, 2020 were as follows:

(dollars in thousands)	September 30, 2021		December 31, 2020
Public deposits	$	3,377,544	$	2,251,508
Federal Home Loan Bank		2,510,228		2,917,317
Federal Reserve Bank		1,851,526		1,919,744
ACH transactions		114,246		111,347
Interest rate swaps		51,987		56,004
Total	$	7,905,531	$	7,255,920

As the Company did not enter into reverse repurchase agreements or repurchase agreements, 0 collateral was accepted or pledged as of September 30, 2021 and December 31, 2020. In addition, 0 debt was extinguished by in-substance defeasance.

7. Deposits

As of September 30, 2021 and December 31, 2020, deposits were categorized as interest-bearing or noninterest-bearing as follows:

(dollars in thousands)	September 30, 2021		December 31, 2020
U.S.:
Interest-bearing	$	12,372,209	$	10,928,712
Noninterest-bearing		8,008,084		6,674,352
Foreign:
Interest-bearing		874,370		776,897
Noninterest-bearing		865,340		847,762
Total deposits	$	22,120,003	$	19,227,723

The following table presents the maturity distribution of time certificates of deposit as of September 30, 2021:

	Under		$250,000
(dollars in thousands)	$250,000		or More		Total
Three months or less	$	193,946	$	237,509	$	431,455
Over three through six months		212,514		262,027		474,541
Over six through twelve months		347,878		215,215		563,093
One to two years		90,481		117,400		207,881
Two to three years		80,378		14,177		94,555
Three to four years		35,555		15,405		50,960
Four to five years		45,201		11,814		57,015
Thereafter		500		250		750
Total	$	1,006,453	$	873,797	$	1,880,250

Time certificates of deposit in denominations of $250,000 or more, in the aggregate, were $0.9 billion and $1.3 billion as of September 30, 2021 and December 31, 2020, respectively. Overdrawn deposit accounts are classified as loans and totaled $1.7 million and $2.6 million as of September 30, 2021 and December 31, 2020, respectively.

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8. Long-Term Borrowings

Long-term borrowings consisted of the following as of September 30, 2021 and December 31, 2020:

(dollars in thousands)	September 30, 2021		December 31, 2020
Finance lease	$	—	$	10
FHLB fixed-rate advances(1)		200,000		200,000
Total long-term borrowings	$	200,000	$	200,010

(1) Interest is payable monthly.

As of September 30, 2021 and December 31, 2020, the Company’s long-term borrowings included $200.0 million in FHLB fixed-rate advances with a weighted average interest rate of 2.73% and maturity dates ranging from 2023 to 2024. The FHLB fixed-rate advances require monthly interest-only payments with the principal amount due on the maturity date. As of September 30, 2021 and December 31, 2020, the available remaining borrowing capacity with the FHLB was $1.7 billion and $2.0 billion, respectively. The FHLB fixed-rate advances and remaining borrowing capacity were secured by residential real estate loan collateral as of September 30, 2021 and December 31, 2020. As of September 30, 2021 and December 31, 2020, the Company had an undrawn line of credit of $1.2 billion and $1.1 billion, respectively, from the FRB. The borrowing capacity with the FRB was secured by consumer, commercial and industrial, commercial real estate and residential real estate loans as of September 30, 2021 and December 31, 2020. See “Note 6. Transfers of Financial Assets” for more information.

As of September 30, 2021, future contractual principal payments and maturities of long-term borrowings were as follows:

	Principal
(dollars in thousands)	Payments
2021	$	—
2022		—
2023(1)		100,000
2024(2)		100,000
2025		—
Total	$	200,000

(1) FHLB fixed-rate advance callable on December 3, 2021 with an interest rate of 2.80%.

(2) FHLB fixed-rate advance callable on January 15, 2022 with an interest rate of 2.65%.

9. Accumulated Other Comprehensive Income (Loss)

Accumulated other comprehensive income (loss) is defined as the revenues, expenses, gains and losses that are included in comprehensive income but excluded from net income. The Company’s significant items of accumulated other comprehensive income (loss) are pension and other benefits and net unrealized gains or losses on investment securities.

Changes in accumulated other comprehensive income (loss) for the three and nine months ended September 30, 2021 and 2020 are presented below:

			Income
			Tax
	Pre-tax		Benefit		Net of
(dollars in thousands)	Amount		(Expense)		Tax
Accumulated other comprehensive loss at June 30, 2021	$	(40,509)	$	10,807	$	(29,702)
Three months ended September 30, 2021
Investment securities:
Unrealized net losses arising during the period		(43,316)		11,555		(31,761)
Net change in investment securities		(43,316)		11,555		(31,761)
Other comprehensive loss		(43,316)		11,555		(31,761)
Accumulated other comprehensive loss at September 30, 2021	$	(83,825)	$	22,362	$	(61,463)

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			Income
			Tax
	Pre-tax		Benefit		Net of
(dollars in thousands)	Amount		(Expense)		Tax
Accumulated other comprehensive income at December 31, 2020	$	43,098	$	(11,494)	$	31,604
Nine months ended September 30, 2021
Investment securities:
Unrealized net losses arising during the period		(126,821)		33,829		(92,992)
Reclassification of net gains to net income:
Investment securities gains, net		(102)		27		(75)
Net change in investment securities		(126,923)		33,856		(93,067)
Other comprehensive loss		(126,923)		33,856		(93,067)
Accumulated other comprehensive loss at September 30, 2021	$	(83,825)	$	22,362	$	(61,463)

			Income
			Tax
	Pre-tax		Benefit		Net of
(dollars in thousands)	Amount		(Expense)		Tax
Accumulated other comprehensive income at June 30, 2020	$	71,911	$	(19,180)	$	52,731
Three months ended September 30, 2020
Investment securities:
Unrealized net losses arising during the period		(1,991)		532		(1,459)
Reclassification of net gains to net income:
Investment securities gains, net		(24)		6		(18)
Net change in investment securities		(2,015)		538		(1,477)
Other comprehensive loss		(2,015)		538		(1,477)
Accumulated other comprehensive income at September 30, 2020	$	69,896	$	(18,642)	$	51,254

			Income
			Tax
	Pre-tax		Benefit		Net of
(dollars in thousands)	Amount		(Expense)		Tax
Accumulated other comprehensive loss at December 31, 2019	$	(43,450)	$	11,701	$	(31,749)
Nine months ended September 30, 2020
Pension and other benefits:
Change in Company tax rate		—		(96)		(96)
Net change in pension and other benefits		—		(96)		(96)
Investment securities:
Unrealized net gains arising during the period		113,244		(30,220)		83,024
Reclassification of net losses to net income:
Investment securities losses, net		102		(27)		75
Net change in investment securities		113,346		(30,247)		83,099
Other comprehensive income		113,346		(30,343)		83,003
Accumulated other comprehensive income at September 30, 2020	$	69,896	$	(18,642)	$	51,254

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

	Pensions				Accumulated
	and				Other
	Other		Investment		Comprehensive
(dollars in thousands)	Benefits		Securities		Income (Loss)
Three Months Ended September 30, 2021
Balance at beginning of period	$	(31,737)	$	2,035	$	(29,702)
Other comprehensive loss		—		(31,761)		(31,761)
Balance at end of period	$	(31,737)	$	(29,726)	$	(61,463)
Nine Months Ended September 30, 2021
Balance at beginning of period	$	(31,737)	$	63,341	$	31,604
Other comprehensive loss		—		(93,067)		(93,067)
Balance at end of period	$	(31,737)	$	(29,726)	$	(61,463)
Three Months Ended September 30, 2020
Balance at beginning of period	$	(28,178)	$	80,909	$	52,731
Other comprehensive loss		—		(1,477)		(1,477)
Balance at end of period	$	(28,178)	$	79,432	$	51,254
Nine Months Ended September 30, 2020
Balance at beginning of period	$	(28,082)	$	(3,667)	$	(31,749)
Other comprehensive income		(96)		83,099		83,003
Balance at end of period	$	(28,178)	$	79,432	$	51,254

10. Regulatory Capital Requirements

Federal and state laws and regulations limit the amount of dividends the Company may declare or pay. The Company depends primarily on dividends from FHB as the source of funds for the Company’s payment of dividends.

The Company and the Bank are subject to various regulatory capital requirements imposed by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s operating activities and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of its assets and certain off-balance sheet items. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios of Common Equity Tier 1 (“CET1”) capital, Tier 1 capital and total capital to risk-weighted assets, as well as a minimum leverage ratio.

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The table below sets forth those ratios at September 30, 2021 and December 31, 2020:

					First Hawaiian				Minimum		Well-
	First Hawaiian, Inc.				Bank				Capital		Capitalized
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Ratio(1)		Ratio(1)
September 30, 2021:
Common equity tier 1 capital to risk-weighted assets	$	1,777,705	12.63	%	$	1,764,464	12.53	%	4.50	%	6.50	%
Tier 1 capital to risk-weighted assets		1,777,705	12.63	%		1,764,464	12.53	%	6.00	%	8.00	%
Total capital to risk-weighted assets		1,953,878	13.88	%		1,940,638	13.79	%	8.00	%	10.00	%
Tier 1 capital to average assets (leverage ratio)		1,777,705	7.39	%		1,764,464	7.34	%	4.00	%	5.00	%
December 31, 2020:
Common equity tier 1 capital to risk-weighted assets	$	1,717,008	12.47	%	$	1,699,485	12.34	%	4.50	%	6.50	%
Tier 1 capital to risk-weighted assets		1,717,008	12.47	%		1,699,485	12.34	%	6.00	%	8.00	%
Total capital to risk-weighted assets		1,889,958	13.73	%		1,872,427	13.60	%	8.00	%	10.00	%
Tier 1 capital to average assets (leverage ratio)		1,717,008	8.00	%		1,699,485	7.92	%	4.00	%	5.00	%

(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”).

Federal regulations require a 2.5% capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is composed entirely of CET1, on top of these minimum risk weighted asset ratios, effectively resulting in minimum ratios of (i) 7% CET1 to risk-weighted assets, (ii) 8.5% Tier 1 capital to risk-weighted assets, and (iii) 10.5% total capital to risk-weighted assets. As of September 30, 2021, 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, 2021, to change the capital adequacy category of the Company or the Bank.

11. 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 a fair value 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.

The following table summarizes notional amounts and fair values of derivatives held by the Company as of September 30, 2021 and December 31, 2020:

	September 30, 2021						December 31, 2020
			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	$	22,066	$	—	$	(852)	$	22,451	$	—	$	(1,276)
Derivatives not designated as hedging instruments:
Interest rate swaps		2,962,557		68,046		—		3,002,333		129,888		—
Visa derivative		102,430		—		(852)		92,647		—		(4,554)
Interest rate caps and floors		148,800		4		(4)		148,800		7		(7)
Foreign exchange contracts		992		—		—		326		—		—

(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.

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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. As of September 30, 2021, the amount of initial margin cash collateral received by the Company was $1.7 million. As of December 31, 2020, the amount of initial margin cash collateral posted by the Company was $4.8 million. As of September 30, 2021 and December 31, 2020, the variation margin was $68.0 million and $129.9 million, respectively.

As of September 30, 2021, the Company pledged $30.5 million in financial instruments and $21.5 million in cash as collateral for interest rate swaps. As of December 31, 2020, the Company pledged $30.8 million in financial instruments and $25.2 million in cash as collateral for interest rate swaps. As of September 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020, the Company carried 1 interest rate swap with a notional amount of $22.1 million and $22.5 million, respectively. As of September 30, 2021 and December 31, 2020, the interest rate swap was categorized as a fair value hedge for a commercial and industrial loan with a negative fair value of $0.9 million and $1.3 million, respectively. The Company received a USD Prime floating rate and paid a fixed rate of 2.90%. The swap matures in 2023.

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, 2021 and 2020:

	Gains (losses) recognized in	Three Months Ended				Nine Months Ended
	the consolidated statements	September 30,				September 30,
(dollars in thousands)	of income line item	2021		2020		2021		2020
Gains (losses) on fair value hedging relationships recognized in interest income(1):
Recognized on interest rate swap	Loans and lease financing	$	111	$	156	$	425	$	(742)
Recognized on hedged item	Loans and lease financing		(126)		(326)		(512)		615

As of September 30, 2021 and December 31, 2020, 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				Carrying Amount of the Hedged Asset
(dollars in thousands)	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Line item in the consolidated balance sheets in which the hedged item is included
Loans and leases	$	23,290	$	24,355	$	975	$	1,487

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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, 2021 and 2020:

	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	2021		2020		2021		2020
Derivatives Not Designated As Hedging Instruments:
Visa derivative	Other noninterest income	$	(49)	$	22	$	(46)	$	131

As of September 30, 2021, the Company carried multiple interest rate swaps with notional amounts totaling $3.0 billion, all of which were related to the Company’s customer swap program, with a positive fair value of $68.0 million and a negative fair value of NaN. The Company received floating rates ranging from 0.00% to 3.41% and paid fixed rates ranging from 2.02% to 6.19%. The swaps mature between October 2021 and June 2040. As of December 31, 2020, the Company carried multiple interest rate swaps with notional amounts totaling $3.0 billion, all of which were related to the Company’s customer swap program, with a positive fair value of $129.9 million and a negative fair value of NaN. The Company received floating rates ranging from 0.15% to 3.16% and paid fixed rates ranging from 2.02% to 5.78%. These swaps resulted in net interest expense of NaN during both the three and nine months ended September 30, 2021 and 2020.

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 $0.3 million and $0.5 million for the three months ended September 30, 2021 and 2020, respectively, and $2.0 million and $7.0 million for the nine months ended September 30, 2021 and 2020, respectively.

Visa Class B Restricted Shares

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 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. During both 2018 and 2019, Visa funded its litigation escrow account, thereby reducing each member bank’s Class B conversion rate to unrestricted Class A common shares from 1.6483 to the current conversion rate of 1.6228. 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 $0.9 million and $4.6 million was included in the unaudited interim consolidated balance sheets at September 30, 2021 and December 31, 2020, respectively, to provide for the fair value of this liability. There were no sales of these shares prior to 2016. See “Note 16. 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 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.

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The Company’s interest rate swap agreements include bilateral collateral agreements with collateral requirements, which begin with exposures in excess of $0.3 million. For each counterparty, the Company reviews the interest rate swap collateral daily. Collateral for customer interest rate swap agreements, calculated as the pledged asset less loan balance, requires valuation of the pledged asset. Counterparty credit risk adjustments of NaN and $0.1 million were recognized during the three months ended September 30, 2021 and 2020, respectively, and $0.2 million were recognized during both the nine months ended September 30, 2021 and 2020.

Credit-Risk Related Contingent Features

Some 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 $23.8 million and $19.8 million at September 30, 2021 and December 31, 2020, respectively, for which we posted $23.2 million and $20.4 million, respectively, in collateral in the normal course of business. If the Company’s credit rating had been downgraded as of September 30, 2021 and December 31, 2020, we may have been required to settle the contracts in an amount equal to their fair value.

12. Commitments and Contingent Liabilities

Contingencies

On November 2, 2020, a lawsuit was filed in Hawaii Circuit Court by a Bank customer related to the sale of credit facilities that the Bank had previously extended to the customer. The customer asserts claims against the Bank for interference with the customer’s contract and business opportunity, unfair methods of competition and declaratory and injunctive relief. The outcome of this legal proceeding is uncertain at this point. Based on information available to the Company at present, the Company cannot reasonably estimate a range of potential loss, if any, for this action. Accordingly, the Company has not recognized any liability associated with this action. Management disputes any wrongdoing and the case is being vigorously defended.

In July 2021, a lawsuit was filed by a Bank vendor alleging breach of contract by FHB, relating to services provided to the Bank by the vendor. During the three and nine months ended September 30, 2021, the Company recorded an expense of $2.1 million related to the lawsuit.

In addition to the litigation noted above, various 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.

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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 $101.1 million and $93.1 million at September 30, 2021 and December 31, 2020, respectively.

Standby and Commercial Letters of Credit

Standby letters of credit are issued on behalf of customers in connection with contracts between the customers and third parties. Under standby letters of credit, the Company assures that the third parties will receive specified funds if customers fail to meet their contractual obligations. The credit risk to the Company arises from its obligation to make payment in the event of a customer’s contractual default. Standby letters of credit are reported net of participations sold to other institutions of $10.8 million and $11.0 million at September 30, 2021 and December 31, 2020, 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, 2021 have maturities ranging from October 2021 to September 2026. 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, 2021 and December 31, 2020 were as follows:

	September 30,		December 31,
(dollars in thousands)	2021		2020
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	6,513,489	$	5,934,535
Standby letters of credit		175,584		185,108
Commercial letters of credit		5,971		3,834

Guarantees

The Company sells residential mortgage loans in the secondary market primarily to the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation 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 11. Derivative Financial Instruments” for more information.

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Reorganization Transactions

On April 1, 2016, a series of reorganization transactions were undertaken to facilitate FHI’s initial public offering. In connection with the reorganization transactions, FHI distributed its interest in BancWest Holding Inc. (“BWHI”), including Bank of the West (“BOW”) to BNP Paribas (“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 BancWest Corporation, 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.

13. 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 performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the Company satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services that are promised within each contract and identifies those that contain performance obligations, and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.

Disaggregation of Revenue

In the second quarter of 2021, the Company made changes to the internal measurement of segment operating profits for the purpose of evaluating segment performance and resource allocation. The Company has restated the selected financial information for the three and nine months ended September 30, 2020 in order to conform with the current presentation. See “Note 17. Reportable Operating Segments” contained in our unaudited interim consolidated financial statements for further information.

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, 2021
					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Net interest income(1)	$	97,547	$	41,218	$	(6,172)	$	132,593
Service charges on deposit accounts		6,151		335		503		6,989
Credit and debit card fees		—		14,105		1,302		15,407
Other service charges and fees		6,218		1,036		417		7,671
Trust and investment services income		8,625		—		—		8,625
Other		64		1,387		233		1,684
Not in scope of Topic 606(1)		1,640		1,454		6,634		9,728
Total noninterest income		22,698		18,317		9,089		50,104
Total revenue	$	120,245	$	59,535	$	2,917	$	182,697

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		Nine Months Ended September 30, 2021
					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Net interest income(1)	$	289,107	$	119,718	$	(15,593)	$	393,232
Service charges on deposit accounts		18,025		899		1,415		20,339
Credit and debit card fees		—		41,322		4,170		45,492
Other service charges and fees		17,765		3,101		1,151		22,017
Trust and investment services income		25,824		—		—		25,824
Other		292		3,506		936		4,734
Not in scope of Topic 606(1)		6,862		5,058		13,017		24,937
Total noninterest income		68,768		53,886		20,689		143,343
Total revenue	$	357,875	$	173,604	$	5,096	$	536,575

(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.

		Three Months Ended September 30, 2020
					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Net interest income(1)	$	96,709	$	38,851	$	(1,558)	$	134,002
Service charges on deposit accounts		5,734		332		457		6,523
Credit and debit card fees		—		12,259		1,236		13,495
Other service charges and fees		5,433		570		321		6,324
Trust and investment services income		8,664		—		—		8,664
Other		325		2,084		176		2,585
Not in scope of Topic 606(1)		4,493		1,434		5,380		11,307
Total noninterest income		24,649		16,679		7,570		48,898
Total revenue	$	121,358	$	55,530	$	6,012	$	182,900

		Nine Months Ended September 30, 2020
					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Net interest income(1)	$	278,267	$	110,830	$	11,410	$	400,507
Service charges on deposit accounts		19,290		1,009		1,101		21,400
Credit and debit card fees		—		35,268		3,110		38,378
Other service charges and fees		14,887		1,209		1,175		17,271
Trust and investment services income		26,919		—		—		26,919
Other		567		4,689		476		5,732
Not in scope of Topic 606(1)		11,534		10,355		12,193		34,082
Total noninterest income		73,197		52,530		18,055		143,782
Total revenue	$	351,464	$	163,360	$	29,465	$	544,289

(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.

For the three and nine months ended September 30, 2021 and 2020, 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.

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Service Charges on Deposit Accounts

Service charges on deposit accounts relate to fees generated from a variety of deposit products and services rendered to customers. Charges include, but are not limited to, overdraft fees, non-sufficient fund fees, dormant fees and monthly service charges. Such fees are recognized concurrent with the event on a daily basis or on a monthly basis depending upon the customer’s cycle date.

Credit and Debit Card Fees

Credit and debit card fees primarily represent revenues earned from interchange fees, ATM fees and merchant processing fees. Interchange and network revenues are earned on credit and debit card transactions conducted with payment networks. ATM fees are primarily earned as a result of surcharges assessed to non-FHB customers who use an FHB ATM. Merchant processing fees are primarily earned on transactions in which FHB is the acquiring bank. Such fees are generally recognized concurrently with the delivery of services on a daily basis.

Trust and Investment Services Fees

Trust and investment services fees represent revenue earned by directing, holding and managing customers’ assets. Fees are generally computed based on a percentage of the previous period’s value of assets under management. The transaction price (i.e., percentage of assets under management) is established at the inception of each contract. Trust and investment services fees also include 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.

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, 2021 and December 31, 2020, the Company had contract liabilities of $0.4 million and $1.0 million, respectively, which it expects to recognize over the remaining term of the respective contracts with the vendors. For the three and nine months ended September 30, 2021, the Company’s recognized revenues increased and contract liabilities decreased by approximately $0.2 million and $0.6 million, respectively, due to the passage of time. For the three and nine months ended September 30, 2020, the Company’s recognized revenues increased 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, 2021 and December 31, 2020, there were 0 material receivables from contracts with customers or contract assets recorded on the Company’s consolidated balance sheets.

Other

Except for the contract liabilities noted above, the Company did 0t have any significant performance obligations as of September 30, 2021 and December 31, 2020. The Company also did 0t have any material contract acquisition costs or use any significant judgments or estimates in recognizing revenue for financial reporting purposes.

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14. Earnings per Share

For the three and nine months ended September 30, 2021, 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, 2020, the Company made 0 adjustments to net income for the purpose of computing earnings per share and there were 353,000 and 352,000 antidilutive securities, respectively. For the three and nine months ended September 30, 2021 and 2020, 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)	2021		2020		2021		2020
Numerator:
Net income	$	64,279	$	65,101	$	208,713	$	124,015
Denominator:
Basic: weighted-average shares outstanding		128,660,038		129,896,054		129,323,973		129,882,878
Add: weighted-average equity-based awards		550,410		189,480		571,338		246,812
Diluted: weighted-average shares outstanding		129,210,448		130,085,534		129,895,311		130,129,690
Basic earnings per share	$	0.50	$	0.50	$	1.61	$	0.95
Diluted earnings per share	$	0.50	$	0.50	$	1.61	$	0.95

15. Noninterest Income and Noninterest Expense

Benefit Plans

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, 2021 and 2020:

	Income line item where recognized in	Pension Benefits				Other Benefits
(dollars in thousands)	the consolidated statements of income	2021		2020		2021		2020
Three Months Ended September 30,
Service cost	Salaries and employee benefits	$	—	$	—	$	218	$	195
Interest cost	Other noninterest expense		1,292		1,639		116		156
Expected return on plan assets	Other noninterest expense		(766)		(1,206)		—		—
Prior service credit	Other noninterest expense		—		—		—		(12)
Recognized net actuarial loss (gain)	Other noninterest expense		1,720		1,474		—		(80)
Total net periodic benefit cost		$	2,246	$	1,907	$	334	$	259
Nine Months Ended September 30,
Service cost	Salaries and employee benefits	$	—	$	—	$	746	$	573
Interest cost	Other noninterest expense		3,754		4,881		378		484
Expected return on plan assets	Other noninterest expense		(2,298)		(3,594)		—		—
Prior service credit	Other noninterest expense		—		—		—		(38)
Recognized net actuarial loss (gain)	Other noninterest expense		5,160		4,332		—		(132)
Total net periodic benefit cost		$	6,616	$	5,619	$	1,124	$	887

Leases

The Company recognized operating lease income related to lease payments of $1.7 million and $1.6 million for the three months ended September 30, 2021 and 2020, respectively, and $5.0 million and $4.7 million for the nine months ended September 30, 2021 and 2020, respectively. In addition, the Company recognized $1.6 million and $1.4 million of lease income related to variable lease payments for the three months ended September 30, 2021 and 2020, respectively, and $4.6 million and $4.3 million for the nine months ended September 30, 2021 and 2020, respectively.

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16. 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.

◾ 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.

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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, 2021 and December 31, 2020, management did not make adjustments to prices provided by the third-party pricing services as a result of illiquid or inactive markets. The Company’s third-party pricing service has also established processes for the Company to submit inquiries regarding quoted prices. Periodically, the Company will challenge the quoted prices provided by the third-party pricing service. The Company’s third-party pricing service will review the inputs to the evaluation in light of the new market data presented by the Company. The Company’s third-party pricing service may then affirm the original quoted price or may update the evaluation on a going forward basis. The Company classifies all available-for-sale securities as Level 2.

Derivatives

Most of the Company’s derivatives are traded in over-the-counter markets where quoted market prices are not readily available. For those derivatives, the Company measures fair value on a recurring basis using proprietary valuation models that primarily use market observable inputs, such as yield curves, and option volatilities. The fair value of derivatives includes values associated with counterparty credit risk and the Company’s own credit standing. The Company classifies these derivatives, included in other assets and other liabilities, as Level 2.

Concurrent with the sale of the Visa Class B restricted shares, the Company entered into an agreement with the buyer that requires payment to the buyer in the event Visa reduces each member bank’s Class B conversion rate to unrestricted Class A common shares. During both 2018 and 2019, Visa funded its litigation escrow account, thereby reducing each member bank’s Class B conversion rate to unrestricted Class A common shares from 1.6483 to the current conversion rate of 1.6228. The Visa derivative of $0.9 million and $4.6 million was included in the unaudited interim consolidated balance sheets at September 30, 2021 and December 31, 2020, 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.

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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, 2021 and December 31, 2020 are summarized below:

	Fair Value Measurements as of September 30, 2021
	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 and government agency debt securities	$	—	$	187,861	$	—	$	187,861
Mortgage-backed securities:
Residential - Government agency(1)		—		98,134		—		98,134
Residential - Government-sponsored enterprises(1)		—		1,458,878		—		1,458,878
Commercial - Government agency		—		448,594		—		448,594
Commercial - Government-sponsored enterprises		—		1,301,249		—		1,301,249
Collateralized mortgage obligations:
Government agency		—		2,059,864		—		2,059,864
Government-sponsored enterprises		—		2,399,147		—		2,399,147
Total available-for-sale securities		—		7,953,727		—		7,953,727
Other assets(2)		7,327		68,050		—		75,377
Liabilities
Other liabilities(3)		—		(856)		(852)		(1,708)
Total	$	7,327	$	8,020,921	$	(852)	$	8,027,396

(1) Backed by residential real estate.

(2) Other assets classified as Level 1 include mutual funds and money market funds that have quoted prices in active markets and are related to the Company’s deferred compensation plans. Other assets classified as Level 2 include derivative assets.

(3) Other liabilities include derivative liabilities.

	Fair Value Measurements as of December 31, 2020
	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 and government agency debt securities	$	—	$	171,421	$	—	$	171,421
Mortgage-backed securities:
Residential - Government agency(1)		—		160,462		—		160,462
Residential - Government-sponsored enterprises(1)		—		447,200		—		447,200
Commercial - Government agency		—		599,650		—		599,650
Commercial - Government-sponsored enterprises		—		932,157		—		932,157
Collateralized mortgage obligations:
Government agency		—		1,933,553		—		1,933,553
Government-sponsored enterprises		—		1,826,972		—		1,826,972
Total available-for-sale securities		—		6,071,415		—		6,071,415
Other assets(2)		11,691		129,895		—		141,586
Liabilities
Other liabilities(3)		—		(1,283)		(4,554)		(5,837)
Total	$	11,691	$	6,200,027	$	(4,554)	$	6,207,164

(1) Backed by residential real estate.

(2) Other assets classified as Level 1 include mutual funds and money market funds that have quoted prices in active markets and are related to the Company’s deferred compensation plans. Other assets classified as Level 2 include derivative assets.

(3) Other liabilities include derivative liabilities.

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Changes in Fair Value Levels

For the three and nine months ended September 30, 2021 and 2020, 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, 2021 and 2020 are summarized below:

	Visa Derivative
(dollars in thousands)	2021		2020
Three Months Ended September 30,
Balance as of July 1,	$	(2,132)	$	(2,095)
Total net (losses) gains included in other noninterest income		(49)		22
Settlements		1,329		1,153
Balance as of September 30,	$	(852)	$	(920)
Total net (losses) gains included in net income attributable to the change in unrealized gains or losses related to liabilities still held as of September 30,	$	(49)	$	22
Nine Months Ended September 30,
Balance as of January 1,	$	(4,554)	$	(4,233)
Total net (losses) gains included in other noninterest income		(46)		131
Settlements		3,748		3,182
Balance as of September 30,	$	(852)	$	(920)
Total net (losses) gains included in net income attributable to the change in unrealized gains or losses related to liabilities still held as of September 30,	$	(46)	$	131

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, 2021
			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	$	2,399,082	$	268,467	$	2,130,619	$	—	$	2,399,086
Loans held for sale		2,052		—		2,054		—		2,054
Loans(1)		12,596,650		—		—		12,743,078		12,743,078
Financial liabilities:
Time deposits(2)	$	1,880,250	$	—	$	1,882,298	$	—	$	1,882,298
Long-term borrowings		200,000		—		209,751		—		209,751

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	December 31, 2020
			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	$	1,040,944	$	303,373	$	737,571	$	—	$	1,040,944
Loans held for sale		11,579		—		12,018		—		12,018
Loans(1)		13,033,686		—		—		13,255,636		13,255,636
Financial liabilities:
Time deposits(2)	$	2,348,298	$	—	$	2,357,137	$	—	$	2,357,137
Long-term borrowings(3)		200,000		—		214,167		—		214,167

(1) Excludes financing leases of $237.7 million at September 30, 2021 and $245.4 million at December 31, 2020.

(2) Excludes deposit liabilities with no defined or contractual maturity of $20.2 billion as of September 30, 2021 and $16.9 billion as of December 31, 2020.

(3) Excludes capital lease obligations of $10 thousand as of December 31, 2020.

Unfunded loan and lease commitments and letters of credit are not included in the tables above. As of September 30, 2021 and December 31, 2020, the Company had $6.7 billion and $6.1 billion, respectively, of unfunded loan and lease commitments and letters of credit. The Company believes that 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 $46.6 million and $42.3 million at September 30, 2021 and December 31, 2020, 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.

Collateral-dependent loans

Collateral-dependent loans are those for which repayment is expected to be provided substantially through the operation or sale of the collateral. These loans are measured at fair value on a nonrecurring basis using collateral values as a practical expedient. The fair values of collateral are primarily based on real estate appraisal reports prepared by third-party appraisers less estimated selling costs. The Company measures the estimated credit losses on collateral-dependent loans by performing a lower of cost or fair value analysis. If the estimated credit losses are determined by the value of the collateral, the net carrying amount is adjusted to fair value on a nonrecurring basis as Level 3 by recognizing an ACL.

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.

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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, 2021 and December 31, 2020:

(dollars in thousands)	Level 1		Level 2		Level 3
September 30, 2021
Collateral-dependent loans	$	—	$	—	$	—
December 31, 2020
Collateral-dependent loans	$	—	$	—	$	1,840

Total expected credit losses recognized on collateral-dependent loans were NaN for both the three months ended September 30, 2021 and 2020, and NaN and $0.4 million for the nine months ended September 30, 2021 and 2020, respectively.

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

	Quantitative Information about Level 3 Fair Value Measurements at September 30, 2021
				Significant
(dollars in thousands)	Fair value		Valuation Technique	Unobservable Input	Range
Visa derivative	$	(852)	Discounted Cash Flow	Expected Conversation Rate - 1.6228(2)	1.5977-1.6228
				Expected Term - 1 year(3)	0.5 to 1.5 years
				Growth Rate - 13%(4)	4% - 17%

	Quantitative Information about Level 3 Fair Value Measurements at December 31, 2020
				Significant
(dollars in thousands)	Fair value		Valuation Technique	Unobservable Input	Range
Collateral-dependent loans	$	1,840	Appraisal Value	Appraisal Value	n/m(1)
Visa derivative	$	(4,554)	Discounted Cash Flow	Expected Conversation Rate - 1.6228(2)	1.5977-1.6228
				Expected Term - 1 year(3)	0.5 to 1.5 years
				Growth Rate - 13%(4)	4% - 17%

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

(2) Due to the uncertainty in the movement of the conversion rate, the current conversion rate was utilized in the fair value calculation.

(3) The expected term of 1 year was based on the median of 0.5 to 1.5 years.

(4) The growth rate of 13% was based on the arithmetic average of analyst price targets.

17. 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 credit losses, and capital. This process is dynamic and requires certain allocations based on judgment and other subjective factors. Unlike financial accounting, there is no comprehensive authoritative guidance for management accounting that is equivalent to GAAP.

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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 credit losses from the Treasury and Other business segment (which is comprised of many of the Company’s support units) to the Retail and Commercial business segments. These allocations are based on direct costs incurred by the Retail and Commercial business segments.

Noninterest income and expense includes allocations from support units to the business segments. These allocations are based on actual usage where practicably calculated or by management’s estimate of such usage. Income tax expense is allocated to each business segment based on the consolidated effective income tax rate for the period shown.

The CARES Act, enacted on March 27, 2020, established, among other COVID-19 relief programs, a loan program (the “PPP”) for fully guaranteed loans (which may then be forgiven) to small businesses. In the second quarter of 2021, the Company made changes to the internal measurement of segment operating profits for the purpose of evaluating segment performance and resource allocation. The primary reason for the change was to align PPP loan balances within the business segment that directly manages them. Specifically, PPP loan balances previously included as part of the Retail Banking segment have been reclassified to the Commercial Banking segment. The reallocation of select PPP loan balances affected net interest income, net interest income after provision for credit losses, noninterest expense, provision for income taxes, net income and asset balances. The Company has reported its selected financial information using the new PPP loan balance alignments for the three and nine months ended September 30, 2021. The Company has restated the selected financial information for the three and nine months ended September 30, 2020 in order to conform with the current presentation.

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 54 banking locations throughout the State of Hawaii, Guam, and Saipan.

Commercial Banking

Commercial Banking offers products that include corporate banking, 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		Banking		Other		Total
Three Months Ended September 30, 2021
Net interest income (expense)	$	97,547	$	41,218	$	(6,172)	$	132,593
Benefit of (provision) for credit losses		3,067		4,233		(3,300)		4,000
Net interest income (expense) after provision for credit losses		100,614		45,451		(9,472)		136,593
Noninterest income		22,698		18,317		9,089		50,104
Noninterest expense		(60,870)		(26,371)		(13,795)		(101,036)
Income (loss) before (provision) benefit for income taxes		62,442		37,397		(14,178)		85,661
(Provision) benefit for income taxes		(15,660)		(9,269)		3,547		(21,382)
Net income (loss)	$	46,782	$	28,128	$	(10,631)	$	64,279
Total assets as of September 30, 2021	$	6,881,247	$	6,109,627	$	12,557,448	$	25,548,322

					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Nine Months Ended September 30, 2021
Net interest income (expense)	$	289,107	$	119,718	$	(15,593)	$	393,232
Benefit of (provision) for credit losses		17,191		23,728		(1,919)		39,000
Net interest income (expense) after provision for credit losses		306,298		143,446		(17,512)		432,232
Noninterest income		68,768		53,886		20,689		143,343
Noninterest expense		(185,874)		(73,842)		(37,014)		(296,730)
Income (loss) before (provision) benefit for income taxes		189,192		123,490		(33,837)		278,845
(Provision) benefit for income taxes		(47,670)		(30,898)		8,436		(70,132)
Net income (loss)	$	141,522	$	92,592	$	(25,401)	$	208,713
Total assets as of September 30, 2021	$	6,881,247	$	6,109,627	$	12,557,448	$	25,548,322

					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Three Months Ended September 30, 2020
Net interest income (expense)	$	96,709	$	38,851	$	(1,558)	$	134,002
Provision for credit losses		(2,141)		(1,531)		(1,400)		(5,072)
Net interest income (expense) after provision for credit losses		94,568		37,320		(2,958)		128,930
Noninterest income		24,649		16,679		7,570		48,898
Noninterest expense		(57,125)		(19,914)		(14,590)		(91,629)
Income (loss) before (provision) benefit for income taxes		62,092		34,085		(9,978)		86,199
(Provision) benefit for income taxes		(15,452)		(8,168)		2,522		(21,098)
Net income (loss)	$	46,640	$	25,917	$	(7,456)	$	65,101
Total assets as of September 30, 2020	$	6,947,160	$	6,713,328	$	8,650,213	$	22,310,701

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					Treasury
	Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total
Nine Months Ended September 30, 2020
Net interest income	$	278,267	$	110,830	$	11,410	$	400,507
Provision for credit losses		(46,517)		(47,498)		(7,703)		(101,718)
Net interest income after provision for credit losses		231,750		63,332		3,707		298,789
Noninterest income		73,197		52,530		18,055		143,782
Noninterest expense		(178,791)		(59,481)		(41,273)		(279,545)
Income (loss) before (provision) benefit for income taxes		126,156		56,381		(19,511)		163,026
(Provision) benefit for income taxes		(30,529)		(13,769)		5,287		(39,011)
Net income (loss)	$	95,627	$	42,612	$	(14,224)	$	124,015
Total assets as of September 30, 2020	$	6,947,160	$	6,713,328	$	8,650,213	$	22,310,701

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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 impact of the ongoing COVID-19 pandemic and any other pandemic, epidemic or health-related crisis; the geographic concentration of our business; current and future economic and market conditions in the United States generally or in Hawaii, Guam and Saipan in particular; our dependence on the real estate markets in which we operate; concentrated exposures to certain asset classes and individual obligors; the effect of the current low interest rate environment or changes in interest rates on our business including our net interest income, net interest margin, the fair value of our investment securities, and our mortgage loan originations, mortgage servicing rights and mortgage loans held for sale; changes in the method pursuant to which LIBOR and other benchmark rates are determined or the discontinuance of LIBOR; the possibility of a deterioration in credit quality in our portfolio; the possibility we might underestimate the credit losses inherent in our loan and lease portfolio; our ability to maintain our Bank’s reputation; the future value of the investment securities that we own; our ability to attract and retain customer deposits; our inability to receive dividends from our bank, pay dividends to our common stockholders and satisfy obligations as they become due; the effects of severe weather, geopolitical instability, including war, terrorist attacks, pandemics or other severe health emergencies and man-made and natural disasters; our ability to maintain consistent growth, earnings and profitability; our ability to attract and retain skilled employees or changes in our management personnel; our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business; the effectiveness of our risk management and internal disclosure controls and procedures; our ability to keep pace with technological changes; any failure or interruption of our information and communications systems; our ability to identify and address cybersecurity risks; the occurrence of fraudulent activity or effect of a material breach of, or disruption to, the security of any of our or our vendors’ systems; the failure to properly use and protect our customer and employee information and data; the possibility of employee misconduct or mistakes; our ability to successfully develop and commercialize new or enhanced products and services; changes in the demand for our products and services; the effects of problems encountered by other financial institutions; our access to sources of liquidity and capital to address our liquidity needs; our use of the secondary mortgage market as a source of liquidity; risks associated with the sale of loans and with our use of appraisals in valuing and monitoring loans; the possibility that actual results may differ from estimates and forecasts; fluctuations in the fair value of our assets and liabilities and off-balance sheet exposures; the effects of the failure of any component of our business infrastructure provided by a third party; the potential for environmental liability; the risk of being subject to litigation and the outcome thereof; the impact of, and changes in, applicable laws, regulations and accounting standards and policies, including the enactment of the Tax Act (Public Law 115-97) on December 22, 2017; possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations; our likelihood of success in, and the impact of, litigation or regulatory actions; our ability to continue to pay dividends on our common stock; contingent liabilities and unexpected tax liabilities that may be applicable to us as a result of the Reorganization Transactions; and damage to our reputation from any of the factors described above.

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The foregoing factors should not be considered an exhaustive list and should be read together with the risk factors and other cautionary statements included in our Annual Report on Form 10-K for the year ended December 31, 2020. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law.

Company Overview

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

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

Basis of Presentation

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

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

The accompanying unaudited interim consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 and filed with the U.S. Securities and Exchange Commission (the “SEC”).

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

Overview

The COVID-19 pandemic has brought unprecedented challenges to businesses and economies around the world, particularly those in the United States. Our business has been, and continues to be, impacted by the recent and ongoing developments relating to the COVID-19 pandemic. Restrictive measures to address the pandemic eased during the first nine months of 2021, resulting in the improvement of the U.S. economy from 2020. The increased availability of COVID-19 vaccinations began to mitigate the public health effects of the pandemic. However, there has been a rise of the Delta variant of COVID-19 and slower progress on vaccination rates. Recovery from the related economic crisis continues to disproportionately affect certain industries, geographies, and demographics more than others.

In September 2020, the City and County of Honolulu (“City”) implemented a framework for reducing the spread of COVID-19, with criteria set for loosening or tightening restrictions on businesses and activities to keep Honolulu residents healthy, which was followed through August 2021. The framework included five tiers of re-opening, with Tier 1 being the most restrictive. On September 20, 2021, Mayor Rick Blangiardi announced that the City would move away from the tier system and into a more flexible approach to COVID-19 restrictions called the Safe Oahu Response Plan, which would allow the City to loosen or tighten restrictions as appropriate based on available metrics and the current circumstances. Under the Safe Oahu Response Plan as of October 27, 2021, the City is limiting indoor social gatherings to 10 people and outdoor social gatherings to 25 people, and planning to loosen restrictions for entertainment and spectator activities throughout October and November. According to the State of Hawaii Department of Health, as of October 27, 2021, approximately 71.2% of Hawaii’s population has been fully vaccinated and the 7-day average for new case counts is at 123 cases.

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We recognize that our customers continue to experience varying degrees of financial distress, which we expect to continue throughout 2021. There remains a high degree of uncertainty relating to the ongoing spread and severity of the virus and new variants. To the extent that the economy continues to be negatively impacted by the pandemic, our results will be affected. In light of the uncertainties and continuing developments discussed herein, the ultimate adverse impact of COVID-19 cannot be reliably estimated at this time, but it has been and is expected to continue to be material.

Hawaii Economy

Hawaii’s economy continues to be significantly impacted by COVID-19 and the responses to it. On July 8, 2021, the State revised its travel requirements, allowing visitors to avoid the mandatory 10-day quarantine if 1) they test negative for COVID-19 within 72 hours of departure or 2) they present evidence of being fully vaccinated in the United States and its Territories. While visitor arrivals to Hawaii increased with reduced travel restrictions in the four-month period through July 2021, Governor Ige urged visitors in August to delay trips to Hawaii through the end of October, which may have resulted in lower visitor traffic in August and September. Because the Hawaii economy is heavily dependent on tourism, the combination of various response measures to the COVID-19 pandemic resulted in unprecedented fluxes in Hawaii unemployment. The statewide seasonally adjusted unemployment rate was 6.6% in September 2021 compared to 15.1% in September 2020, according to the Hawaii Department of Business, Economic Development & Tourism, while the national seasonally adjusted unemployment rate was 4.8% in September 2021 compared to 7.9% in September 2020. Visitor arrivals for the first nine months of 2021 increased by 119.8% compared to the same period in 2020, according to the Hawaii Tourism Authority. The timing and extent of the recovery of the Hawaii tourism industry remains highly uncertain and beyond our control. Despite decreasing unemployment rates, however, Hawaii’s demand for workers continues to strengthen but is constrained by a labor shortage that, in many cases, is impeding business activity throughout the State.

The volume of home sales on Oahu has increased relative to the corresponding period in 2020, which was significantly impacted by the COVID-19 pandemic. For the nine months ended September 30, 2021, the volume of single-family home sales increased by 24.2%, while condominium sales increased by 63.3% compared to the same period in 2020, according to the Honolulu Board of Realtors. The median price of single-family home sales and condominium sales on Oahu was $975,000 and $467,500, respectively, or an increase of 20.2% and 8.7%, respectively, for the nine months ended September 30, 2021 as compared to the same period in 2020. As of September 30, 2021, months of inventory of single-family homes and condominiums on Oahu remained low at approximately 1.2 and 1.8 months, respectively. Lastly, state general excise and use tax revenues increased by 11.6% for the first eight months of 2021 as compared to the same period in 2020, according to the Hawaii Department of Business, Economic Development & Tourism.

Legislative and Regulatory Developments

Actions taken by the federal government and the Federal Reserve and other bank regulatory agencies to partially mitigate the economic effects of COVID-19 and related containment measures have had, and will continue to have, an impact on our financial position and results of operations. Certain of these actions are further discussed below.

The Federal Reserve has instituted a number of other measures to mitigate the lasting impact from the COVID-19 pandemic and to support the flow of credit to households and businesses, offset forced liquidiations and restore liquidity in the financial markets. For example, among other things, the Federal Reserve lowered the rate charged on its discount window while extending the length of the loans offered, and introduced a number of additional facilities designed to enhance support for small and mid-sized businesses.

The U.S. government has also enacted certain fiscal stimulus measures in several phases to counteract the economic disruption caused by COVID-19, such as:

● The CARES Act, enacted on March 27, 2020, established, among other COVID-19 relief programs, a $670 billion loan program (the “Paycheck Protection Program” or the “PPP”) for fully guaranteed loans (which may then be forgiven) to small businesses.

● The Consolidated Appropriations Act – 2021 (the “CAA”) extended the term of a number of initiatives under the CARES Act. One such example was the extension of the Small Business Administration’s (“SBA”) authority to make commitments under the PPP to March 31, 2021 or until the additional PPP funds were exhausted. The PPP Extension Act of 2021 later extended the covered period of the PPP to June 30, 2021. The PPP ended on May 31, 2021.

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● The American Rescue Plan Act of 2021 (“American Rescue Plan”), enacted on March 11, 2021, builds upon the measures established in the CARES Act and the CAA. Through this legislation, unemployment benefits were extended to September 6, 2021, eligible individuals received direct stimulus payments of up to $1,400, an additional $7 billion was added to the PPP, while expanding eligibility to include non-profit organizations previously excluded from the program, and funds were allocated for COVID-19 vaccines, testing and contact tracing.

We are continuing to monitor the potential development of additional legislation and further actions taken by the U.S. government.

The State of Hawaii received at least $1.25 billion in federal aid from the CARES Act, with the majority of this federal aid used to help fund state and county government response efforts to COVID-19. Additional federal funding provided for unemployment assistance, direct cash payments to Hawaii residents and funding to support local schools and colleges. The CAA provided an additional $1.7 billion in new federal funding, while extending the ability of the State of Hawaii and its local governments to use its previously received federal aid until December 31, 2021. The American Rescue Plan also provides an additional $2.2 billion of federal funding to the State of Hawaii.

Impact to our Operations

We saw a significant decrease in customer traffic in our branches in the past year. As a result, we strategically closed 26 of our branch locations on a temporary basis since 2020, closed four of them permanently, and have decided to close three more of them permanently by December 2021. As of September 2021, we reopened all 19 of the remaining temporarily closed branch locations in connection with the reopening of local businesses. The temporary (or in certain cases, permanent) closures of bank branches and the safety precautions implemented at reopened branches could result in consumers becoming more comfortable with technology and seeing less need for face-to-face interaction. Our business is relationship driven and such changes could necessitate changes to our business practices to accommodate changing consumer behaviors. The Bank continues to adapt to these changing behaviors and launched its newly enhanced mobile banking application in April 2021, allowing customers to not only perform certain transactions virtually but also to integrate their financial information in one place and categorize their transactions to fit their budgeting or financial management needs. We continue to provide service to customers and operate our businesses on all islands of Hawaii, Guam and Saipan. Many of our employees continue to work remotely. We continue to emphasize the importance of practicing social distancing and good hygiene practices in the workplace, especially as more employees have returned to working in our physical offices and spaces.

Impact on our Financial Position and Results of Operations

We expect that COVID-19 will continue to impact commercial activity throughout the State of Hawaii and nationally, and thus continue to affect the way our customers (businesses and individuals), vendors and counterparties meet existing payment, or other, obligations to us. As Hawaii’s economy continues to reopen, we expect that local consumption of goods and services will continue to improve. Additionally, although forecasts of the Hawaii economy currently point towards more favorable results with the upcoming holiday season and the potential travel that accompanies it, the timing and extent of the recovery of the Hawaii tourism industry remains uncertain and is dependent upon, among other things, the number of cases declining around the globe, in the United States and, in particular, in Hawaii, public health impacts of new COVID-19 variants, the continued administration of the vaccine to unvaccinated populations, and the effectivity and the duration of immunity granted by current vaccines.

During this time of uncertainty, we remain committed to servicing our customers. The economic pressures and uncertainties arising from the COVID-19 pandemic have resulted in and may continue to result in specific changes in consumer and business spending and borrowing and saving habits, affecting the demand for loans and other products and services we offer. For example, certain industries may take longer to recover (particularly those that rely on visitors or in-person foot traffic) as certain consumers may still be hesitant to travel or return to full social interaction. Our credit risk profile has also been, and we expect that it will continue to be, adversely impacted during this period of financial hardship for our customers. We lend to customers operating in industries including tourism, hotels/lodging, restaurants, entertainment and commercial real estate, among others. We will continue to closely monitor the impact that COVID-19 has on our customers and will adjust the means by which we assist our customers during this period of financial hardship.

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The uncertainty of the economy as it recovers from the pandemic may continue to have a negative impact on our financial position and results of operations. A sustained period of lower interest rates would likely reduce our net interest margin, as, currently, our interest rate profile is such that we project net interest income will benefit from higher interest rates as our assets would reprice faster and to a greater degree than our liabilities, while in the case of lower interest rates, our assets would reprice downward and to a greater degree than our liabilities. Although the Federal Open Market Committee voted to keep short-term interest rates near zero in September 2021, the future continues to remain highly uncertain. Our net interest margin may also be reduced as a result of our participation in the PPP, as loans made thereunder that are not forgiven carry an interest rate of 1%.

In light of volatility in the capital markets and economic disruptions, we continue to carefully monitor our capital and liquidity positions. As of September 30, 2021, the Company was “well-capitalized” and met all applicable regulatory capital requirements, including a Common Equity Tier 1 (“CET1”) capital ratio of 12.63% compared to the minimum requirement of 4.50%. We continue to anticipate that we will have sufficient capital levels to meet all of these requirements. Additionally, we continue to access our routine short-term funding sources, such as borrowings and repurchase agreements, and our longer-term funding sources. For additional discussions regarding our capital and liquidity positions and related risks, refer to the sections titled “Liquidity” and “Capital” in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

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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)	2021			2020			2021			2020
Income Statement Data:
Interest income	$	137,204		$	141,927		$	408,002		$	441,078
Interest expense		4,611			7,925			14,770			40,571
Net interest income		132,593			134,002			393,232			400,507
Provision for credit losses		(4,000)			5,072			(39,000)			101,718
Net interest income after provision for credit losses		136,593			128,930			432,232			298,789
Noninterest income		50,104			48,898			143,343			143,782
Noninterest expense		101,036			91,629			296,730			279,545
Income before provision for income taxes		85,661			86,199			278,845			163,026
Provision for income taxes		21,382			21,098			70,132			39,011
Net income	$	64,279		$	65,101		$	208,713		$	124,015
Basic earnings per share	$	0.50		$	0.50		$	1.61		$	0.95
Diluted earnings per share	$	0.50		$	0.50		$	1.61		$	0.95
Basic weighted-average outstanding shares		128,660,038			129,896,054			129,323,973			129,882,878
Diluted weighted-average outstanding shares		129,210,448			130,085,534			129,895,311			130,129,690
Dividends declared per share	$	0.26		$	0.26		$	0.78		$	0.78
Dividend payout ratio		52.00	%		52.00	%		48.45	%		82.11	%
Supplemental Income Statement Data (non-GAAP)(1):
Core net interest income	$	132,593		$	134,002		$	393,232		$	400,507
Core noninterest income		50,104			48,874			143,241			143,884
Core noninterest expense		98,936			91,629			293,470			279,545
Core net income		65,819			65,083			211,216			124,090
Core basic earnings per share		0.51			0.50			1.63			0.96
Core diluted earnings per share		0.51			0.50			1.63			0.95
Other Financial Information / Performance Ratios(2):
Net interest margin		2.36	%		2.70	%		2.45	%		2.79	%
Core net interest margin (non-GAAP)(1),(3)		2.36	%		2.70	%		2.45	%		2.79	%
Efficiency ratio		55.07	%		50.01	%		55.10	%		51.32	%
Core efficiency ratio (non-GAAP)(1),(4)		53.92	%		50.02	%		54.51	%		51.31	%
Return on average total assets		1.02	%		1.16	%		1.16	%		0.76	%
Core return on average total assets (non-GAAP)(1),(5)		1.04	%		1.16	%		1.18	%		0.76	%
Return on average tangible assets (non-GAAP)(11)		1.06	%		1.21	%		1.21	%		0.80	%
Core return on average tangible assets (non-GAAP)(1),(6)		1.09	%		1.21	%		1.23	%		0.80	%
Return on average total stockholders' equity		9.31	%		9.58	%		10.26	%		6.16	%
Core return on average total stockholders' equity (non-GAAP)(1),(7)		9.54	%		9.57	%		10.38	%		6.17	%
Return on average tangible stockholders' equity (non-GAAP)(11)		14.63	%		15.16	%		16.19	%		9.79	%
Core return on average tangible stockholders' equity (non-GAAP)(1),(8)		14.98	%		15.15	%		16.38	%		9.80	%
Noninterest expense to average assets		1.60	%		1.63	%		1.65	%		1.72	%
Core noninterest expense to average assets (non-GAAP)(1),(9)		1.57	%		1.63	%		1.63	%		1.72	%
											(continued)

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(continued)	September 30,			December 31,
(dollars in thousands, except per share data)	2021			2020
Balance Sheet Data:
Cash and cash equivalents	$	2,399,082		$	1,040,944
Investment securities		7,953,727			6,071,415
Loans and leases		12,834,339			13,279,097
Allowance for credit losses for loans and leases		161,246			208,454
Goodwill		995,492			995,492
Total assets		25,548,322			22,662,831
Total deposits		22,120,003			19,227,723
Long-term borrowings		200,000			200,010
Total liabilities		22,836,588			19,918,727
Total stockholders' equity		2,711,734			2,744,104
Book value per share	$	21.14		$	21.12
Tangible book value per share (non-GAAP)(11)	$	13.38		$	13.46
Asset Quality Ratios:
Non-accrual loans and leases / total loans and leases		0.07	%		0.07	%
Allowance for credit losses for loans and leases / total loans and leases		1.26	%		1.57	%
Net charge-offs / average total loans and leases(10)		0.06	%		0.23	%

	September 30,			December 31,
Capital Ratios:	2021			2020
Common Equity Tier 1 Capital Ratio		12.63	%		12.47	%
Tier 1 Capital Ratio		12.63	%		12.47	%
Total Capital Ratio		13.88	%		13.73	%
Tier 1 Leverage Ratio		7.39	%		8.00	%
Total stockholders' equity to total assets		10.61	%		12.11	%
Tangible stockholders' equity to tangible assets (non-GAAP)(11)		6.99	%		8.07	%

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

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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)	2021			2020			2021			2020
Net interest income	$	132,593		$	134,002		$	393,232		$	400,507
Core net interest income (non-GAAP)	$	132,593		$	134,002		$	393,232		$	400,507
Noninterest income	$	50,104		$	48,898		$	143,343		$	143,782
(Gains) losses on sale of securities		—			(24)			(102)			102
Core noninterest income (non-GAAP)	$	50,104		$	48,874		$	143,241		$	143,884
Noninterest expense	$	101,036		$	91,629		$	296,730		$	279,545
Loss on litigation		(2,100)			—			(2,100)			—
One-time items(a)		—			—			(1,160)			—
Core noninterest expense (non-GAAP)	$	98,936		$	91,629		$	293,470		$	279,545
Net income	$	64,279		$	65,101		$	208,713		$	124,015
(Gains) losses on sale of securities		—			(24)			(102)			102
Loss on litigation		2,100			—			2,100			—
One-time noninterest expense items(a)		—			—			1,160			—
Tax adjustments(b)		(560)			6			(655)			(27)
Total core adjustments		1,540			(18)			2,503			75
Core net income (non-GAAP)	$	65,819		$	65,083		$	211,216		$	124,090
Basic earnings per share	$	0.50		$	0.50		$	1.61		$	0.95
Diluted earnings per share	$	0.50		$	0.50		$	1.61		$	0.95
Efficiency ratio		55.07	%		50.01	%		55.10	%		51.32	%
Core basic earnings per share (non-GAAP)	$	0.51		$	0.50		$	1.63		$	0.96
Core diluted earnings per share (non-GAAP)	$	0.51		$	0.50		$	1.63		$	0.95
Core efficiency ratio (non-GAAP)		53.92	%		50.02	%		54.51	%		51.31	%

(a) One-time items included severance costs.

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

(2) Except for the efficiency ratio and the core efficiency ratio, amounts are annualized for the three and nine months ended September 30, 2021 and 2020.

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

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

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

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

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(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 is annualized for the nine months ended September 30, 2021.

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

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

GAAP to Non-GAAP Reconciliation											Table 3
	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
(dollars in thousands, except per share data)	2021			2020			2021			2020
Income Statement Data:
Noninterest expense	$	101,036		$	91,629		$	296,730		$	279,545
Core noninterest expense	$	98,936		$	91,629		$	293,470		$	279,545
Net income	$	64,279		$	65,101		$	208,713		$	124,015
Core net income	$	65,819		$	65,083		$	211,216		$	124,090
Average total stockholders' equity	$	2,738,540		$	2,704,129		$	2,719,442		$	2,687,632
Less: average goodwill		995,492			995,492			995,492			995,492
Average tangible stockholders' equity	$	1,743,048		$	1,708,637		$	1,723,950		$	1,692,140
Average total assets	$	25,058,085		$	22,341,485		$	24,013,691		$	21,667,948
Less: average goodwill		995,492			995,492			995,492			995,492
Average tangible assets	$	24,062,593		$	21,345,993		$	23,018,199		$	20,672,456
Return on average total stockholders' equity(a)		9.31	%		9.58	%		10.26	%		6.16	%
Core return on average total stockholders' equity (non-GAAP)(a)		9.54	%		9.57	%		10.38	%		6.17	%
Return on average tangible stockholders' equity (non-GAAP)(a)		14.63	%		15.16	%		16.19	%		9.79	%
Core return on average tangible stockholders' equity (non-GAAP)(a)		14.98	%		15.15	%		16.38	%		9.80	%
Return on average total assets(a)		1.02	%		1.16	%		1.16	%		0.76	%
Core return on average total assets (non-GAAP)(a)		1.04	%		1.16	%		1.18	%		0.76	%
Return on average tangible assets (non-GAAP)(a)		1.06	%		1.21	%		1.21	%		0.80	%
Core return on average tangible assets (non-GAAP)(a)		1.09	%		1.21	%		1.23	%		0.80	%
Noninterest expense to average assets(a)		1.60	%		1.63	%		1.65	%		1.72	%
Core noninterest expense to average assets (non-GAAP)(a)		1.57	%		1.63	%		1.63	%		1.72	%

(continued)

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	As of			As of
(continued)	September 30,			December 31,
(dollars in thousands, except share amount and per share data)	2021			2020
Balance Sheet Data:
Total stockholders' equity	$	2,711,734		$	2,744,104
Less: goodwill		995,492			995,492
Tangible stockholders' equity	$	1,716,242		$	1,748,612
Total assets	$	25,548,322		$	22,662,831
Less: goodwill		995,492			995,492
Tangible assets	$	24,552,830		$	21,667,339
Shares outstanding		128,255,570			129,912,272
Total stockholders' equity to total assets		10.61	%		12.11	%
Tangible stockholders' equity to tangible assets (non-GAAP)		6.99	%		8.07	%
Book value per share	$	21.14		$	21.12
Tangible book value per share (non-GAAP)	$	13.38		$	13.46

(a) Annualized for the three and nine months ended September 30, 2021 and 2020.

Financial Highlights

Results of operations for the three and nine months ended September 30, 2021 and 2020 were significantly affected by the economic decline attributable to the onset of the COVID-19 pandemic that began to be felt in March 2020, as well as the economic improvements that occurred in the first nine months of 2021 as the Hawaii economy began to reopen and tourists started to return to Hawaii in more significant numbers.

Net income was $64.3 million for the three months ended September 30, 2021, a decrease of $0.8 million or 1% as compared to the same period in 2020. Basic and diluted earnings per share were both $0.50 per share for the three months ended September 30, 2021, flat as compared to the same period in 2020. The decrease in net income was primarily due to a $9.4 million increase in noninterest expense, a $1.4 million decrease in net interest income and a $0.3 million increase in the provision for income taxes for the three months ended September 30, 2021, partially offset by a negative provision for credit losses (the “Provision”) of $4.0 million for the three months ended September 30, 2021, compared to a Provision of $5.1 million for the three months ended September 30, 2020. In addition, the decrease in net income was also partially offset by a $1.2 million increase in noninterest income.

Our return on average total assets was 1.02% for the three months ended September 30, 2021, a decrease of 14 basis points from the same period in 2020, and our return on average total stockholders’ equity was 9.31% for the three months ended September 30, 2021, a decrease of 27 basis points from the same period in 2020. Our return on average tangible assets was 1.06% for the three months ended September 30, 2021, a decrease of 15 basis points from the same period in 2020, and our return on average tangible stockholders’ equity was 14.63% for the three months ended September 30, 2021, a decrease of 53 basis points from the same period in 2020. Our efficiency ratio was 55.07% for the three months ended September 30, 2021 compared to 50.01% for the same period in 2020.

Our results for the three months ended September 30, 2021 were highlighted by the following:

● Net interest income was $132.6 million for the three months ended September 30, 2021, a decrease of $1.4 million or 1% as compared to the same period in 2020. Our net interest margin was 2.36% for the three months ended September 30, 2021, a decrease of 34 basis points as compared to the same period in 2020. The decrease in net interest income was primarily due to lower average balances and yields in a few loan categories, due to the low interest rate environment, partially offset by higher average balances in our investment securities portfolio and lower deposit funding costs.

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● There was a negative Provision of $4.0 million for the three months ended September 30, 2021, compared to a Provision of $5.1 million for the same period in 2020. The negative Provision in 2021 was primarily due to lower expected credit losses as a result of the economic recovery and easing of restrictions related to the COVID-19  pandemic and the impact of the pandemic on Hawaii’s economy, key industries, businesses and our customers. The Provision is recorded to maintain the Allowance for Credit Losses (“ACL”) at levels deemed adequate to absorb lifetime expected credit losses in our loan and lease portfolio as of the balance sheet date.

● Noninterest income was $50.1 million for the three months ended September 30, 2021, an increase of $1.2 million or 2% as compared to the same period in 2020. The increase was primarily due to a $2.0 million increase in credit and debit card fees, a $1.2 million increase in other service charges and fees and a $0.5 million increase in service charges on deposit accounts. This was partially offset by a $2.3 million decrease in other noninterest income.

● Noninterest expense was $101.0 million for the three months ended September 30, 2021, an increase of $9.4 million or 10% compared to the same period in 2020. The increase in noninterest expense was primarily due to a $4.9 million increase in other noninterest expense, a $2.2 million increase in salaries and employee benefits, a $1.6 million increase in card rewards program expense and a $1.4 million increase in equipment expense, partially offset by a $0.6 million decrease in regulatory assessment and fees.

Net income was $208.7 million for the nine months ended September 30, 2021, an increase of $84.7 million or 68% as compared to the same period in 2020. Basic and diluted earnings per share were both $1.61 per share for the nine months ended September 30, 2021, an increase of $0.66 per share as compared to the same period in 2020. The increase in net income was primarily due to a negative Provision of $39.0 million for the nine months ended September 30, 2021, compared to a Provision of $101.7 million for the nine months ended September 30, 2020. This was partially offset by a $31.1 million increase in the provision for income taxes, a $17.2 million increase in noninterest expense, a $7.3 million decrease in net interest income and a $0.4 million decrease in noninterest income for the nine months ended September 30, 2021.

Our return on average total assets was 1.16% for the nine months ended September 30, 2021, an increase of 40 basis points from the same period in 2020, and our return on average total stockholders’ equity was 10.26% for the nine months ended September 30, 2021, up from 6.16% for the same period in 2020. Our return on average tangible assets was 1.21% for the nine months ended September 30, 2021, an increase of 41 basis points from the same period in 2020, and our return on average tangible stockholders’ equity was 16.19% for the nine months ended September 30, 2021, up from 9.79% for the same period in 2020. Our efficiency ratio was 55.10% for the nine months ended September 30, 2021 compared to 51.32% for the same period in 2020.

Our results for the nine months ended September 30, 2021 were highlighted by the following:

● Net interest income was $393.2 million for the nine months ended September 30, 2021, a decrease of $7.3 million or 2% as compared to the same period in 2020. Our net interest margin was 2.45% for the nine months ended September 30, 2021, a decrease of 34 basis points as compared to the same period in 2020. The decrease in net interest income was primarily due to lower average balances and yields in a few loan categories and lower yields in our investment securities portfolio, primarily due to the low interest rate environment. This was partially offset by higher average balances in our investment securities portfolio and lower deposit funding costs.

● There was a negative Provision of $39.0 million for the nine months ended September 30, 2021, compared to a Provision of $101.7 million for the same period in 2020. The negative Provision in 2021 was primarily due to lower expected credit losses as a result of the economic recovery and easing of restrictions related to the COVID-19 pandemic and the impact of the pandemic on Hawaii’s economy, key industries, businesses and our customers. The Provision is recorded to maintain the ACL at levels deemed adequate to absorb lifetime expected credit losses in our loan and lease portfolio as of the balance sheet date.

● Noninterest income was $143.3 million for the nine months ended September 30, 2021, a decrease of $0.4 million as compared to the same period in 2020. The decrease was primarily due to a $8.6 million decrease in other noninterest income, a $1.3 million decrease in Bank-owned life insurance (“BOLI”) income, a $1.1 million decrease in trust and investment services income and a $1.1 million decrease in service charges on deposit accounts, partially offset by a $7.4 million increase in credit and debit card fees and a $3.9 million increase in other service charges and fees.

56

● Noninterest expense was $296.7 million for the nine months ended September 30, 2021, an increase of $17.2 million or 6% as compared to the same period in 2020. The increase in noninterest expense was primarily due to a $7.3 million increase in other noninterest expense, a $4.9 million increase in salaries and employee benefits expense, a $3.4 million increase in equipment expense, a $2.1 million increase in contracted services and professional fees and a $0.5 million increase in card rewards program expense, partially offset by a $0.8 million decrease in regulatory assessment and fees.

Hawaii’s economy continues to be significantly impacted by COVID-19 and the responses to it. Because the Hawaii economy is heavily dependent on tourism, the combination of various response measures to the COVID-19 pandemic resulted in unprecedented fluxes in Hawaii unemployment and a slower economic recovery than the U.S. Mainland. While we saw visitor arrivals increase with looser travel restrictions in the second quarter and into July 2021, Governor Ige urged visitors in August to delay trips to Hawaii through the end of October, which may have resulted in lower visitor traffic in August and September. The timing and extent of the return of air travel and the recovery of the Hawaii tourism industry remains highly uncertain and beyond our control.

We continued to maintain high levels of liquidity and remained well-capitalized as of September 30, 2021. CET1 was 12.63% as of September 30, 2021, an increase of 16 basis points from December 31, 2020. The increase in CET1 was primarily due to earnings for the nine months ended September 30, 2021, including the $39.0 million negative Provision, partially offset by the dividends declared and paid to the Company’s stockholders. The U.S. government and bank regulatory agencies have enacted certain fiscal stimulus measures to counteract the economic disruption caused by COVID-19 and support the flow of credit to households and businesses. These actions have contributed to our continued high levels of liquidity.

● Total loans and leases were $12.8 billion as of September 30, 2021, a decrease of $444.8 million or 3% from December 31, 2020. The decrease was primarily due to a decrease in dealer flooring and PPP loans, partially offset by increases in our Shared National Credits, commercial real estate, residential mortgage and construction portfolios. The decrease in dealer flooring balances was driven by the global chip shortage that has been adversely impacting the automobile industry. Additionally, the aforementioned lag in Hawaii’s economic recovery in comparison to the U.S. Mainland has led to slower growth in loan demand within the Hawaii markets.

● The ACL was $161.2 million as of September 30, 2021, a decrease of $47.2 million or 23% from December 31, 2020. This decrease was primarily due to the $40.9 million negative Provision expense due to lower expected credit losses in the consumer and commercial real estate portfolios. The ratio of our ACL to total loans and leases outstanding was 1.26% as of September 30, 2021, a decrease of 31 basis points compared to December 31, 2020.

● We continued to invest in high-grade investment securities, primarily collateralized mortgage obligations issued by the Government National Mortgage Association (“Ginnie Mae”), the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) and mortgage-backed securities issued by Ginnie Mae, Freddie Mac, Fannie Mae and Municipal Housing Authorities. The total fair value of our investment securities portfolio was $8.0 billion as of September 30, 2021, an increase of $1.9 billion or 31% from December 31, 2020. The increase was primarily due to purchases in this portfolio as we invested excess liquidity into securities, partially offset by principal repayments.

● Total deposits were $22.1 billion as of September 30, 2021, an increase of $2.9 billion or 15% from December 31, 2020. The increase in total deposits was primarily due to a $1.4 billion increase in demand deposit balances, a $1.3 billion increase in savings deposit balances and a $682.0 million increase in money market deposit balances, partially offset by a $468.0 million decrease in time deposit balances.

● Total stockholders’ equity was $2.7 billion as of September 30, 2021, a decrease of $32.4 million or 1% from December 31, 2020. The decrease in stockholders’ equity was primarily due to dividends declared and paid to the Company’s stockholders of $100.9 million, a net unrealized loss in the fair value of our investment securities net of tax of $93.1 million and share repurchases of $53.5 million, partially offset by earnings for the period of $208.7 million.

57

Analysis of Results of Operations

Net Interest Income

For the three months ended September 30, 2021 and 2020, average balances, related income and expenses, on a fully taxable-equivalent basis, and resulting yields and rates are presented in Table 4. An analysis of the change in net interest income, on a fully taxable-equivalent basis, is presented in Table 5.

Average Balances and Interest Rates											Table 4
	Three Months Ended						Three Months Ended
	September 30, 2021						September 30, 2020
					Average							Average
	Average		Income/		Yield/		Average		Income/			Yield/
(dollars in millions)	Balance		Expense		Rate		Balance		Expense			Rate
Earning Assets
Interest-Bearing Deposits in Other Banks	$	2,356.4	$	0.9	0.16	%	$	889.6	$	0.2		0.10	%
Available-for-Sale Investment Securities
Taxable		6,654.6		22.9	1.37			5,308.5		20.2		1.52
Non-Taxable		561.1		2.9	2.11			25.7		0.1		2.11
Total Available-for-Sale Investment Securities		7,215.7		25.8	1.43			5,334.2		20.3		1.53
Loans Held for Sale		2.2		—	2.39			10.2		0.1		2.67
Loans and Leases (1)
Commercial and industrial		2,367.2		19.7	3.29			3,230.4		21.6		2.67
Commercial real estate		3,447.0		25.4	2.92			3,418.0		27.8		3.23
Construction		862.4		7.0	3.24			637.6		5.2		3.22
Residential:
Residential mortgage		3,866.1		34.6	3.58			3,680.5		37.9		4.12
Home equity line		837.7		5.5	2.62			871.1		6.6		3.02
Consumer		1,260.2		16.8	5.28			1,474.4		20.2		5.46
Lease financing		241.3		2.0	3.23			247.4		1.8		2.90
Total Loans and Leases		12,881.9		111.0	3.43			13,559.4		121.1		3.56
Other Earning Assets		77.0		0.3	1.34			53.3		0.5		3.32
Total Earning Assets (2)		22,533.2		138.0	2.44			19,846.7		142.2		2.86
Cash and Due from Banks		290.5						307.9
Other Assets		2,234.4						2,186.9
Total Assets	$	25,058.1					$	22,341.5
Interest-Bearing Liabilities
Interest-Bearing Deposits
Savings	$	6,886.0	$	0.6	0.03	%	$	5,768.3	$	0.6		0.04	%
Money Market		3,957.1		0.5	0.05			3,288.2		0.4		0.05
Time		1,884.4		2.1	0.45			3,029.8		5.2		0.69
Total Interest-Bearing Deposits		12,727.5		3.2	0.10			12,086.3		6.2		0.20
Short-Term Borrowings		—		—	—			45.1		0.3		2.69
Long-Term Borrowings		200.0		1.4	2.76			200.0		1.4		2.77
Total Interest-Bearing Liabilities		12,927.5		4.6	0.14			12,331.4		7.9		0.26
Net Interest Income			$	133.4					$	134.3
Interest Rate Spread					2.30	%						2.60	%
Net Interest Margin					2.36	%						2.70	%
Noninterest-Bearing Demand Deposits		8,894.3						6,805.7
Other Liabilities		497.7						500.3
Stockholders' Equity		2,738.6						2,704.1
Total Liabilities and Stockholders' Equity	$	25,058.1					$	22,341.5

(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) Interest income includes taxable-equivalent basis adjustments of $0.8 million and $0.3 million for the three months ended September 30, 2021 and 2020, respectively.

58

Analysis of Change in Net Interest Income						Table 5
	Three Months Ended September 30, 2021
	Compared to September 30, 2020
(dollars in millions)	Volume		Rate		Total (1)
Change in Interest Income:
Interest-Bearing Deposits in Other Banks	$	0.5	$	0.2	$	0.7
Available-for-Sale Investment Securities
Taxable		4.8		(2.1)		2.7
Non-Taxable		2.8		—		2.8
Total Available-for-Sale Investment Securities		7.6		(2.1)		5.5
Loans Held for Sale		(0.1)		—		(0.1)
Loans and Leases
Commercial and industrial		(6.3)		4.4		(1.9)
Commercial real estate		0.2		(2.6)		(2.4)
Construction		1.8		—		1.8
Residential:
Residential mortgage		1.8		(5.1)		(3.3)
Home equity line		(0.2)		(0.9)		(1.1)
Consumer		(2.8)		(0.6)		(3.4)
Lease financing		—		0.2		0.2
Total Loans and Leases		(5.5)		(4.6)		(10.1)
Other Earning Assets		0.1		(0.3)		(0.2)
Total Change in Interest Income		2.6		(6.8)		(4.2)
Change in Interest Expense:
Interest-Bearing Deposits
Savings		0.1		(0.1)		—
Money Market		0.1		—		0.1
Time		(1.6)		(1.5)		(3.1)
Total Interest-Bearing Deposits		(1.4)		(1.6)		(3.0)
Short-term Borrowings		(0.2)		(0.1)		(0.3)
Total Change in Interest Expense		(1.6)		(1.7)		(3.3)
Change in Net Interest Income	$	4.2	$	(5.1)	$	(0.9)

(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 $133.4 million for the three months ended September 30, 2021, a decrease of $0.9 million or 1% compared to the same period in 2020. Our net interest margin was 2.36% for the three months ended September 30, 2021, a decrease of 34 basis points from the same period in 2020. The decrease in net interest income, on a fully taxable-equivalent basis, was primarily due to lower average balances and yields in a few loan categories, partially offset by higher average balances in our investment securities portfolio and lower deposit funding costs during the three months ended September 30, 2021. Fees are accelerated into net interest income upon the forgiveness of PPP loans. Net interest income for the three months ended September 30, 2021 and 2020 included $7.7 million and $5.6 million, respectively, of fees from PPP loans. As of September 30, 2021, there were approximately $15.3 million of additional fees remaining on our PPP loans that had not yet been recognized into income.

For the three months ended September 30, 2021, the average balance of our loans and leases was $12.9 billion, a decrease of $677.5 million or 5% compared to the same period in 2020. Yields on our loans and leases were 3.43% for the three months ended September 30, 2021, a decrease of 13 basis points as compared to the same period in 2020. We experienced a decrease in our yields from total loans primarily due to decreases in our residential mortgage and commercial real estate loans. This was partially offset by an increase in our yields from commercial and industrial loans. The adjustable rate commercial real estate loans are typically based on the LIBOR. Increases in the yield on commercial and industrial loans stemmed from higher PPP loan fees as these fees were accelerated into income upon the forgiveness of the loans. For the three months ended September 30, 2021, the average balance of our investment securities portfolio was $7.2 billion, an increase of $1.9 billion or 35% compared to the same period in 2020. Deposit funding costs were $3.2 million for the three months ended September 30, 2021, a decrease of $3.0 million or 48% compared to the same period in 2020 primarily due to a decrease in interest rates. Rates paid on our interest-bearing deposits were 10 basis points for the three months ended September 30, 2021, a decrease of 10 basis points compared to the same period in 2020.

59

For the nine months ended September 30, 2021 and 2020, 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, 2021							September 30, 2020
	Average		Income/		Yield/			Average		Income/		Yield/
(dollars in millions)	Balance		Expense		Rate			Balance		Expense		Rate
Earning Assets
Interest-Bearing Deposits in Other Banks	$	1,604.6	$	1.5		0.13	%	$	947.3	$	2.2	0.31	%
Available-for-Sale Investment Securities
Taxable		6,303.5		67.5		1.43			4,579.8		59.0	1.72
Non-Taxable		436.9		6.9		2.11			8.9		0.1	2.11
Total Available-for-Sale Investment Securities		6,740.4		74.4		1.47			4,588.7		59.1	1.72
Loans Held for Sale		4.4		0.1		2.31			11.9		0.2	2.31
Loans and Leases(1)
Commercial and industrial		2,756.2		61.2		2.97			3,202.4		70.5	2.94
Commercial real estate		3,417.5		75.6		2.96			3,423.9		90.7	3.54
Construction		803.8		19.2		3.19			586.9		15.8	3.59
Residential:
Residential mortgage		3,776.5		103.3		3.65			3,700.8		111.3	4.01
Home equity line		824.1		16.7		2.71			881.2		21.1	3.20
Consumer		1,287.1		51.4		5.34			1,537.5		63.9	5.55
Lease financing		243.2		5.7		3.10			236.4		5.1	2.90
Total Loans and Leases		13,108.4		333.1		3.39			13,569.1		378.4	3.72
Other Earning Assets		65.9		0.8		1.65			57.3		1.6	3.78
Total Earning Assets(2)		21,523.7		409.9		2.54			19,174.3		441.5	3.07
Cash and Due from Banks		291.7							310.1
Other Assets		2,198.3							2,183.5
Total Assets	$	24,013.7						$	21,667.9
Interest-Bearing Liabilities
Interest-Bearing Deposits
Savings	$	6,410.9	$	1.7		0.04	%	$	5,454.7	$	4.7	0.12	%
Money Market		3,758.3		1.5		0.05			3,208.1		6.1	0.25
Time		2,067.7		7.4		0.48			2,966.9		19.6	0.88
Total Interest-Bearing Deposits		12,236.9		10.6		0.12			11,629.7		30.4	0.35
Short-Term Borrowings		—		—		—			279.9		6.0	2.87
Long-Term Borrowings		200.0		4.2		2.76			200.0		4.2	2.77
Total Interest-Bearing Liabilities		12,436.9		14.8		0.16			12,109.6		40.6	0.45
Net Interest Income			$	395.1						$	400.9
Interest Rate Spread						2.38	%					2.62	%
Net Interest Margin						2.45	%					2.79	%
Noninterest-Bearing Demand Deposits		8,358.5							6,365.5
Other Liabilities		498.9							505.2
Stockholders' Equity		2,719.4							2,687.6
Total Liabilities and Stockholders' Equity	$	24,013.7						$	21,667.9

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

(2) Interest income includes taxable-equivalent basis adjustments of $1.9 million and $0.4 million for the nine months ended September 30, 2021 and 2020, respectively.

60

Analysis of Change in Net Interest Income						Table 7
	Nine Months Ended September 30, 2021
	Compared to September 30, 2020
(dollars in millions)	Volume		Rate		Total(1)
Change in Interest Income:
Interest-Bearing Deposits in Other Banks	$	1.0	$	(1.7)	$	(0.7)
Available-for-Sale Investment Securities
Taxable		19.6		(11.1)		8.5
Non-Taxable		6.8		—		6.8
Total Available-for-Sale Investment Securities		26.4		(11.1)		15.3
Loans Held for Sale		(0.1)		—		(0.1)
Loans and Leases
Commercial and industrial		(10.0)		0.7		(9.3)
Commercial real estate		(0.2)		(14.9)		(15.1)
Construction		5.3		(1.9)		3.4
Residential:
Residential mortgage		2.2		(10.2)		(8.0)
Home equity line		(1.3)		(3.1)		(4.4)
Consumer		(10.1)		(2.4)		(12.5)
Lease financing		0.2		0.4		0.6
Total Loans and Leases		(13.9)		(31.4)		(45.3)
Other Earning Assets		0.2		(1.0)		(0.8)
Total Change in Interest Income		13.6		(45.2)		(31.6)
Change in Interest Expense:
Interest-Bearing Deposits
Savings		0.7		(3.7)		(3.0)
Money Market		0.9		(5.5)		(4.6)
Time		(4.9)		(7.3)		(12.2)
Total Interest-Bearing Deposits		(3.3)		(16.5)		(19.8)
Short-Term Borrowings		(3.0)		(3.0)		(6.0)
Total Change in Interest Expense		(6.3)		(19.5)		(25.8)
Change in Net Interest Income	$	19.9	$	(25.7)	$	(5.8)

(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 $395.1 million for the nine months ended September 30, 2021, a decrease of $5.8 million or 1% compared to the same period in 2020. Our net interest margin was 2.45% for the nine months ended September 30, 2021, a decrease of 34 basis points from the same period in 2020. The decrease in net interest income, on a fully taxable-equivalent basis, was primarily due to lower average balances and yields in a few loan categories and lower yields in our investment securities portfolio. This was partially offset by higher average balances in our investment securities portfolio and lower deposit funding costs. Fees are accelerated into net interest income upon the forgiveness of PPP loans. Net interest income for the nine months ended September 30, 2021 and 2020 included $21.7 million and $9.3 million, respectively, of fees from PPP loans. As of September 30, 2021, there were approximately $15.3 million of additional fees remaining on our PPP loans that had not yet been recognized into income.

For the nine months ended September 30, 2021, the average balance of our loans and leases was $13.1 billion, a decrease of $460.7 million or 3% compared to the same period in 2020. Yields on our loans and leases were 3.39% for the nine months ended September 30, 2021, a decrease of 33 basis points as compared to the same period in 2020. We experienced a decrease in our yield from total loans primarily due to decreases in commercial real estate and residential mortgage. The decrease in our adjustable rate commercial real estate loans are typically based on LIBOR. For the nine months ended September 30, 2021, the average balance of our investment securities portfolio was $6.7 billion, an increase of $2.2 billion or 47% compared to the same period in 2020. For the nine months ended September 30, 2021, the yield in our investment securities portfolio was 1.47%, a decrease of 25 basis points compared to the same period in 2020. Deposit funding costs were $10.6 million for the nine months ended September 30, 2021, a decrease of $19.8 million or 65% compared to the same period in 2020. Rates paid on our interest-bearing deposits were 12 basis points for the nine months ended September 30, 2021, a decrease of 23 basis points compared to the same period in 2020.

61

The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is affected by changes in the prime interest rate. The prime rate at the start of 2020 was 4.75%. The prime rate decreased 150 basis points in March 2020 to 3.25%, where it remained as at the end of the third quarter of 2021. As noted above, our loan portfolio is also impacted by changes in the LIBOR. At September 30, 2021, the one-month and three-month U.S. dollar LIBOR interest rates were 0.08% and 0.13%, respectively, while at September 30, 2020, the one-month and three-month U.S. dollar LIBOR interest rates were 0.15% and 0.23%, respectively. The target range for the federal funds rate, which is the cost of immediately available overnight funds, began 2020 at 1.50% to 1.75%. The target range for the federal funds rate decreased 150 basis points in March 2020 to 0.00% to 0.25%, where it remained as at the end of the third quarter of 2021. In September 2021, the Federal Reserve indicated that it expects to maintain the targeted federal funds rate at current levels through 2021. The decrease in the target range for the federal funds rate in 2020 was largely an emergency measure by the Federal Reserve aimed at mitigating the economic impact of COVID-19.

Provision for Credit Losses

There was a negative Provision of $4.0 million for the three months ended September 30, 2021, compared to a Provision of $5.1 million for the same period in 2020. This decrease was primarily due to lower expected credit losses as a result of the economic recovery and easing of restrictions related to the COVID-19 pandemic and the impact of the pandemic on Hawaii’s economy, key industries, businesses and our customers. We recorded net charge-offs of loans and leases of $0.6 million for the three months ended September 30, 2021 and net recoveries of loans and leases of $0.1 million for the three months ended September 30, 2020. This represented charge-offs of 0.02% and nil of average loans and leases, on an annualized basis, for the three months ended September 30, 2021 and 2020, respectively. There was a negative Provision of $39.0 million for the nine months ended September 30, 2021, compared to a Provision of $101.7 million for the same period in 2020. We recorded net charge-offs of loans and leases of $6.3 million and $29.4 million for the nine months ended September 30, 2021 and 2020, respectively. This represented net charge-offs of 0.06% and 0.29% of average loans and leases, on an annualized basis, for the nine months ended September 30, 2021 and 2020, respectively. The ACL was $161.2 million as of September 30, 2021, a decrease of $47.2 million or 23% from December 31, 2020 and represented 1.26% of total outstanding loans and leases as of September 30, 2021 compared to 1.57% of total outstanding loans and leases as of December 31, 2020. The reserve for unfunded commitments was $32.5 million as of September 30, 2021, compared to $30.6 million as of December 31, 2020. The Provision is recorded to maintain the ACL and the reserve for unfunded commitments at levels deemed adequate by management based on the factors noted in the “Risk Governance and Quantitative and Qualitative Disclosures About Market Risk — Credit Risk” section of this MD&A.

Noninterest Income

Table 8 presents the major components of noninterest income for the three months ended September 30, 2021 and 2020 and Table 9 presents the major components of noninterest income for the nine months ended September 30, 2021 and 2020:

Noninterest Income							Table 8
	Three Months Ended
	September 30,				Dollar		Percent
(dollars in thousands)	2021		2020		Change		Change
Service charges on deposit accounts	$	6,989	$	6,523	$	466	7	%
Credit and debit card fees		16,017		14,049		1,968	14
Other service charges and fees		10,233		9,021		1,212	13
Trust and investment services income		8,625		8,664		(39)	—
Bank-owned life insurance		4,841		4,903		(62)	(1)
Investment securities gains, net		—		24		(24)	n/m
Other		3,399		5,714		(2,315)	(41)
Total noninterest income	$	50,104	$	48,898	$	1,206	2	%

n/m – Denotes a variance that is not a meaningful metric to inform the change in noninterest income for the three months ended September 30, 2021 to the same period in 2020.

62

Noninterest Income							Table 9
	Nine Months Ended
	September 30,				Dollar		Percent
(dollars in thousands)	2021		2020		Change		Change
Service charges on deposit accounts	$	20,339	$	21,400	$	(1,061)	(5)	%
Credit and debit card fees		47,314		39,868		7,446	19
Other service charges and fees		29,382		25,472		3,910	15
Trust and investment services income		25,824		26,919		(1,095)	(4)
Bank-owned life insurance		10,334		11,595		(1,261)	(11)
Investment securities gains (losses), net		102		(102)		204	n/m
Other		10,048		18,630		(8,582)	(46)
Total noninterest income	$	143,343	$	143,782	$	(439)	—	%

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, 2021 to the same period in 2020.

Total noninterest income was $50.1 million for the three months ended September 30, 2021, an increase of $1.2 million or 2% as compared to the same period in 2020. Total noninterest income was $143.3 million for the nine months ended September 30, 2021, a decrease of $0.4 million as compared to the same period in 2020. Total noninterest income was bolstered by the gradual reopening of Hawaii’s economy and upturn in tourism during the three and nine months ended September 30, 2021.

Service charges on deposit accounts were $7.0 million for the three months ended September 30, 2021, an increase of $0.5 million or 7% as compared to the same period in 2020. This increase was primarily due to a $0.4 million increase in overdraft and checking account fees. Service charges on deposit accounts were $20.3 million for the nine months ended September 30, 2021, a decrease of $1.1 million or 5% as compared to the same period in 2020. This decrease was primarily due to a $0.6 million decrease in checking account service fees, a $0.4 million decrease in overdraft and checking account fees and a $0.2 million decrease in account analysis service charges, partially offset by a $0.4 million increase in ATM interchange fees from customers.

Credit and debit card fees were $16.0 million for the three months ended September 30, 2021, an increase of $2.0 million or 14% as compared to the same period in 2020. This increase was primarily due to a $1.5 million increase in merchant service revenues, a $1.4 million increase in interchange settlement fees and a $0.2 million increase in debit card interchange fees, partially offset by a $1.3 million increase in network association dues. Credit and debit card fees were $47.3 million for the nine months ended September 30, 2021, an increase of $7.4 million or 19% as compared to the same period in 2020. This increase was primarily due to a $2.8 million increase in interchange settlement fees, a $2.6 million increase in merchant service revenues, a $1.2 million increase in ATM interchange and surcharge fees and a $0.8 million increase in debit card interchange fees.

Other service charges and fees were $10.2 million for the three months ended September 30, 2021, an increase of $1.2 million or 13% as compared to the same period in 2020. This increase was primarily due to a $0.7 million increase in fees from annuities and securities, a $0.3 million increase in arranger fees and a $0.2 million increase in cash management service fees. Other service charges and fees were $29.4 million for the nine months ended September 30, 2021, an increase of $3.9 million or 15% as compared to the same period in 2020. This increase was primarily due to a $2.5 million increase in fees from annuities and securities, a $1.6 million increase in arranger fees, a $0.3 million increase in online banking fees and a $0.3 million increase in cash management service fees, partially offset by a $0.7 million decrease in service fees related to participation loans.

Trust and investment services income was $8.6 million for the three months ended September 30, 2021, a minimal change as compared to the same period in 2020. Trust and investment services income was $25.8 million for the nine months ended September 30, 2021, a decrease of $1.1 million or 4% as compared to the same period in 2020. This decrease was primarily due to a $1.7 million decrease in business cash management fees, a $0.2 million decrease in money market fund management fees, a $0.2 million decrease in personal property agency account fees and a $0.2 million decrease in tax services. This was partially offset by a $0.8 million increase in investment management fees and a $0.7 million increase in irrevocable trust fees.

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BOLI income was $4.8 million for the three months ended September 30, 2021, a decrease of $0.1 million or 1% as compared to the same period in 2020. BOLI income was $10.3 million for the nine months ended September 30, 2021, a decrease of $1.3 million or 11% as compared to the same period in 2020. This decrease was due to a $2.6 million decrease in BOLI earnings, partially offset by a $1.3 million increase in death benefit proceeds from life insurance policies.

Net gains on the sale of investment securities were approximately nil for both the three months ended September 30, 2021 and 2020. Net gains on the sale of investment securities were $0.1 million for the nine months ended September 30, 2021, an increase of $0.2 million as compared to the same period in 2020.

Other noninterest income was $3.4 million for the three months ended September 30, 2021, a decrease of $2.3 million or 41% as compared to the same period in 2020. This decrease was primarily due to a $2.5 million decrease in gains on the sale of residential loans to government-sponsored enterprises, a $0.9 million decrease in volume-based incentives, a $0.2 million decrease in net mortgage servicing rights and a $0.2 million decrease in customer-related interest rate swap fees, partially offset by a $1.5 million increase in gains on the sale of bank properties. Other noninterest income was $10.0 million for nine months ended September 30, 2021, a decrease of $8.6 million or 46% as compared to the same period in 2020. This decrease was primarily due to a $5.0 million decrease in customer-related interest rate swap fees, a $3.7 million decrease in gains on the sale of residential loans to government-sponsored enterprises, a $1.0 million decrease in volume-based incentives, a $0.7 million decrease in market adjustments on mutual funds purchased and a $0.6 million decrease in market adjustments for foreign exchange transactions. This was partially offset by a $2.1 million increase in gains on the sale of bank properties.

Noninterest Expense

Table 10 presents the major components of noninterest expense for the three months ended September 30, 2021 and 2020 and Table 11 presents the major components of noninterest expense for the nine months ended September 30, 2021 and 2020:

Noninterest Expense							Table 10
	Three Months Ended
	September 30,					Dollar	Percentage
(dollars in thousands)	2021		2020			Change	Change
Salaries and employee benefits	$	46,484	$	44,291	$	2,193	5	%
Contracted services and professional fees		15,042		15,073		(31)	—
Occupancy		6,790		6,921		(131)	(2)
Equipment		6,549		5,137		1,412	27
Regulatory assessment and fees		1,828		2,445		(617)	(25)
Advertising and marketing		1,469		1,374		95	7
Card rewards program		6,676		5,046		1,630	32
Other		16,198		11,342		4,856	43
Total noninterest expense	$	101,036	$	91,629	$	9,407	10	%

Noninterest Expense							Table 11
	Nine Months Ended
	September 30,				Dollar		Percentage
(dollars in thousands)	2021		2020		Change		Change
Salaries and employee benefits	$	136,402	$	131,534	$	4,868	4	%
Contracted services and professional fees		48,746		46,606		2,140	5
Occupancy		21,274		21,466		(192)	(1)
Equipment		18,402		15,052		3,350	22
Regulatory assessment and fees		5,688		6,491		(803)	(12)
Advertising and marketing		4,529		4,599		(70)	(2)
Card rewards program		17,773		17,224		549	3
Other		43,916		36,573		7,343	20
Total noninterest expense	$	296,730	$	279,545	$	17,185	6	%

Total noninterest expense was $101.0 million for the three months ended September 30, 2021, an increase of $9.4 million or 10% as compared to the same period in 2020. Total noninterest expense was $296.7 million for the nine months ended September 30, 2021, an increase of $17.2 million or 6% as compared to the same period in 2020.

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Salaries and employee benefits expense was $46.5 million for the three months ended September 30, 2021, an increase of $2.2 million or 5% as compared to the same period in 2020. This increase was primarily due to a $2.0 million increase in incentive compensation, a $1.2 million increase in temporary help expenses, a $0.4 million increase in group health plan costs and a $0.3 million increase in base salaries and related payroll taxes. This was partially offset by a $1.9 million increase in payroll and benefit costs being deferred as loan origination costs. Salaries and employee benefits expense was $136.4 million for the nine months ended September 30, 2021, an increase of $4.9 million or 4% as compared to the same period in 2020. This increase was primarily due to a $2.8 million increase in temporary help expenses, a $2.6 million increase in other compensation, including a nonrecurring severance cost of $1.2 million, a $1.9 million increase in base salaries and related payroll taxes, a $1.4 million increase in incentive compensation, a $1.0 million increase in group health plan costs, a $0.8 million increase in retirement plan expenses and a $0.5 million increase in employee overtime pay expense. This was partially offset by a $6.6 million increase in payroll and benefit costs being deferred as loan origination costs.

Contracted services and professional fees were $15.0 million for the three months ended September 30, 2021, a minimal change as compared to the same period in 2020. Contracted services and professional fees were $48.7 million for the nine months ended September 30, 2021, an increase of $2.1 million or 5% as compared to the same period in 2020. This increase was primarily due to a $1.4 million increase in outside services, primarily attributable to marketing and new customer services, and a $0.5 million increase in contracted data processing expenses, primarily related to system upgrades and product enhancements.

Occupancy expense was $6.8 million for three months ended September 30, 2021, a decrease of $0.1 million or 2% as compared to the same period in 2020. Occupancy expense was $21.3 million for nine months ended September 30, 2021, a decrease of $0.2 million or 1% as compared to the same period in 2020.

Equipment expense was $6.5 million for the three months ended September 30, 2021, an increase of $1.4 million or 27% as compared to the same period in 2020. This increase was primarily due to a $1.4 million increase in technology-related license and maintenance fees. Equipment expense was $18.4 million for the nine months ended September 30, 2021, an increase of $3.4 million or 22% as compared to the same period in 2020. This increase was primarily due to a $3.6 million increase in technology-related license and maintenance fees.

Regulatory assessment and fees were $1.8 million for the three months ended September 30, 2021, a decrease of $0.6 million or 25% as compared to the same period in 2020. This decrease was primarily due to a $0.6 million decrease in the FDIC insurance assessment. Regulatory assessment and fees were $5.7 million for the nine months ended September 30, 2021, a decrease of $0.8 million or 12% as compared to the same period in 2020. This decrease was primarily due to a $0.8 million decrease in the FDIC insurance assessment.

Advertising and marketing expense was $1.5 million for the three months ended September 30, 2021, an increase of $0.1 million or 7% as compared to the same period in 2020. Advertising and marketing expense was $4.5 million for the nine months ended September 30, 2021, a decrease of $0.1 million or 2% as compared to the same period in 2020.

Card rewards program expense was $6.7 million for the three months ended September 30, 2021, an increase of $1.6 million or 32% as compared to the same period in 2020. This increase was primarily due to a $1.1 million increase in interchange fees paid to our credit card partners and a $0.5 million increase in priority rewards card redemptions. Card rewards program expense was $17.8 million for the nine months ended September 30, 2021, an increase of $0.5 million or 3% as compared to the same period in 2020. This increase was primarily due to a $1.1 million increase in interchange fees paid to our credit card partners and a $0.3 million increase in credit card cash reward redemptions, partially offset by a $0.8 million decrease in priority rewards card redemptions.

Other noninterest expense was $16.2 million for the three months ended September 30, 2021, an increase of $4.9 million or 43% as compared to the same period in 2020. This increase was primarily due to a $2.1 million loss on litigation, a $1.1 million increase in software amortization, a $0.5 million operational loss, a $0.4 million increase in pension-related expenses, a $0.2 million increase in shipping and delivery expenses, a $0.2 million increase in client meals and entertainment expenses and a $0.2 million increase in other insurance expense. Other noninterest expense was $43.9 million for the nine months ended September 30, 2021, an increase of $7.3 million or 20% as compared to the same period in 2020. This increase was primarily due to a $3.2 million increase in software amortization, a $2.1 million loss on litigation, a $1.1 million increase in pension-related expenses, a $0.5 million operational loss, a $0.5 million increase in other insurance expense and a $0.4 million increase in brokers fees, partially offset by a $0.7 million decrease in charitable contributions.

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Provision for Income Taxes

The provision for income taxes was $21.4 million (an effective tax rate of 24.96%) for the three months ended September 30, 2021, compared with the provision for income taxes of $21.1 million (an effective tax rate of 24.48%) for the same period in 2020. The provision for income taxes was $70.1 million (an effective tax rate of 25.15%) for the nine months ended September 30, 2021, compared with the provision for income taxes of $39.0 million (an effective tax rate of 23.93%) for the same period in 2020. The increase in the effective tax rate was primarily from the recognition of a tax benefit for the nine months ended September 30, 2020, due to a state tax settlement with BNP Paribas USA, Inc. related to periods during which the Company was included in the state combined returns of BNP Paribas USA, Inc. A similar tax benefit was not recognized during the nine months ended September 30, 2021. In addition, the significant increase in pre-tax income for the nine months ended September 30, 2021 caused the permanent tax benefit to have a disproportionately lesser impact on the effective tax rate as compared to the same periods in 2020.

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, 2021 and 2020. Additional information about operating segment performance is presented in “Note 17. Reportable Operating Segments” contained in our unaudited interim consolidated financial statements.

In the second quarter of 2021, the Company made changes to the internal measurement of segment operating profits for the purpose of evaluating segment performance and resource allocation. The primary reason for the change was to align PPP loan balances within the business segment that directly manages them. Specifically, PPP loan balances previously included as part of the Retail Banking segment have been reclassified to the Commercial Banking segment. The reallocation of select PPP loan balances affected net interest income, net interest income after provision for credit losses, noninterest expense, provision for income taxes, net income and asset balances. The Company has reported its selected financial information using the new PPP loan balance alignments for the three and nine months ended September 30, 2021. The Company has restated the selected financial information for the three and nine months ended September 30, 2020 in order to conform with the current presentation.

Business Segment Net Income								Table 12
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(dollars in thousands)	2021		2020		2021		2020
Retail Banking	$	46,782	$	46,640	$	141,522	$	95,627
Commercial Banking		28,128		25,917		92,592		42,612
Treasury and Other		(10,631)		(7,456)		(25,401)		(14,224)
Total	$	64,279	$	65,101	$	208,713	$	124,015

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

Net income for the Retail Banking segment was $46.8 million for the three months ended September 30, 2021, an increase of $0.1 million as compared to the same period in 2020. The increase in net income for the Retail Banking segment was primarily due to a negative Provision of $3.1 million for the three months ended September 30, 2021, compared to a Provision of $2.1 million for the three months ended September 30, 2020. The increase in net income for the Retail Banking segment also stemmed from a $0.8 million increase in net interest income. This was partially offset by a $3.7 million increase in noninterest expense and a $2.0 million decrease in noninterest income. The decrease in the Provision was primarily due to lower expected credit losses as a result of the economic recovery after COVID-19 and its impact on Hawaii’s economy, key industries, businesses and our customers. The increase in net interest income was primarily due to lower deferred loan costs and an increase in net transfer pricing credits on interest expenses from deposits as a result of higher average deposit balances, partially offset by lower yields on our deposit portfolio and a decrease in consumer loan income. The increase in noninterest expense was primarily due to higher overall expenses that were allocated to the Retail Banking segment and loss on litigation, partially offset by decreases in salaries and benefits expense and occupancy expense. The decrease in noninterest income was primarily due to lower gains on the sale of residential mortgage loans.

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Net income for the Retail Banking segment was $141.5 million for the nine months ended September 30, 2021, an increase of $45.9 million or 48% as compared to the same period in 2020. The increase in net income for the Retail Banking segment was primarily due to a negative Provision of $17.2 million for the nine months ended September 30, 2021, compared to a Provision of $46.5 million for the nine months ended September 30, 2020. The increase in net income for the Retail Banking segment also stemmed from a $10.8 million increase in net interest income. This was partially offset by a $17.1 million increase in the provision for income taxes, a $7.1 million increase in noninterest expense and a $4.4 million decrease in noninterest income. The decrease in the Provision was primarily due to lower expected credit losses as a result of the economic recovery after COVID-19 and its impact on Hawaii’s economy, key industries, businesses and our customers. The increase in net interest income was primarily due to a higher spread on our residential mortgage loan portfolio and an increase in net transfer pricing credits on interest expenses from deposits as a result of higher average deposit balances, partially offset by lower yields on our deposit portfolio. The increase in the provision for income taxes was primarily due to the increase in pretax income. The increase in noninterest expense was primarily due to higher overall expenses that were allocated to the Retail Banking segment and loss on litigation, partially offset by decreases in salaries and benefits expense and occupancy expense. The decrease in noninterest income was primarily due to lower gains on the sale of residential mortgage loans and decreases in service charges and deposit accounts, trust and investment services income and market adjustments for foreign exchange transactions, partially offset by an increase in other service charges and fees.

Total assets for the Retail Banking segment was relatively flat during the nine months ended September 30, 2021.

Commercial Banking.  Our Commercial Banking segment includes our corporate banking, commercial real estate loans, commercial lease financing, automobile loans and auto dealer financing, business deposit products and credit cards that we provide primarily to middle market and large companies in Hawaii, Guam, Saipan and California.

Net income for the Commercial Banking segment was $28.1 million for the three months ended September 30, 2021, an increase of $2.2 million or 9% as compared to the same period in 2020. The increase in net income for the Commercial Banking segment was primarily due to a negative Provision of $4.2 million for the three months ended September 30, 2021, compared to a Provision of $1.5 million for the three months ended September 30, 2020. The increase in net income for the Commercial Banking segment also stemmed from a $2.4 million increase in net interest income and a $1.6 million increase in noninterest income, partially offset by a $6.5 million increase in noninterest expense and a $1.1 million increase in the provision for income taxes. The decrease in the Provision was primarily due to lower expected credit losses as a result of the economic recovery after COVID-19 and its impact on Hawaii’s economy, key industries, businesses and our customers. The increase in net interest income was primarily due to an increase in loan fees. The increase in noninterest income was primarily due to an increase in credit and debit card fees and other services charges and fees, partially offset by a decrease in volume-based incentives. The increase in noninterest expense was primarily due to increases in salaries and benefits expense, card rewards program expense, higher overall expenses that were allocated to the Commercial Banking segment and an operational loss. The increase in the provision for income taxes was primarily due to the increase in pretax income.

Net income for the Commercial Banking segment was $92.6 million for the nine months ended September 30, 2021, an increase of $50.0 million as compared to the same period in 2020. The increase in net income for the Commercial Banking segment was primarily due to a negative Provision of $23.7 million for the nine months ended September 30, 2021, compared to a Provision of $47.5 million for the nine months ended September 30, 2020. The increase in net income for the Commercial Banking segment also stemmed from a $8.9 million increase in net interest income and a $1.4 million increase in noninterest income, partially offset by a $17.1 million increase in the provision for income taxes and a $14.4 million increase in noninterest expense. The decrease in the Provision was primarily due to lower expected credit losses as a result of the economic recovery after COVID-19 and its impact on Hawaii’s economy, key industries, businesses and our customers. The increase in net interest income was primarily due to an increase in loan fees, partially offset by a decrease in commercial and industrial and credit card loan income. The increase in noninterest income was primarily due to increases in credit and debit card fees and other services charges and fees, partially offset by decreases in customer-related interest rate swap fees and volume-based incentives. The increase in the provision for income taxes was primarily due to the increase in pretax income. The increase in noninterest expense was primarily due to increases in salaries and benefits expense, higher overall expenses that were allocated to the Commercial Banking segment, an operational loss and increases in card rewards program expense, supplies and occupancy expense.

The decrease in total assets for the Commercial Banking segment was primarily due to a decrease in dealer flooring and PPP loans, partially offset by increases in our commercial real estate and construction portfolios during the nine months ended September 30, 2021.

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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 $10.6 million for the three months ended September 30, 2021, an increase in loss of $3.2 million or 43% as compared to the same period in 2020. The increase in net loss for the Treasury and Other segment was primarily due to a $4.6 million increase in net interest expense and a $1.9 million increase in the Provision, partially offset by a $1.5 million increase in noninterest income and a $1.0 million increase in the benefit for income taxes. The increase in net interest expense was primarily due to lower earnings credits as a result of lower average balances and yields in our loan portfolio. This was partially offset by higher average balances in our investment securities portfolio and a decrease in net transfer pricing charges on interest expenses from deposits as a result of lower yields on our deposit portfolio, partially offset by higher average deposit balances. The increase in the Provision was primarily due to the increase in the reserve for unfunded commitments. The increase in noninterest income was primarily due to an increase in gains on the sale of bank properties. The increase in the benefit for income taxes was primarily due to the increase in pretax loss.

Net loss for the Treasury and Other segment was $25.4 million for the nine months ended September 30, 2021, an increase in loss of $11.2 million or 79% as compared to the same period in 2020. The increase in net loss was primarily due to a $27.0 million increase in net interest expense. This was partially offset by a $5.8 million decrease in the Provision, a $4.3 million decrease in noninterest expense, a $3.1 million increase in the benefit for income taxes and a $2.6 million increase in noninterest income. The increase in net interest expense was primarily due to lower earnings credits as a result of lower average balances and yields in our loan portfolio. This was partially offset by higher average balances in our investment securities portfolio, a decrease in borrowings and a decrease in net transfer pricing charges on interest expenses from deposits as a result of lower yields on our deposit portfolio, partially offset by higher average deposit balances. The decrease in the Provision was due to lower increases in the Provision related to the reserve for unfunded commitments. The decrease in noninterest expense was primarily due to higher overall expenses that led to a larger credit allocation to the Treasury and Other segment, partially offset by increases in salaries and benefits expense, software amortization, equipment expenses, contracted services and professional fees, occupancy expense and pension-related expenses. The increase in the benefit for income taxes was primarily due to the increase in pretax loss. The increase in noninterest income was primarily due to increases in gains on the sale of bank properties and credit and debit card fees, partially offset by a decrease in BOLI income.

The increase in total assets for the Treasury and Other segment was primarily due to increases in our investment securities portfolio and interest-bearing deposits in other banks during the nine months ended September 30, 2021.

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.

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Liquidity is managed to ensure stable, reliable and cost-effective sources of funds to satisfy demand for credit, deposit withdrawals and investment opportunities. Funding requirements are impacted by loan originations and refinancings, deposit balance changes, liability issuances and settlements and off-balance sheet funding commitments. We consider and comply with various regulatory and internal guidelines regarding required liquidity levels and periodically monitor our liquidity position in light of the changing economic environment and customer activity. Based on periodic liquidity assessments, we may alter our asset, liability and off-balance sheet positions. The Company’s Asset Liability Management Committee (“ALCO”) monitors sources and uses of funds and modifies asset and liability positions as liquidity requirements change. This process, combined with our ability to raise funds in money and capital markets and through private placements, provides flexibility in managing the exposure to liquidity risk.

Immediate liquid resources are available in cash, which is primarily on deposit with the Federal Reserve Bank of San Francisco (the “FRB”). As of September 30, 2021 and December 31, 2020, cash and cash equivalents were $2.4 billion and $1.0 billion, respectively. Potential sources of liquidity also include investment securities in our available-for-sale portfolio. The carrying value of our available-for-sale investment securities were $8.0 billion and $6.1 billion as of September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021 and December 31, 2020, we maintained our excess liquidity primarily in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac and mortgage-backed securities issued by Ginnie Mae, Freddie Mac, Fannie Mae and Municipal Housing Authorities. As of September 30, 2021, our available-for-sale investment securities portfolio was comprised of securities with a weighted average life of approximately 5.5 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, 2021, we have borrowing capacity of $1.7 billion from the FHLB and $1.2 billion from the FRB based on the amount of collateral pledged.

Our core deposits have historically provided us with a long-term source of stable and relatively lower cost of funding. Our core deposits, defined as all deposits exclusive of time deposits exceeding $250,000, totaled $21.2 billion and $17.9 billion as of September 30, 2021 and December 31, 2020, which represented 96% and 93%, respectively, of our total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company; however, deposit levels could decrease if interest rates increase significantly or if corporate customers increase investing activities and reduce deposit balances.

The Company’s routine funding requirements are expected to consist primarily of general corporate needs and capital to be returned to our shareholders. We expect to meet these obligations from dividends paid by the Bank to the Parent. Additional sources of liquidity available to us include selling residential real estate loans in the secondary market, taking out short- and long-term borrowings and issuing long-term debt and equity securities. At the start of the pandemic, we increased our liquidity position through additional public time deposits in anticipation of a surge in funding needs due to our participation in the PPP and other additional liquidity needs. While our public time deposits have since decreased from the fourth quarter of 2020, we have continued to maintain high levels of liquidity as of September 30, 2021.

Investment Securities

Table 13 presents the estimated fair value of our available-for-sale investment securities portfolio as of September 30, 2021 and December 31, 2020:

Investment Securities				Table 13
	September 30,		December 31,
(dollars in thousands)	2021		2020
U.S. Treasury and government agency debt securities	$	187,861	$	171,421
Mortgage-backed securities:
Residential - Government agency		98,134		160,462
Residential - Government-sponsored enterprises		1,458,878		447,200
Commercial - Government agency		448,594		599,650
Commercial - Government-sponsored enterprises		1,301,249		932,157
Collateralized mortgage obligations:
Government agency		2,059,864		1,933,553
Government-sponsored enterprises		2,399,147		1,826,972
Total available-for-sale securities	$	7,953,727	$	6,071,415

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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, 2021:

Maturities and Weighted-Average Yield on Securities(1)																						Table 14
	1 Year or Less				After 1 Year - 5 Years				After 5 Years - 10 Years				Over 10 Years				Total
			Weighted				Weighted				Weighted				Weighted				Weighted
			Average				Average				Average				Average				Average		Fair
(dollars in millions)	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Value
As of September 30, 2021
Available-for-sale securities
U.S. Treasury and government agency debt securities	$	—	—	%	$	41.5	0.84	%	$	83.2	1.03	%	$	64.2	1.57	%	$	188.9	1.17	%	$	187.9
Mortgage-backed securities(2):
Residential - Government agency		—	—			95.3	2.26			—	—			—	—			95.3	2.26			98.1
Residential - Government-sponsored enterprises		—	—			1,327.5	1.39			127.9	1.35			—	—			1,455.4	1.39			1,458.9
Commercial - Government agency		2.0	2.59			370.2	2.03			76.9	1.85			—	—			449.1	2.00			448.6
Commercial - Government-sponsored enterprises		—	—			130.4	1.46			556.6	1.69			650.9	2.10			1,337.9	1.86			1,301.2
Collateralized mortgage obligations(2):
Government agency		14.6	1.74			1,290.0	1.62			748.6	1.27			—	—			2,053.2	1.49			2,059.9
Government-sponsored enterprises		17.7	1.97			965.9	1.18			1,430.9	1.34			—	—			2,414.5	1.28			2,399.1
Total available-for-sale securities as of September 30, 2021	$	34.3	1.91	%	$	4,220.8	1.48	%	$	3,024.1	1.39	%	$	715.1	2.05	%	$	7,994.3	1.50	%	$	7,953.7

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

(2) Maturities for mortgage-backed securities and collateralized mortgage obligations anticipate future prepayments.

The fair value of our available-for-sale investment securities portfolio was $8.0 billion as of September 30, 2021, an increase of $1.9 billion or 31% compared to December 31, 2020. Our available-for-sale investment securities are carried at fair value with changes in fair value reflected in other comprehensive income or through the Provision.

As of September 30, 2021, we maintained all of our investment securities in the available-for-sale category recorded at fair value in the unaudited interim consolidated balance sheets, with $4.5 billion invested in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac. Our available-for-sale portfolio also included $3.3 billion in mortgage-backed securities issued by Ginnie Mae, Freddie Mac, Fannie Mae and Municipal Housing Authorities and $187.9 million in debt securities issued by the U.S Treasury and government agencies (US International Development Finance Corporation bonds).

We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability and the level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds we deploy into investment securities and change the composition of our investment securities portfolio.

Gross unrealized gains in our investment securities portfolio were $45.8 million and $97.1 million as of September 30, 2021 and December 31, 2020, respectively. Gross unrealized losses in our investment securities portfolio were $86.3 million and $10.7 million as of September 30, 2021 and December 31, 2020, respectively. The decrease in unrealized gains and increase in unrealized loss in our investment securities portfolio was primarily due to higher market interest rates as of September 30, 2021, relative to December 31, 2020, resulting in a lower valuation. Additionally, the decrease in unrealized gains and increase in unrealized loss positions was primarily related to our commercial mortgage-backed securities, mortgage-backed securities and collateralized mortgage obligations, the fair values of which are sensitive to changes in market interest rates.

We conduct a regular assessment of our investment securities portfolio to determine whether any securities are impaired. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and the ACL is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through the ACL is recognized in other comprehensive income. For the three and nine months ended September 30, 2021, we did not record any credit losses related to our investment securities portfolio.

We are required to hold non-marketable equity securities, comprised of FHLB stock, as a condition of our membership in the FHLB system. Our FHLB stock is accounted for at cost, which equals par or redemption value. As of both September 30, 2021 and December 31, 2020, we held FHLB stock of $18.1 million, which is recorded as a component of other assets in our unaudited interim consolidated balance sheets.

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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, 2021 and December 31, 2020:

Loans and Leases				Table 15
	September 30,		December 31,
(dollars in thousands)	2021		2020
Commercial and industrial:
Commercial and industrial excluding Paycheck Protection Program loans	$	1,692,315	$	2,218,266
Paycheck Protection Program loans		503,069		801,241
Total commercial and industrial		2,195,384		3,019,507
Commercial real estate		3,569,768		3,392,676
Construction		826,078		735,819
Residential:
Residential mortgage		3,914,632		3,690,218
Home equity line		852,074		841,624
Total residential		4,766,706		4,531,842
Consumer		1,238,714		1,353,842
Lease financing		237,689		245,411
Total loans and leases	$	12,834,339	$	13,279,097

Total loans and leases were $12.8 billion as of September 30, 2021, a decrease of $444.8 million or 3% from December 31, 2020. The decrease in total loans and leases was primarily due to decreases in commercial and industrial loans and consumer loans, partially offset by increases in residential mortgage loans, commercial real estate loans and construction loans. It is possible that the continued effects of COVID-19 on the economy could result in less demand for our loan products.

Commercial and industrial loans are made primarily to corporations, middle market and small businesses for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes. We also offer a variety of automobile dealer flooring lines to our customers in Hawaii and California to assist with the financing of their inventory. Commercial and industrial loans were $2.2 billion as of September 30, 2021, a decrease of $824.1 million or 27% from December 31, 2020. This decrease was primarily due to a decrease in dealer flooring and PPP loans, partially offset by an increase in our Shared National Credits during the nine months ended September 30, 2021. The decrease in dealer flooring balances was driven by the global chip shortage that has been adversely impacting the automobile industry.

Commercial real estate loans are secured by first mortgages on commercial real estate at loan to value (“LTV”) ratios generally not exceeding 75% and a minimum debt service coverage ratio of 1.20 to 1. The commercial properties are predominantly apartments, neighborhood and grocery anchored retail, industrial, office, and to a lesser extent, specialized properties such as hotels. The primary source of repayment for investor property and owner-occupied property is cash flow from the property and operating cash flow from the business, respectively. Commercial real estate loans were $3.6 billion as of September 30, 2021, an increase of $177.1 million or 5% from December 31, 2020. This increase was primarily due to an increase in U.S. Mainland commercial real estate loans during nine months ended September 30, 2021.

Construction loans are for the purchase or construction of a property for which repayment will be generated by the property. Loans in this portfolio are primarily for the purchase of land, as well as for the development of commercial properties, single family homes and condominiums. We classify loans as construction until the completion of the construction phase. Following completion of the construction phase, if a loan is retained by the Bank, the loan is reclassified to the commercial real estate or residential real estate classes of loans. Construction loans were $826.1 million as of September 30, 2021, an increase of $90.3 million or 12% from December 31, 2020. The increase in construction loans was primarily due to the funding of U.S. Mainland and Hawaii construction loan draws during the nine months ended September 30, 2021.

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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 $4.8 billion as of September 30, 2021, an increase of $234.9 million or 5% from December 31, 2020. This increase was primarily due to increases in residential mortgages of $224.4 million and home equity lines of $10.5 million during the nine months ended September 30, 2021.

Consumer loans consist primarily of open- and closed-end direct and indirect credit facilities for personal, automobile and household purchases as well as credit card loans. We seek to maintain reasonable levels of risk in consumer lending by following prudent underwriting guidelines, which include an evaluation of personal credit history, cash flow and collateral values based on existing market conditions. Consumer loans were $1.2 billion as of September 30, 2021, a decrease of $115.1 million or 9% from December 31, 2020. The decrease in consumer loans was primarily due to decreases in indirect automobile loans and other unsecured consumer loans.

Lease financing consists of commercial single investor leases and leveraged leases. Underwriting of new lease transactions is based on our lending policy, including but not limited to an analysis of customer cash flows and secondary sources of repayment, including the value of leased equipment, the guarantors’ cash flows and/or other credit enhancements. No new leveraged leases are being added to the portfolio and all remaining leveraged leases are running off. Lease financing was $237.7 million as of September 30, 2021, a decrease of $7.7 million or 3% from December 31, 2020. The reduction was reflective of weak demand for new business equipment and vehicles in the Hawaii market.

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

The Company’s loan and lease portfolio includes adjustable-rate loans, primarily tied to Prime and LIBOR, hybrid-rate loans, for which the initial rate is fixed for a period from one year to as much as ten years, and fixed rate loans, for which the interest rate does not change through the life of the loan. Table 16 presents the recorded investment in our loan and lease portfolio as of September 30, 2021 by rate type:

Loans and Leases by Rate Type																							Table 16
	September 30, 2021
	Adjustable Rate															Hybrid			Fixed
(dollars in thousands)	Prime			LIBOR			Treasury			Other			Total			Rate			Rate			Total
Commercial and industrial	$	257,412		$	1,095,188		$	—		$	2,478		$	1,355,078		$	39,162		$	801,144		$	2,195,384
Commercial real estate		290,048			1,979,638			—			881,493			3,151,179			128,961			289,628			3,569,768
Construction		141,985			555,542			25			23,404			720,956			3,645			101,477			826,078
Residential:
Residential mortgage		20,456			174,687			74,257			62,498			331,898			289,271			3,293,463			3,914,632
Home equity line		350,032			—			5,253			—			355,285			496,774			15			852,074
Total residential		370,488			174,687			79,510			62,498			687,183			786,045			3,293,478			4,766,706
Consumer		291,971			3,823			1,004			91			296,889			74			941,751			1,238,714
Lease financing		—			—			—			—			—			—			237,689			237,689
Total loans and leases	$	1,351,904		$	3,808,878		$	80,539		$	969,964		$	6,211,285		$	957,887		$	5,665,167		$	12,834,339
% by rate type at September 30, 2021		10	%		30	%		1	%		8	%		49	%		7	%		44	%		100	%

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Tables 17 and 18 present the geographic distribution of our loan and lease portfolio as of September 30, 2021 and December 31, 2020:

Geographic Distribution of Loan and Lease Portfolio										Table 17
	September 30, 2021
			U.S.		Guam &		Foreign &
(dollars in thousands)	Hawaii		Mainland(1)		Saipan		Other		Total
Commercial and industrial	$	1,244,745	$	798,646	$	138,591	$	13,402	$	2,195,384
Commercial real estate		2,169,986		1,003,768		395,817		197		3,569,768
Construction		421,949		397,771		6,358		—		826,078
Residential:
Residential mortgage		3,787,211		1,369		126,052		—		3,914,632
Home equity line		823,419		—		28,655		—		852,074
Total residential		4,610,630		1,369		154,707		—		4,766,706
Consumer		925,065		16,901		295,042		1,706		1,238,714
Lease financing		71,279		150,502		15,908		—		237,689
Total Loans and Leases	$	9,443,654	$	2,368,957	$	1,006,423	$	15,305	$	12,834,339
Percentage of Total Loans and Leases		73%		18%		8%		1%		100%

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

Geographic Distribution of Loan and Lease Portfolio										Table 18
	December 31, 2020
			U.S.		Guam &		Foreign &
(dollars in thousands)	Hawaii		Mainland(1)		Saipan		Other		Total
Commercial and industrial	$	1,755,804	$	1,042,318	$	193,829	$	27,556	$	3,019,507
Commercial real estate		2,180,829		809,493		402,142		212		3,392,676
Construction		333,112		398,218		4,489		—		735,819
Residential:
Residential mortgage		3,568,827		1,662		119,729		—		3,690,218
Home equity line		811,964		—		29,660		—		841,624
Total residential		4,380,791		1,662		149,389		—		4,531,842
Consumer		1,001,868		18,993		331,255		1,726		1,353,842
Lease financing		80,670		149,934		14,807		—		245,411
Total Loans and Leases	$	9,733,074	$	2,420,618	$	1,095,911	$	29,494	$	13,279,097
Percentage of Total Loans and Leases		73%		18%		8%		1%		100%

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

Our lending activities are concentrated primarily in Hawaii. However, we also have lending activities on the U.S. mainland, Guam and Saipan. Our commercial lending activities on the U.S. mainland include automobile dealer flooring activities in California, participation in the Shared National Credits Program and selective commercial real estate projects based on existing customer relationships. Our lease financing portfolio includes commercial leveraged and single investor lease financing activities both in Hawaii and on the U.S. mainland. However, no new leveraged leases are being added to the portfolio and all remaining leveraged leases are running off. Our consumer lending activities are concentrated primarily in Hawaii and, to a smaller extent, in Guam and Saipan.

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Table 19 presents certain contractual loan maturity categories and the sensitivities of those loans to changes in interest rates as of September 30, 2021:

Maturities for Selected Loan Categories(1)								Table 19
	September 30, 2021
	Due in One		Due After One		Due After
(dollars in thousands)	Year or Less		to Five Years		Five Years		Total
Commercial and industrial	$	583,515	$	1,225,115	$	386,754	$	2,195,384
Construction		266,060		415,609		144,409		826,078
Total Selected Loans	$	849,575	$	1,640,724	$	531,163	$	3,021,462
Total of loans with:
Adjustable interest rates	$	683,331	$	934,701	$	458,002	$	2,076,034
Hybrid interest rates		—		36,986		5,821		42,807
Fixed interest rates		166,244		669,037		67,340		902,621
Total Selected Loans	$	849,575	$	1,640,724	$	531,163	$	3,021,462

(1) Based on contractual maturities.

Credit Quality

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

For purposes of managing credit risk and estimating the ACL, management has identified three portfolio segments (commercial, residential and consumer) that we use to develop our systematic methodology to determine the ACL. The categorization of loans for the evaluation of credit risk is specific to our credit risk evaluation process and these loan categories are not necessarily the same as the loan categories used for other evaluations of our loan portfolio. See “Note 4. Allowance for Credit Losses” contained in our unaudited interim consolidated financial statements for more information about our approach to estimating the ACL.

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

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

Table 20 presents information on our non-performing assets and accruing loans and leases past due 90 days or more as of September 30, 2021 and December 31, 2020:

Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More					Table 20
	September 30,			December 31,
(dollars in thousands)	2021			2020
Non-Performing Assets
Non-Accrual Loans and Leases
Commercial Loans:
Commercial and industrial	$	746		$	518
Commercial real estate		745			80
Construction		—			2,043
Total Commercial Loans		1,491			2,641
Residential Loans:
Residential mortgage		7,137			6,441
Total Residential Loans		7,137			6,441
Total Non-Accrual Loans and Leases		8,628			9,082
Total Non-Performing Assets	$	8,628		$	9,082
Accruing Loans and Leases Past Due 90 Days or More
Commercial Loans:
Commercial and industrial	$	439		$	2,108
Commercial real estate		—			882
Construction		—			93
Total Commercial Loans		439			3,083
Residential Loans:
Residential mortgage		100			—
Home equity line		3,871			4,818
Total Residential Loans		3,971			4,818
Consumer		1,376			3,266
Total Accruing Loans and Leases Past Due 90 Days or More	$	5,786		$	11,167
Restructured Loans on Accrual Status and Not Past Due 90 Days or More	$	36,234		$	16,684
Total Loans and Leases	$	12,834,339		$	13,279,097
Ratio of Non-Accrual Loans and Leases to Total Loans and Leases		0.07	%		0.07	%
Ratio of Non-Performing Assets to Total Loans and Leases and OREO		0.07	%		0.07	%
Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More to Total Loans and Leases and OREO		0.11	%		0.15	%

Table 21 presents the activity in Non-Performing Assets (“NPAs”) for the nine months ended September 30, 2021 and 2020:

Non-Performing Assets				Table 21
	Nine Months Ended September 30,
(dollars in thousands)	2021		2020
Balance at beginning of period	$	9,082	$	5,787
Additions		5,602		51,146
Reductions
Payments		(1,539)		(6,890)
Return to accrual status		(2,512)		(567)
Sales of other real estate owned		—		(766)
Transfers to loans held for sale		(1,840)		(14,566)
Charge-offs/write-downs		(165)		(16,511)
Total Reductions		(6,056)		(39,300)
Balance at end of period	$	8,628	$	17,633

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

Total NPAs were $8.6 million as of September 30, 2021, a decrease of $0.5 million or 5% from December 31, 2020. The ratio of our NPAs to total loans and leases and other real estate owned was 0.07% as of both September 30, 2021 and December 31, 2020. During the nine months ended September 30, 2021, construction non-accrual loans decreased by $2.0 million, offset by increases in commercial real estate non-accrual loans of $0.7 million, residential mortgage non-accrual loans of $0.7 million and commercial and industrial non-accrual loans of $0.2 million.

As of September 30, 2021, commercial real estate non-accrual loans were $0.7 million, an increase of $0.7 million from December 31, 2020. This increase was due to the addition of a $0.9 million commercial real estate loan, partially offset by payments.

As of September 30, 2021, commercial and industrial non-accrual loans were $0.7 million, an increase of $0.2 million or 44% from December 31, 2020. This increase was primarily due to additions in commercial and industrial loans totaling $0.5 million, partially offset by payments and charge-offs.

As of September 30, 2021, construction non-accrual loans were nil, a decrease of $2.0 million from December 31, 2020. This decrease was primarily due to a $1.8 million transfer to loans held for sale and payments of $0.6 million, partially offset by an addition of $0.4 million.

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, 2021, residential mortgage non-accrual loans were $7.1 million, an increase of $0.7 million or 11% from December 31, 2020. This increase was primarily due to additions of residential mortgage non-accrual loans totaling $3.8 million, partially offset by returns to accrual status of $2.5 million and payments of $0.6 million. As of September 30, 2021, our residential mortgage non-accrual loans were comprised of 35 loans with a weighted average current LTV ratio of 45%.

Other real estate owned represents property acquired as the result of borrower defaults on loans. Other real estate owned is recorded at fair value, less estimated selling costs, at the time of foreclosure. On an ongoing basis, properties are appraised as required by market conditions and applicable regulations. As of both September 30, 2021 and December 31, 2020, there were no other real estate owned.

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 $5.8 million as of September 30, 2021, a decrease of $5.4 million or 48% as compared to December 31, 2020. This decrease was primarily due to decreases in consumer loans of $1.9 million, commercial and industrial loans of $1.7 million, home equity lines of $0.9 million and commercial real estate loans of $0.9 million that were past due 90 days or more and still accruing interest.

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.

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Total impaired loans were $45.0 million and $25.8 million as of September 30, 2021 and December 31, 2020, respectively. These impaired loans had a related ACL of $4.4 million and $2.4 million as of September 30, 2021 and December 31, 2020, respectively. The increase in impaired loans during the nine months ended September 30, 2021 was due to increases in consumer loans of $16.0 million, residential mortgage loans of $3.7 million, commercial real estate loans of $0.8 million and commercial and industrial loans of $0.2 million, partially offset by a decrease in construction loans of $1.3 million. The change in the impaired loans balance includes charge-offs and paydowns. For both the three months ended September 30, 2021 and 2020, we recorded charge-offs of $0.1 million, and $0.9 million and $16.5 million during the nine months ended September 30, 2021 and 2020, respectively, related to our total impaired loans. Our impaired loans are considered in management’s assessment of the overall adequacy of the ACL.

If interest due on the balances of all non-accrual loans as of  September 30, 2021 had been accrued under the original terms, approximately $0.1 million and $0.3 million in additional interest income would have been recorded during the three and nine months ended September 30, 2021, respectively, and $0.3 million and $0.9 million during the three and nine months ended September 30, 2020, respectively. Actual interest income recorded on these loans was $0.2 million and $0.4 million, for the three and nine months ended September 30, 2021, respectively, compared to $0.1 million and $0.2 million during the three and nine months ended September 30, 2020, respectively.

COVID-19 Financial Hardship Relief Programs

Certain borrowers have been unable to meet their contractual payment obligations because of the adverse effects of COVID-19. To help mitigate these effects, we have been offering various relief programs to assist customers who are experiencing financial hardship due to COVID-19. For example, for certain residential mortgage and commercial loans, various relief options were available on a case-by-case basis, including payment deferrals for up to six months. For certain consumer loans, loan assistance was being offered in the form of payment deferrals for up to three months, which extended the term of the loan by the number of months deferred, and interest continued to accrue on the principal balance. The short-term modifications for payment deferrals, extensions of repayment terms, or delays in payment described above that are insignificant and made on a good faith basis in response to borrowers impacted by COVID-19 who were current prior to any relief are not required to be accounted for and disclosed as TDRs under GAAP. See “Note 4. Allowance for Credit Losses” in the notes to our unaudited interim consolidated financial statements for further discussion on short-term modifications.

Table 22 presents information on the portion of our loans and leases balance as of September 30, 2021 that received payment deferrals under our COVID-19 financial hardship relief programs:

Loans and Leases that Received Payment Deferrals under COVID-19 Financial Hardship Relief Programs				Table 22
	September 30, 2021
	Number of Loans		Amortized
(dollars in thousands)	and Leases		Cost Basis
Loans and Leases that Received Payment Deferrals under COVID-19 Financial Hardship Relief Programs
Commercial and industrial		742	$	372,125
Commercial real estate		379		1,042,057
Construction		21		48,893
Lease financing		47		9,662
Residential mortgage		1,180		457,520
Consumer		17,691		179,941
Total Loans and Leases that Received Payment Deferrals under COVID-19 Financial Hardship Relief Programs		20,060	$	2,110,198
Total Loans and Leases			$	12,834,339
Ratio of Loans and Leases that Received Payment Deferrals under COVID-19 Financial Hardship Relief Programs to Total Loans and Leases				16.4	%

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In addition to the relief programs described above, we also participated in the PPP offered by the SBA. The PPP is intended to help small businesses impacted by the COVID-19 pandemic by providing “fully forgivable” loans for up to $10 million to cover payroll expenses, including employee benefits, and can also be used for various other eligible expenses. PPP loans have a fixed interest rate of one percent per annum and a maturity date of up to five years, with the ability to prepay the loan in full without penalty. The first payment is deferred until the date the SBA remits the borrower’s loan forgiveness amount to the Bank, or if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period. Interest will continue to accrue during the initial deferment period. The borrower may apply with the Bank for loan forgiveness of the amount due on the loan in an amount equal to payroll, employee benefits, and other eligible expenses incurred, subject to limitations, in accordance with the PPP and CARES Act, as amended by the PPPF Act and CAA. Because the purpose of the PPP is to help small businesses keep their workers employed and paid, if the business spends less than 60% of loan proceeds on payroll costs, uses the loan proceeds for non-payroll costs that are not eligible expenses, or significantly reduces its employee count or compensation levels without qualifying for other exceptions, a portion of the loan will not be forgiven, and the business will be required to repay that portion of the loan to the Bank over the remaining term of the loan.

Table 23 presents information on our PPP loans outstanding as of September 30, 2021 and December 31, 2020 to borrowers operating in industries we consider to be the most impacted by the COVID-19 pandemic (“high impact industries”) and all other industries:

PPP Loans Outstanding to Borrowers by Industry									Table 23
	September 30, 2021					December 31, 2020
	Number		Amortized			Number		Amortized
(dollars in thousands)	of Loans		Cost Basis			of Loans		Cost Basis
PPP Loans Outstanding to Borrowers by Industry
High Impact Industries:
Food service		477	$	120,958			587	$	107,839
Automobile dealers		27		21,119			65		54,202
Retail		259		25,577			494		52,153
Hospitality/Hotel		91		52,950			91		55,382
Transportation		97		22,582			161		32,763
Total PPP Loans Outstanding to Borrowers Operating in High Impact Industries		951		243,186			1,398		302,339
All other industries (1)		1,939		259,883			4,334		498,902
Total PPP Loans Outstanding (2)		2,890	$	503,069			5,732	$	801,241
Total Loans and Leases			$	12,834,339				$	13,279,097
Ratio of PPP Loans Outstanding to Borrowers Operating in High Impact Industries to Total Loans and Leases				1.9	%				2.3	%
Ratio of PPP Loans Outstanding to Total Loans and Leases				3.9	%				6.0	%

(1) “All other industries” represent borrowers that received PPP loans that did not operate in the five high impact industries listed above, which is primarily comprised of the construction, health care, professional services, and administrative and support services industries.

(2) At September 30, 2021, outstanding loan balances are reported net of deferred loan costs and fees of $0.9 million and $15.3 million, respectively. At December 31, 2020, outstanding loan balances are reported net of deferred loan costs and fees of $1.5 million and $14.7 million, respectively.

Loans Modified in a Troubled Debt Restructuring

Table 24 presents information on loans whose terms have been modified in a TDR as of September 30, 2021 and December 31, 2020:

Loans Modified in a Troubled Debt Restructuring				Table 24
	September 30,		December 31,
(dollars in thousands)	2021		2020
Commercial and industrial	$	2,421	$	2,298
Commercial real estate		7,244		7,126
Construction		699		—
Total commercial		10,364		9,424
Residential mortgage		11,232		7,553
Total residential		11,232		7,553
Consumer		15,950		—
Total	$	37,546	$	16,977

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Loans modified in a TDR were $37.5 million as of September 30, 2021, compared to $17.0 million as of December 31, 2020. This increase was primarily due to increases in consumer loans of $16.0 million, residential mortgages of $3.7 million and construction loans of $0.7 million. As of September 30, 2021, $36.2 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 Credit Losses” contained in our unaudited interim consolidated financial statements and “Analysis of Financial Condition — COVID-19 Financial Hardship Relief Programs” for more information and a description of the modification programs that we currently offer to our customers.

As noted above, we have been providing our borrowers with opportunities to defer payments, or portions thereof. In the absence of intervening factors, such short-term modifications made on a good faith basis are not categorized as troubled debt restructurings, nor are loans granted payment deferrals related to COVID-19 reported as past due or placed on non-accrual status (provided the loans were not past due or on non-accrual status prior to the deferral).

Allowance for Credit Losses for Loans and Leases & Reserve for Unfunded Commitments

We adopted the provisions of Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments on January 1, 2020. This guidance changed the accounting for credit losses from an “incurred loss” model, which estimates a loss allowance based on current known and inherent losses within a loan portfolio to an “expected loss” model, which estimates a loss based on losses expected to be recorded over the life of the loan portfolio.

Effective January 1, 2020, we recorded a pre-tax cumulative effect adjustment to increase the ACL by $0.8 million and to increase the reserve for unfunded commitments by $16.3 million. The Company’s ACL under CECL is significantly more dependent on the quantitative model and less on the qualitative assessment, compared to the previous incurred loss model. The increase in the ACL was primarily related to our indirect auto, commercial real estate and consumer loan products. This was partially offset by the decrease in the ACL related to our commercial and industrial, home equity lines and residential real estate loan products. These directional changes were predominantly due to differences between the loss emergence periods previously used under the incurred loss methodology and the remaining life of the loan as required under CECL. The large increase to our reserve for unfunded commitments was primarily due to an increase in utilization rates estimated using our CECL methodology.

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Table 25 presents an analysis of our ACL for the periods indicated:

Allowance for Credit Losses											Table 25
	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2021			2020			2021			2020
Balance at Beginning of Period	$	169,148		$	192,120		$	208,454		$	130,530
Adjustment to Adopt ASC Topic 326		—			—			—			770
After Adoption of ASC Topic 326		169,148			192,120			208,454			131,300
Loans and Leases Charged-Off
Commercial Loans:
Commercial and industrial		(224)			(598)			(1,517)			(14,773)
Commercial real estate		—			—			(66)			(2,723)
Construction		—			—			—			(379)
Total Commercial Loans		(224)			(598)			(1,583)			(17,875)
Residential Loans:
Residential mortgage		—			—			(98)			(14)
Home equity line		(235)			—			(235)			(8)
Total Residential Loans		(235)			—			(333)			(22)
Consumer		(2,926)			(4,238)			(13,384)			(21,742)
Total Loans and Leases Charged-Off		(3,385)			(4,836)			(15,300)			(39,639)
Recoveries on Loans and Leases Previously Charged-Off
Commercial Loans:
Commercial and industrial		121			1,699			623			2,019
Commercial real estate		15			—			30			—
Construction		—			30			166			170
Total Commercial Loans		136			1,729			819			2,189
Residential Loans:
Residential mortgage		215			27			246			179
Home equity line		27			16			89			146
Total Residential Loans		242			43			335			325
Consumer		2,405			3,148			7,857			7,687
Total Recoveries on Loans and Leases Previously Charged-Off		2,783			4,920			9,011			10,201
Net Loans and Leases (Charged-Off) Recovered		(602)			84			(6,289)			(29,438)
Provision for Credit Losses - Loans and Leases		(7,300)			3,672			(40,919)			94,014
Balance at End of Period	$	161,246		$	195,876		$	161,246		$	195,876
Average Loans and Leases Outstanding	$	12,881,885		$	13,559,367		$	13,108,427		$	13,569,119
Ratio of Net Loans and Leases Charged-Off to Average Loans and Leases Outstanding(1)		0.02	%		-	%		0.06	%		0.29	%
Ratio of Allowance for Credit Losses for Loans and Leases to Loans and Leases Outstanding		1.26	%		1.45	%		1.26	%		1.45	%

(1) Annualized for the three and nine months ended September 30, 2021 and 2020.

Tables 26 and 27 present the allocation of the ACL by loan and lease category, in both dollars and as a percentage of total loans and leases outstanding as of September 30, 2021 and December 31, 2020:

Allocation of the Allowance for Credit Losses by Loan and Lease Category			Table 26
	September 30,		December 31,
(dollars in thousands)	2021		2020
Commercial and industrial	$	23,756	$	24,711
Commercial real estate		43,599		58,123
Construction		9,754		10,039
Lease financing		2,234		3,298
Total commercial		79,343		96,171
Residential mortgage		33,768		40,461
Home equity line		5,717		7,163
Total residential		39,485		47,624
Consumer		42,418		64,659
Total Allowance for Credit Losses for Loans and Leases	$	161,246	$	208,454

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Allocation of the Allowance for Credit Losses by Loan and Lease Category (as a percentage of total loans and leases outstanding)							Table 27
	September 30,				December 31,
	2021				2020
	Allocated		Loan		Allocated		Loan
	ACL as		category as		ACL as		category as
	% of loan or		% of total		% of loan or		% of total
	lease		loans and		lease		loans and
	category		leases		category		leases
Commercial and industrial	1.08	%	17.11	%	0.82	%	22.74	%
Commercial real estate	1.22		27.81		1.71		25.55
Construction	1.18		6.44		1.36		5.54
Lease financing	0.94		1.85		1.34		1.85
Total commercial	1.16		53.21		1.30		55.68
Residential mortgage	0.86		30.50		1.10		27.78
Home equity line	0.67		6.64		0.85		6.34
Total residential	0.83		37.14		1.05		34.12
Consumer	3.42		9.65		4.78		10.20
Total	1.26	%	100.00	%	1.57	%	100.00	%

As of September 30, 2021, the ACL was $161.2 million or 1.26% of total loans and leases outstanding, compared with an ACL of $208.5 million or 1.57% of total loans and leases outstanding as of December 31, 2020. The level of the ACL was commensurate with the adverse impacts that COVID-19 is having on the Hawaii and global economy.

Net charge-offs of loans and leases were $0.6 million or 0.02% of total average loans and leases, on an annualized basis, for the three months ended September 30, 2021, compared to net recoveries of $0.1 million for the three months ended September 30, 2020. Net charge-offs in our commercial lending portfolio were $0.1 million for the three months ended September 30, 2021, compared to net recoveries of $1.1 million for the three months ended September 30, 2020. Net recoveries in our residential lending portfolio were nil for both the three months ended September 30, 2021 and 2020. Net charge-offs in our consumer lending portfolio were $0.5 million and $1.1 million for the three months ended September 30, 2021 and 2020, respectively. Net charge-offs in our consumer portfolio segment include those related to credit cards, automobile loans, installment loans and small business lines of credit and reflect the inherent risk associated with these loans.

Net charge-offs of loans and leases were $6.3 million or 0.06% of total average loans and leases on an annualized basis, for the nine months ended September 30, 2021, compared to $29.4 million or 0.29% of total average loans and leases, on an annualized basis, for the nine months ended September 30, 2020. Net charge-offs in our commercial lending portfolio were $0.8 million and $15.7 million for the nine months ended September 30, 2021 and 2020, respectively. The decrease in net charge-offs in our commercial lending portfolio was primarily due to $16.0 million in charge-offs related to several loans that were adversely impacted by the shut-down of the tourism industry in Hawaii during the nine months ended September 30, 2020. Net recoveries in our residential lending portfolio were nil and $0.3 million for the nine months ended September 30, 2021 and 2020, respectively. Net charge-offs in our consumer lending portfolio were $5.5 million and $14.1 million for the nine months ended September 30, 2021 and 2020, respectively. Net charge-offs in our consumer portfolio segment include those related to credit card, automobile loans, installment loans and small business lines of credit and reflect the inherent risk associated with these loans.

The decrease in the ACL was primarily due to lower expected credit losses as the economic outlook and credit quality continued to improve during the third quarter of 2021. However, we still retained a COVID-19 related overlay as a component of the ACL as Hawaii’s economy continues to be significantly impacted by COVID-19. As noted earlier, a significant number of our customers (primarily individuals and small businesses) have taken advantage of payment deferral programs in assisting them while they may be temporarily unemployed or while their businesses have closed. We continue to closely monitor the impact of COVID-19 on our tourism industry and the re-opening of the Hawaii economy under new guidelines. While we have begun to see and may continue to see a gradual improvement in unemployment as local businesses and the Hawaii tourism industry continues to reopen in 2021 and the COVID-19 vaccine becomes more widely administered, the timing and extent of the return of air travel and the recovery of the Hawaii tourism industry is highly uncertain and beyond our control.

As of September 30, 2021, while the allocation of our ACL to our commercial, residential and consumer portfolio segments was lower as compared to December 31, 2020, the ACL was considered adequate based on our ongoing analysis of estimated expected credit losses, credit risk profiles, current economic outlook, coverage ratios and other relevant factors.  We will continue to monitor factors that drive expected credit losses including COVID-19 and the impact on the Hawaii economy, local businesses and our customers. See “Note 4. Allowance for Credit Losses” contained in our unaudited interim consolidated financial statements for more information on the ACL.

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Goodwill

Goodwill was $995.5 million as of both September 30, 2021 and December 31, 2020. Our goodwill originated from the acquisition of the Company by BNP Paribas in December of 2001. Goodwill generated in that acquisition was recorded on the balance sheet of the Bank as a result of push down accounting treatment, and remains on our consolidated balance sheets.

The Company’s policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment is the condition that exists when the carrying amount of a reporting unit exceeds its fair value. There was no impairment in our goodwill for the three and nine months ended September 30, 2021. Future events, including the ongoing impacts of the COVID-19 pandemic, that could cause a significant decline in our expected future cash flows or a significant adverse change in our business or the business climate may necessitate taking charges in future reporting periods related to the impairment of our goodwill.

Other Assets

Other assets were $664.7 million as of September 30, 2021, an increase of $61.2 million or 10% from December 31, 2020. This increase was primarily due to a $32.1 million increase in current tax receivables and deferred tax assets, $29.6 million of additional operating lease right-of-use assets obtained in exchange for new lease obligations, a $21.8 million increase in prepaid assets, a $21.6 million increase in municipal advances and a $13.8 million increase in clearing adjustments. This was partially offset by a $61.8 million decrease in interest rate swap agreements.

Deposits

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

Table 28 presents the composition of our deposits as of September 30, 2021 and December 31, 2020:

Deposits				Table 28
	September 30,		December 31,
(dollars in thousands)	2021		2020
Demand	$	8,873,424	$	7,522,114
Savings		7,347,079		6,020,075
Money Market		4,019,250		3,337,236
Time		1,880,250		2,348,298
Total Deposits(1)	$	22,120,003	$	19,227,723

(1) Public deposits were $2.1 billion as of September 30, 2021, an increase of $445.7 million or 27% compared to December 31, 2020.

Total deposits were $22.1 billion as of September 30, 2021, an increase of $2.9 billion or 15% from December 31, 2020. The increase in deposit balances stemmed primarily from a $1.3 billion increase in non-public demand deposit balances, a $682.0 million increase in non-public money market deposit balances, a $675.5 million increase in public savings deposit balances and a $651.5 million increase in non-public savings deposit balances. These increases are partially offset by a $468.0 million decrease in total time deposit balances. The U.S. government and bank regulatory agencies have enacted certain fiscal stimulus measures to counteract the economic disruption caused by COVID-19 and support the flow of credit to households and businesses. These actions have contributed to our continued high levels of liquidity.

Long-term Borrowings

Long-term borrowings were $200.0 million as of both September 30, 2021 and December 31, 2020. The Company’s long-term borrowings included $200.0 million in FHLB fixed-rate advances with a weighted average interest rate of 2.73% and maturity dates ranging from 2023 to 2024. Long-term borrowings mature in excess of one year from the unaudited interim consolidated balance sheet date.

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As of September 30, 2021 and December 31, 2020, the available remaining borrowing capacity with the FHLB was $1.7 billion and $2.0 billion, respectively. The FHLB fixed-rate advances and remaining borrowing capacity were secured by residential real estate loan collateral as of September 30, 2021 and December 31, 2020.

Pension and Postretirement Plan Obligations

We have a noncontributory qualified defined benefit pension plan, an unfunded supplemental executive retirement plan (“SERP”), a directors’ retirement plan (a non-qualified pension plan for eligible directors) and a postretirement benefit plan providing life insurance and healthcare benefits that we offer to our directors and employees, as applicable. The 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 $128.6 million as of September 30, 2021, an increase of $1.5 million or 1% from December 31, 2020. This increase was primarily due to net periodic benefit costs for the nine months ended September 30, 2021 of $7.7 million, offset by payments of $6.2 million.

See “Note 15. Noninterest Income and Noninterest Expense” contained in our unaudited interim consolidated financial statements for more information on our pension and postretirement benefit plans.

Foreign Activities

Cross-border outstandings are defined as loans (including accrued interest), acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets which are denominated in dollars or other non-local currency. As of September 30, 2021 and December 31, 2020, there were no aggregate cross-border outstandings in other countries which amounted to 0.75% to 1% of our total consolidated assets. Additionally, there were no cross-border outstandings in excess of 1% of our total consolidated assets as of both September 30, 2021 and December 31, 2020.

Capital

The bank regulators currently use a combination of risk-based ratios and a leverage ratio to evaluate capital adequacy. The Company and the Bank are subject to the federal bank regulators’ final rules implementing Basel III and various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Capital Rules”).

The Capital Rules, among other things impose a capital measure called CET1, to which most deductions/adjustments to regulatory capital must be made. In addition, the Capital Rules specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain specified requirements.

Under the Capital Rules, the minimum capital ratios are as follows:

● 4.5% CET1 capital to risk-weighted assets,

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

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

● 4.0% Tier 1 capital to average quarterly assets.

The Capital Rules also require a 2.5% capital conservation buffer designed to absorb losses during periods of economic stress. The capital conservation buffer is composed entirely of CET1, on top of these minimum risk weighted asset ratios, effectively resulting in minimum ratios of (i) 7% CET1 to risk-weighted assets, (ii) 8.5% Tier 1 capital to risk-weighted assets, and (iii) 10.5% total capital to risk-weighted assets.

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As of September 30, 2021, the Company’s capital levels remained characterized as “well capitalized” under the Capital Rules. Our regulatory capital ratios, calculated in accordance with the Capital Rules, are presented in Table 29 below. There have been no conditions or events since September 30, 2021 that management believes have changed either the Company’s or the Bank’s capital classifications. CET1 was 12.63% as of September 30, 2021, an increase of 16 basis points from December 31, 2020. The increase in CET1 was primarily due to earnings for the nine months ended September 30, 2021, including the $39.0 million negative Provision, partially offset by the dividends declared and paid to the Company’s stockholders.

Regulatory Capital					Table 29
	September 30,			December 31,
(dollars in thousands)	2021			2020
Stockholders' Equity	$	2,711,734		$	2,744,104
Less:
Goodwill		995,492			995,492
Accumulated other comprehensive (loss) income, net		(61,463)			31,604
Common Equity Tier 1 Capital and Tier 1 Capital	$	1,777,705		$	1,717,008
Add:
Qualifying allowance for credit losses and reserve for unfunded commitments		176,173			172,950
Total Capital	$	1,953,878		$	1,889,958
Risk-Weighted Assets	$	14,076,251		$	13,769,885
Key Regulatory Capital Ratios
Common Equity Tier 1 Capital Ratio		12.63	%		12.47	%
Tier 1 Capital Ratio		12.63	%		12.47	%
Total Capital Ratio		13.88	%		13.73	%
Tier 1 Leverage Ratio		7.39	%		8.00	%

Total stockholders’ equity was $2.7 billion as of September 30, 2021, a decrease of $32.4 million or 1% from December 31, 2020. The decrease in stockholders’ equity was primarily due to dividends declared and paid to the Company’s stockholders of $100.9 million, a net unrealized loss in the fair value of our investment securities net of tax of $93.1 million and share repurchases of $53.5 million, partially offset by earnings for the period of $208.7 million during the nine months ended September 30, 2021.

In February 2021, the Company announced a stock repurchase program for up to $75.0 million of its outstanding common stock during 2021. As of September 30, 2021, $21.5 million remained of the $75 million total repurchase amount authorized under the stock repurchase program for 2021. The timing and amount of stock repurchases are influenced by various internal and external factors.

In October 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.26 per share on our outstanding shares. The dividend will be paid on December 3, 2021 to shareholders of record at the close of business on November 22, 2021.

Off-Balance Sheet Arrangements and Guarantees

Off-Balance Sheet Arrangements

We hold interests in several unconsolidated variable interest entities (“VIEs”). These unconsolidated VIEs are primarily low income housing tax credit investments in partnerships and limited liability companies. Variable interests are defined as contractual ownership or other 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.

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Guarantees

We sell residential mortgage loans on the secondary market, primarily to Fannie Mae or Freddie Mac. The agreements under which we sell residential mortgage loans to Fannie Mae or Freddie Mac contain provisions that include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the specific representations and warranties vary among investors, insurance or guarantee agreements, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state and local laws and other matters. As of September 30, 2021 and December 31, 2020, the unpaid principal balance of our portfolio of residential mortgage loans sold was $1.8 billion and $2.2 billion, respectively. The agreements under which we sell residential mortgage loans require delivery of various documents to the investor or its document custodian. Although these loans are primarily sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred if a loan review reveals that underwriting and documentation standards were potentially not met in the origination of those loans. Upon receipt of a repurchase request, we work with investors to arrive at a mutually agreeable resolution. Repurchase demands are typically reviewed on an individual loan by loan basis to validate the claims made by the investor to determine if a contractually required repurchase event has occurred. We manage the risk 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, 2021, there were two residential mortgage loan repurchases totaling $0.6 million and there were no pending repurchase requests.

In addition to servicing loans in our portfolio, substantially all of the loans we sell to investors are sold with servicing rights retained. We also service loans originated by other mortgage loan originators. As servicer, our primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans, or loan modifications or short sales. Each agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by the Company in such capacity and provides protection against expenses and liabilities incurred by the Company when acting in compliance with the respective servicing agreements. However, if we commit a material breach of obligations as servicer, we may be subject to termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards vary by investor. These standards and remedies are determined by servicing guides issued by the investors as well as the contract provisions established between the investors and the Company. Remedies could include repurchase of an affected loan. For the nine months ended September 30, 2021, we had no repurchase requests related to loan servicing activities, nor were there any pending repurchase requests as of September 30, 2021.

Although to-date repurchase requests related to representation and warranty provisions and servicing activities have been limited, it is possible that requests to repurchase mortgage loans may increase in frequency as investors more aggressively pursue all means of recovering losses on their purchased loans. However, as of September 30, 2021, management believes that this exposure is not material due to the historical level of repurchase requests and loss trends and thus has not established a liability for losses related to mortgage loan repurchases. As of September 30, 2021, 98% 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, 2020.

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, 2021, see “Note 1. Organization and Basis of Presentation — Recent Accounting Pronouncements” to the unaudited interim consolidated financial statements for more information.

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Risk Governance and Quantitative and Qualitative Disclosures About Market Risk

Managing risk is an essential part of successfully operating our business. Management believes that the most prominent risk exposures for the Company are credit risk, market risk, liquidity risk management, capital management and operational risk. See “Analysis of Financial Condition — Liquidity” and “—Capital” sections of this MD&A for further discussions of liquidity risk management and capital management, respectively.

Credit Risk

Credit risk is the risk that borrowers or counterparties will be unable or unwilling to repay their obligations in accordance with the underlying contractual terms. We manage and control credit risk in the loan and lease portfolio by adhering to well-defined underwriting criteria and account administration standards established by management. Written credit policies document underwriting standards, approval levels, exposure limits and other limits or standards deemed necessary and prudent. Portfolio diversification at the obligor, industry, product, and/or geographic location levels is actively managed to mitigate concentration risk. In addition, credit risk management 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 ACL: commercial, residential 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 lending 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 $371,000. Residential mortgage loan production is added to our loan portfolio or is sold in the secondary market, based on management’s evaluation of our liquidity, capital and loan portfolio mix as well as market conditions. Changes in interest rates, the economic environment and other market factors have impacted, and will likely continue to impact, the marketability and value of collateral and the financial condition of our borrowers which impacts the level of credit risk inherent in this portfolio, although we remain in a supply constrained housing environment in Hawaii. Geographic concentrations exist for this portfolio as nearly all residential mortgage loans and home equity lines of credit are for residences

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located in Hawaii, Guam or Saipan. These island locales are susceptible to a wide array of potential natural disasters including, but not limited to, hurricanes, floods, tsunamis and earthquakes. We offer home equity lines of credit with variable rates; fixed rate lock options may be available post-closing. All lines are underwritten at 2% over the fully indexed rate. Our procedures for underwriting home equity lines of credit include an assessment of an applicant’s overall financial capacity and repayment ability. Decisions are primarily based on repayment ability via debt-to-income ratios, LTV ratios and an evaluation of credit history.

Consumer lending is further categorized into the following classes of loans: credit cards, automobile loans and other consumer-related installment loans. Consumer loans are either unsecured or secured by the borrower’s personal assets. The average loan size is generally small and risk is diversified among many borrowers. We offer a wide array of credit cards for business and personal use. In general, our customers are attracted to our credit card offerings on the basis of price, credit limit, reward programs and other product features. Credit card underwriting decisions are generally based on repayment ability of our borrower via DTI ratios, credit bureau information, including payment history, debt burden and credit scores, such as FICO, and analysis of financial capacity. Automobile lending activities include loans and leases secured by new or used automobiles. We originate the majority of our automobile loans and leases on an indirect basis through selected dealerships. Our procedures for underwriting automobile loans include an assessment of an applicant’s overall financial capacity and repayment ability, credit history and the ability to meet existing obligations and payments on the proposed loan or lease. Although an applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the collateral security to the proposed loan amount. We require borrowers to maintain full coverage automobile insurance on automobile loans and leases, with the Bank listed as either the loss payee or additional insured. Installment loans consist of open and closed end facilities for personal and household purchases. We seek to maintain reasonable levels of risk in installment lending by following prudent underwriting guidelines which include an evaluation of personal credit history and cash flow.

In addition to geographic concentration risk, we also monitor our exposure to industry risk. While the Bank, our customers and our 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, 2021 and December 31, 2020, 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.

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Market Risk Measurement

We primarily use net interest income simulation analysis to measure and analyze interest rate risk. We run various hypothetical interest rate scenarios and compare these results against a measured base case scenario. Our net interest income simulation analysis incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results. These assumptions include: (1) the timing of changes in interest rates, (2) shifts or rotations in the yield curve, (3) re-pricing characteristics for market rate sensitive instruments on and off-balance sheet, (4) differing sensitivities of financial instruments due to differing underlying rate indices and (5) varying loan prepayment speeds for different interest rate scenarios. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset liability management strategies to manage our interest rate risk.

Table 30 presents, for the twelve months subsequent to September 30, 2021 and December 31, 2020, 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, 2021 and December 31, 2020 are held constant.

Net Interest Income Sensitivity Profile - Estimated Percentage Change Over 12 Months		Table 30
		Static Forecast				Static Forecast
	September 30, 2021				December 31, 2020
Ramp Change in Interest Rates (basis points)
+100			7.2	%			6.4	%
+50			3.6				3.2
(50)			(1.6)				(1.7)
(100)			(2.5)				(2.5)
Immediate Change in Interest Rates (basis points)
+100			14.0	%			12.4	%
+50			7.1				6.3
(50)			(3.1)				(3.0)
(100)			(5.4)				(4.4)

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, 2021 our net interest income sensitivity profile is slightly higher in higher interest rate scenarios compared to similar forecasts as of December 31, 2020. The sensitivity outcomes described above are primarily due to the impact of holding a larger federal funds position as of September 30, 2021 as compared with December 31, 2020. A larger federal funds position has the effect of magnifying the impact of higher interest rate scenarios.

The comparisons above provide insight into the potential effects of changes in interest rates on net interest income. The Company believes that its approach to interest rate risk has appropriately considered its susceptibility to both rising and falling rates and has adopted strategies which minimize the impact of such risks.

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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.

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 11. 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.

In addition, our business relies upon a large volume of loans, derivative contracts and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR to establish their interest rate and/or value. In 2017, the U.K. Financial Conduct Authority announced that it would no longer compel banks to submit rates for the calculation of LIBOR after 2021. The administrator of LIBOR has stated it will extend publication of the most commonly used U.S. Dollar LIBOR settings to June 30, 2023 and cease publishing other LIBOR settings on December 31, 2021. The U.S. federal banking agencies issued guidance strongly encouraging banking organizations to cease using U.S. dollar LIBOR as a reference rate in new contracts as soon as practicable and in any event by December 31, 2021. Although the full impact of alternatives to LIBOR on the valuations, pricing and operation of our financial instruments is not yet known, we have established a working group, consisting of key stakeholders from throughout the Company, to prepare to transition from LIBOR to alternative

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reference rates, and it is expected that a broad transition away from the use of LIBOR to alternative reference rates for new financial contracts will occur by the end of 2021. In the United States, LIBOR-priced transactions and products will transfer to the Secured Overnight Financing Rate (“SOFR”), Prime Rate or other similar indices (collectively, “Alternative Rates”). There are risks inherent with the transition to any Alternative Rate as the rate may behave differently than LIBOR in reaction to monetary, market and economic events.

Our LIBOR transition plan is organized around key work streams, including work to ensure that our technology systems are prepared for the transition, our loan documents that reference LIBOR-based rates have been appropriately amended to reference other methods of interest rate determinations and internal and external stakeholders are apprised of the transition. We have implemented certain SOFR conventions and are in the process of developing other products and transaction agreements that are based on reference rates other than LIBOR.

For a further discussion of the various risks the Company faces in connection with the expected replacement of LIBOR on its operations, see “Risk Factors—Market Risks—Certain of our businesses, our funding and financial products may be adversely affected by changes or the discontinuance of LIBOR” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 25, 2021.

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, 2021. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the 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, 2021

Changes in Internal Control over Financial Reporting

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

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.

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, 2020, filed with the SEC on February 25, 2021 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, 2020.

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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, 2021:

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		Programs2	Plans or Programs2
July 1, 2021 through July 31, 2021	240,476	$	28.27	237,250	$	36,364,917
August 1, 2021 through August 31, 2021	252,996		27.82	252,996		29,326,248
September 1, 2021 through September 30, 2021	292,230		27.27	286,738		21,504,640
Total	785,702	$	27.76	776,984

(1) Includes 8,718 shares acquired from employees to satisfy income tax withholding requirements in connection with vested share awards during the three months ended September 30, 2021.

(2) In February 2021, the Company announced a stock repurchase program for up to $75 million of its outstanding common stock during 2021. As of September 30, 2021, $21.5 million remained of the $75 million total repurchase amount authorized under the stock repurchase program for 2021. The timing and amount of stock 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: November 1, 2021		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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