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, ~~2018~~2019

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

For the transition period from to

Commission File Number 001-14585

FIRST HAWAIIAN, INC.

(Exact Name of Registrant as Specified in its Charter)


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

999 Bishop Street, 29th Floor

Honolulu, HI

96813

(Address of Principal Executive Offices)

(Zip Code)

~~(808)~~ (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~~“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 ⌧

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: ~~134,874,302~~130,977,395 shares of Common Stock, par value $0.01 per share, were outstanding as of October ~~18, 2018.~~17, 2019.

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)

2018

2017

2018

2017
Interest income

Loans and lease financing

$
135,394

$
118,986

$
389,228

$
342,431
Available-for-sale securities

25,196

24,195

81,586

75,683
Other

3,462

2,089

7,193

4,096
Total interest income

164,052

145,270

478,007

422,210
Interest expense

Deposits

20,205

11,949

52,824

28,279
Short-term and long-term borrowings

2,589

2

2,850

13
Total interest expense

22,794

11,951

55,674

28,292
Net interest income

141,258

133,319

422,333

393,918
Provision for loan and lease losses

4,460

4,500

16,430

13,400
Net interest income after provision for loan and lease losses

136,798

128,819

405,903

380,518
Noninterest income

Service charges on deposit accounts

7,933

8,929

23,609

27,548
Credit and debit card fees

16,535

16,126

48,961

48,450
Other service charges and fees

9,578

8,510

28,553

25,717
Trust and investment services income

7,487

7,672

23,429

22,536
Bank-owned life insurance

3,692

3,119

8,131

10,624
Other

2,180

5,308

13,219

16,406
Total noninterest income

47,405

49,664

145,902

151,281
Noninterest expense

Salaries and employee benefits

41,959

38,687

125,755

119,459
Contracted services and professional fees

11,478

10,834

36,770

33,530
Occupancy

6,757

6,238

20,149

17,382
Equipment

4,181

4,174

13,104

12,898
Regulatory assessment and fees

3,966

3,668

12,164

11,192
Advertising and marketing

1,060

2,005

3,126

5,255
Card rewards program

5,805

5,438

17,882

17,107
Other

17,941

13,740

46,649

40,881
Total noninterest expense

93,147

84,784

275,599

257,704
Income before provision for income taxes

91,056

93,699

276,206

274,095
Provision for income taxes

23,668

35,336

71,807

102,097
Net income

$
67,388

$
58,363

$
204,399

$
171,998
Basic earnings per share

$
0.50

$
0.42

$
1.48

$
1.23
Diluted earnings per share

$
0.50

$
0.42

$
1.48

$
1.23
Dividends declared per share

$
0.24

$
0.22

$
0.72

$
0.66
Basic weighted-average outstanding shares

135,466,669

139,556,532

137,643,005

139,549,665
Diluted weighted-average outstanding shares

135,675,498

139,696,330

137,809,573

139,670,487


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

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

FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,
(dollars in thousands)

2018

2017

2018

2017
Net income

$
67,388

$
58,363

$
204,399

$
171,998
Other comprehensive (loss) income, net of tax:

Net unrealized (losses) gains on investment securities

(22,420)

128

(89,236)

19,970
Net unrealized gains on cash flow derivative hedges

131

409

988

927
Other comprehensive (loss) income

(22,289)

537

(88,248)

20,897
Total comprehensive income

$
45,099

$
58,900

$
116,151

$
192,895


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

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

FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

(Unaudited)

September 30,

December 31,
(dollars in thousands, except share amount)

2018

2017
Assets

Cash and due from banks

$
350,967

$
367,084
Interest-bearing deposits in other banks

348,526

667,560
Investment securities

4,595,301

5,234,658
Loans held for sale

—

556
Loans and leases

12,600,464

12,277,369
Less: allowance for loan and lease losses

141,250

137,253
Net loans and leases

12,459,214

12,140,116

Premises and equipment, net

286,374

289,215
Other real estate owned and repossessed personal property

362

329
Accrued interest receivable

49,407

47,987
Bank-owned life insurance

444,987

438,010
Goodwill

995,492

995,492
Mortgage servicing rights

16,937

13,196
Other assets

436,271

355,258
Total assets

$
19,983,838

$
20,549,461
Liabilities and Stockholders' Equity

Deposits:

Interest-bearing

$
10,881,918

$
11,485,269
Noninterest-bearing

5,807,355

6,126,853
Total deposits

16,689,273

17,612,122
Short-term borrowings

30,000

—
Long-term borrowings

400,026

34
Retirement benefits payable

135,523

134,218
Other liabilities

305,554

270,536
Total liabilities

17,560,376

18,016,910

Commitments and contingent liabilities (Note 14)

Stockholders' equity

Common stock ($0.01 par value; authorized 300,000,000 shares; issued/outstanding: 139,655,841 / 134,873,728 as of September 30, 2018; issued/outstanding: 139,599,454 / 139,588,782 as of December 31, 2017)

1,397

1,396
Additional paid-in capital

2,494,436

2,488,643
Retained earnings

264,463

139,177
Accumulated other comprehensive loss, net

(204,699)

(96,383)
Treasury stock (4,782,113 shares as of September 30, 2018 and 10,672 shares as of December 31, 2017)

(132,135)

(282)
Total stockholders' equity

2,423,462

2,532,551
Total liabilities and stockholders' equity

$
19,983,838

$
20,549,461


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

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

Commitments and contingent liabilities (Note 13)

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

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

FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

Accumulated

Additional

Other

Common Stock

Paid-In

Retained

Comprehensive

Treasury

(dollars in thousands, except share amounts)

Shares

Amount

Capital

Earnings

Loss

Stock

Total
Balance as of December 31, 2016

139,530,654

$
1,395

$
2,484,251

$
78,850

$
(88,011)

$
—

$
2,476,485
Net income

—

—

—

171,998

—

—

171,998
Cash dividends declared ($0.66 per share)

—

—

—

(92,101)

—

—

(92,101)
Common stock issued under Employee Stock Purchase Plan

15,961

—

528

—

—

—

528
Equity-based awards

39,667

1

4,494

(444)

—

—

4,051
Other comprehensive income, net of tax

—

—

—

—

20,897

—

20,897
Balance as of September 30, 2017

139,586,282

$
1,396

$
2,489,273

$
158,303

$
(67,114)

$
—

$
2,581,858

Balance as of December 31, 2017

139,588,782

$
1,396

$
2,488,643

$
139,177

$
(96,383)

$
(282)

$
2,532,551
Net income

—

—

—

204,399

—

—

204,399
Cash dividends declared ($0.72 per share)

—

—

—

(98,666)

—

—

(98,666)
Common stock issued under Employee Stock Purchase Plan

12,341

—

342

—

—

—

342
Equity-based awards

42,475

1

5,451

(515)

—

(53)

4,884
Common stock repurchased

(4,769,870)

—

—

—

—

(131,800)

(131,800)
Adoption of Accounting Standards Update No. 2018-02

—

—

—

20,068

(20,068)

—

—
Other comprehensive loss, net of tax

—

—

—

—

(88,248)

—

(88,248)
Balance as of September 30, 2018

134,873,728

$
1,397

$
2,494,436

$
264,463

$
(204,699)

$
(132,135)

$
2,423,462


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


	Nine Months Ended September 30, 2019
								Accumulated
				Additional				Other
	Common Stock			Paid-In		Retained		Comprehensive		Treasury
(dollars in thousands, except share amounts)	Shares	Amount		Capital		Earnings		Income (Loss)		Stock		Total
Balance as of December 31, 2018	134,874,302	$	1,397	$	2,495,853	$	291,919	$	(132,195)	$	(132,135)	$	2,524,839
Net income	—		—		—		216,556		—		—		216,556
Cash dividends declared ($0.78 per share)	—		—		—		(104,392)		—		—		(104,392)
Equity-based awards	185,736		2		5,471		(766)		—		(1,764)		2,943
Common stock repurchased	(3,799,138)		—		—		—		—		(98,809)		(98,809)
Other comprehensive income, net of tax	—		—		—		—		113,421		—		113,421
Balance as of September 30, 2019	131,260,900	$	1,399	$	2,501,324	$	403,317	$	(18,774)	$	(232,708)	$	2,654,558

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

FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF ~~CASH FLOWS~~STOCKHOLDERS’ EQUITY (continued)

(Unaudited)

Nine Months Ended

September 30,
(dollars in thousands)

2018

2017
Cash flows from operating activities

Net income

$
204,399

$
171,998
Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan and lease losses

16,430

13,400
Depreciation, amortization and accretion, net

41,893

46,273
Deferred income taxes

2,208

(6,348)
Stock-based compensation

4,884

4,171
Gains on sale of bank properties

—

(2,667)
Other gains

(897)

(133)
Originations of loans held for sale

(28,472)

—
Proceeds from sales of loans held for sale

28,614

—
Net gains on sales of loans held for sale

(148)

—
Change in assets and liabilities:

Net decrease (increase) in other assets

5,573

(935)
Net decrease in other liabilities

(8,973)

(11,257)
Net cash provided by operating activities

265,511

214,502
Cash flows from investing activities

Available-for-sale securities:

Proceeds from maturities and principal repayments

637,538

644,854
Purchases

(130,251)

(864,049)
Other investments:

Proceeds from sales

10,333

13,318
Purchases

(45,432)

(11,484)
Loans:

Net increase in loans and leases resulting from originations and principal repayments

(171,306)

(626,262)
Proceeds from sales of loans originated for investment

562

1,775
Purchases of loans

(158,616)

(11,626)
Proceeds from bank-owned life insurance

1,154

4,226
Purchases of premises, equipment and software

(13,495)

(5,964)
Proceeds from sales of premises and equipment

—

3,857
Purchases of mortgage servicing rights

(6,444)

—
Proceeds from sales of other real estate owned

332

635
Other

(2,054)

(1,572)
Net cash provided by (used in) investing activities

122,321

(852,292)
Cash flows from financing activities

Net (decrease) increase in deposits

(922,849)

800,951
Net increase (decrease) in short-term borrowings

30,000

(9,151)
Proceeds from long-term borrowings

400,000

—
Repayment of long-term borrowings

(10)

(10)
Dividends paid

(98,666)

(92,101)
Stock tendered for payment of withholding taxes

—

(120)
Proceeds from employee stock purchase plan

342

528
Common stock repurchased

(131,800)

—
Net cash (used in) provided by financing activities

(722,983)

700,097
Net (decrease) increase in cash and cash equivalents

(335,151)

62,307
Cash and cash equivalents at beginning of period

1,034,644

1,052,058
Cash and cash equivalents at end of period

$
699,493

$
1,114,365

Supplemental disclosures

Interest paid

$
56,430

$
24,692
Income taxes paid, net of income tax refunds

29,204

87,240
Noncash investing and financing activities:

Transfers from loans and leases to other real estate owned

143

759
Transfers from loans and leases to loans held for sale

—

1,759


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


	Nine Months Ended September 30, 2018
								Accumulated
				Additional				Other
	Common Stock			Paid-In		Retained		Comprehensive		Treasury
(dollars in thousands, except share amounts)	Shares	Amount		Capital		Earnings		Loss		Stock		Total
Balance as of December 31, 2017	139,588,782	$	1,396	$	2,488,643	$	139,177	$	(96,383)	$	(282)	$	2,532,551
Net income	—		—		—		204,399		—		—		204,399
Cash dividends declared ($0.72 per share)	—		—		—		(98,666)		—		—		(98,666)
Common stock issued under Employee Stock Purchase Plan	12,341		—		342		—		—		—		342
Equity-based awards	42,475		1		5,451		(515)		—		(53)		4,884
Common stock repurchased	(4,769,870)		—		—		—		—		(131,800)		(131,800)
Adoption of Accounting Standards Update No. 2018-02	—		—		—		20,068		(20,068)		—		—
Other comprehensive loss, net of tax	—		—		—		—		(88,248)		—		(88,248)
Balance as of September 30, 2018	134,873,728	$	1,397	$	2,494,436	$	264,463	$	(204,699)	$	(132,135)	$	2,423,462

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

FIRST HAWAIIAN, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


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

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

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

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FIRST HAWAIIAN, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization and Basis of Presentation

First Hawaiian, Inc. (“FHI” or the “Parent”), a bank holding company, owns 100% of the outstanding common stock of First Hawaiian Bank (“FHB” or the “Bank”), its only direct, wholly owned subsidiary. FHB offers a comprehensive suite of banking services to consumer and commercial customers including loans, deposit products, wealth management, insurance, trust, retirement planning, credit card and merchant processing services.

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

The accompanying unaudited interim consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

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

~~Reorganization Transactions~~Transition to an Independent Public Company

On July 1, 2016, FHI became a direct wholly owned subsidiary of BancWest Corporation (“BWC”), a Delaware corporation and an indirect wholly owned subsidiary of BNP Paribas (“BNPP”). In connection with FHI’s initial public offering (“IPO”) in August 2016, ~~in which BNP Paribas (“BNPP”) sold approximately 17% of its interest in FHI,~~ BNPP announced its intent to sell ~~a controlling~~its interest in FHI, including FHI’s wholly owned subsidiary, FHB, over time, subject to market conditions and other considerations. ~~On April 1, 2016,~~

Following a series of ~~reorganization transactions (the “Reorganization Transactions”) were undertaken to facilitate~~secondary offerings completed in 2017 and 2018, on February 1, 2019, BWC completed the IPO. As part of the Reorganization Transactions, FHI, which was then known as BancWest Corporation (“BancWest”), formed a new bank holding company, BancWest Holding Inc. (“BWHI”), a Delaware corporation and a direct wholly owned subsidiary of BancWest, and contributed 100%sale of its interest in Bank of the West (“BOW”), as well as other assets and liabilities not related to FHB, to BWHI. Following the contribution of BOW to BWHI, BancWest distributed its interest in BWHI to BNPP. As part of these transactions, BancWest amended its certificate of incorporation to change its name to “First Hawaiian, Inc.”, with First Hawaiian Bank remaining ~~as the only direct wholly owned subsidiary of FHI.~~

On July 1, 2016, in order to comply with the Board of Governors of the Federal Reserve System’s requirement (under Regulation YY) applicable to BNPP that a foreign banking organization with $50 billion or more in U.S. non-branch assets as of June 30, 2015 establish a U.S. intermediate holding company and hold its interest in the substantial majority of its U.S. subsidiaries through the intermediate holding company by July 1, 2016, FHI became an indirect subsidiary of BNP Paribas USA, Inc. (“BNP Paribas USA”), BNPP’s U.S. intermediate holding company. As part of that reorganization, FHI became a direct wholly owned subsidiary of BancWest Corporation (“BWC”), a direct wholly owned subsidiary of BNP Paribas USA. As used herein, “BWC” refers, for all periods beginning April 1, 2016, to BancWest Corporation, a Delaware corporation and indirect wholly owned subsidiary of BNPP.

~~On August 4, 2016, FHI’s common stock began trading on the NASDAQ Global Select Market (“NASDAQ”) under the ticker symbol “FHB”. On August 9, 2016, the IPO of 24,250,000~~24,859,750 shares of FHI common stock which included the full exercise of the underwriters’ option to purchase an additional 3,163,043 shares, at a price to the public of $23.00 per share was completed. On February 17, 2017, a secondary offering of 28,750,000 shares of FHI common stock, which included the full exercise of the underwriters’ option to purchase an additional 3,750,000 shares, at a price to the public of $32.00 per share was completed. On May 10, 2018, a secondary offering of 15,300,000 shares of FHI common stock at a price to the public of $27.75 per share was completed. Concurrently with the secondary offering completed on May 10, 2018, FHI entered into a share repurchase agreement with BWC and completed the repurchase of 2,968,069 shares of FHI common stock at $27.56 per share, the per share price paid by the underwriters to BWC in the concurrent public offering. On June 8, 2018, the underwriters’ exercised their full option to purchase an additional 1,530,000 shares of FHI common

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stock at $27.56 per share. On August 1, 2018, a secondary offering of 20,000,000 shares of FHI common stock at a price to the public of $27.90 per share was completed. Concurrently with the secondary offering completed on August 1, 2018, FHI entered into a share repurchase agreement with BWC and completed the repurchase of 1,801,801 shares of FHI common stock at $27.75 per share, the per share price paid by the underwriters to BWC in the concurrent public offering. Lastly, on September 10, 2018, in a ~~secondary offering, BWC sold 20,000,000 shares of FHI common stock at a variable price to the public. The per share price paid in the offering to BWC by the underwriters was $28.70.~~public offering. FHI did not receive any of the proceeds from the sales of shares of FHI common stock in that offering, in any of the secondary offerings ~~completed on September 10, 2018, August 1, 2018, May 10, 2018 or February 17, 2017~~described above or the ~~IPO on August 9, 2016.~~IPO. As a result of ~~September 30, 2018,~~the completion of the February 1, 2019 public offering, BNPP ~~remained~~(through BWC, the ~~beneficial owner of approximately 18% of FHI’s outstanding~~selling stockholder) fully exited its ownership interest in FHI common stock.

Use of Estimates in the Preparation of Financial Statements

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events, actual results may differ from these estimates.

~~Correction of an Immaterial Error to the Financial Statements~~

Subsequent to the issuance of the Company’s unaudited interim September 30, 2017 consolidated financial statements, the Company’s management determined that certain expenses related to the Company’s card rewards program were incorrectly offset against credit and debit card fee income and credit card interchange assessment fees were incorrectly classified in card rewards program expense instead of credit and debit card fee income in the consolidated statements of income for the three and nine months ended September 30, 2017. For the three and nine months ended September 30, 2017, income from service charges on deposit accounts was overstated by $0.2 million and $0.5 million, respectively, credit and debit card fee income was understated by $1.3 million and $5.0 million, respectively, occupancy expense was understated by $0.4 million and $1.2 million, respectively, and card rewards program expense was understated by $0.7 million and $3.3 million, respectively. As a result, certain noninterest income and noninterest expense amounts have been restated from the amounts previously reported to correct the classification errors. There was no change to net income or earnings per share as previously reported as a result of these errors. Management has evaluated the materiality of these errors on its prior period financial statements from a quantitative and qualitative perspective, and has concluded that these errors were not material to the prior periods.

Accounting Standards Adopted in ~~2018~~2019

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. ~~2014-09,~~ ~~Revenue from Contracts with Customers~~2016-02, Leases (Topic ~~606)~~. This guidance requires entities to recognize revenues when they transfer promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted the provisions of ASU No. 2014-09 on January 1, 2018. The Company adopted the new guidance using the modified retrospective transition approach, in which the guidance would only be applied to existing contracts in effect at January 1, 2018 and new contracts entered into after this date. Most of the Company’s revenue is comprised of net interest income on loans, leases, investment securities and deposits, all of which is explicitly out of scope of the new revenue recognition guidance. Management conducted an assessment of the revenue streams that were potentially affected by the new guidance and reviewed contracts in scope to ensure compliance with the new guidance. These contracts included those related to credit and debit card fees, service charges and fees on deposit accounts, and trust and investment services fees. The adoption of ASU No. 2014-09 did not have a material impact on the Company’s consolidated financial statements. However, additional disclosures required by the standard have been included in “Note 15. Revenue from Contracts with Customers” to the Company’s consolidated financial statements.

~~In March 2017, the FASB issued ASU No. 2017-07,~~ ~~Compensation – Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~. This guidance requires entities to report the service cost component of net periodic benefit cost in the same line item as other compensation costs arising from services rendered by pertinent employees during the reporting period. The other components of net periodic benefit costs are to be presented in the income statement separately from the service cost component. The Company adopted the provisions of ASU No. 2017-07 on January 1, 2018 and applied the guidance retrospectively to all periods for which a statement of income is presented. The Company continues to record the service cost component of net periodic benefit cost in salaries and employee benefits expense; however, all other components of net periodic benefit cost are now recorded

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in other noninterest expense. The Company elected to use the practical expedient which permits entities to estimate amounts for comparative periods using the information previously disclosed in the Company’s pension and other postretirement benefit plan disclosure as such amounts are not material. The adoption of ASU No. 2017-07 did not have a material impact on the Company’s consolidated financial statements. See “Note 17. Benefit Plans” for required disclosures.

~~In May 2017, the FASB issued ASU No. 2017-09,~~ ~~Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting.~~ This guidance applies to entities that change the terms or conditions of a share-based payment award. This guidance clarifies when an entity should account for a change as a modification. Modification accounting will be required only if the fair value, the vesting conditions or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The Company adopted the provisions of ASU No. 2017-09 on January 1, 2018. The adoption of ASU No. 2017-09 did not have a material impact on the Company’s consolidated financial statements.

~~In February 2018, the FASB issued ASU No. 2018-02,~~ ~~Income Statement – Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income~~842). This guidance provided entities with an option to reclassify tax effects that were stranded in accumulated other comprehensive income, pursuant to the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. However, this guidance may be early adopted in any interim or annual period for which financial statements have not yet been issued and applied either in the period of adoption or retrospectively to each period in which the effect of the change in the corporate tax rate in the Tax Act is recognized. The Company elected to early adopt the provisions of ASU No. 2018-02 on January 1, 2018 and reflected the reclassification related to the Tax Act in the period of adoption. The amount of the reclassification reflected the impact of the Tax Act that was signed into law on December 22, 2017 which reduced the corporate tax rate from 35% to 21%. The result of the early adoption of ASU No. 2018-02 was to reclassify a credit balance of $20.1 million from accumulated other comprehensive loss to retained earnings as of January 1, 2018. The Company utilizes a security-by-security approach to releasing income tax effects from accumulated other comprehensive loss. The adoption of ASU No. 2018-02 did not have a material impact on the Company’s consolidated financial statements.

~~Recent Accounting Pronouncements~~

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

~~In February 2016, the FASB issued ASU No. 2016-02,~~ ~~Leases (Topic 842).~~ ~~This guidance provides~~ that lessees ~~will~~would be required to recognize the following for all operating leases (with the exception of short-term leases): 1) a lease liability, which is the present value of a lessee's obligation to make lease payments, and 2) a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. Lessor accounting under the new guidance remains largely unchanged as it is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. ~~This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. In July 2018,~~The Company adopted the ~~FASB issued~~provisions of ASU No. ~~2018-11,~~ ~~Targeted Improvements to Topic 842, Leases~~.2016-02 on January 1, 2019 and elected several practical expedients made available by the FASB. Specifically, ~~entities may elect not to recast comparative periods presented when transitioning to Topic 842 and lessors may elect not to separate lease and nonlease components when certain conditions are met. The~~the Company ~~expects to elect~~elected the transition practical expedient to not recast comparative periods upon the adoption of ~~ASU No. 2016-02 on January 1, 2019. As lessee,~~the new guidance. In addition, the Company has lease agreements for branch premises, ATM locations and information technology equipment that are currently considered operating leases, and therefore, are not recognized on the Company’s consolidated balance sheets. The Company has formed a working group comprised of teams from different disciplines, including finance, bank properties and information technology. The Company has also engaged a software vendor to assist in complying with the new lease accounting requirements. The FASB has made available several practical expedients to assist entities with adoption. In addition to the transition practical expedient noted above, the Company expects to electelected the package of practical expedients which among other things, ~~would require~~required no reassessment of whether existing contracts ~~are~~were or ~~contain~~ contained

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leases as well as no reassessment of lease classification for existing ~~leases. Additionally, the Company does not plan to elect~~leases and the practical expedient which permitted the Company to ~~use hindsight~~not separate nonlease components from lease components in determining the consideration in the lease ~~term and in assessing impairment of right-of-use assets. While~~agreement when the Company ~~has not yet quantified~~was a lessee or a lessor. The Company identified the ~~impact to the consolidated balance sheet upon the adoption~~primary lease agreements in scope of this new guidance as those relating to branch premises. As a result, the Company ~~expects to report increased assets~~recognized a lease liability of $50.3 million and ~~liabilities as~~ a ~~result~~related right-of-use asset of recognizing right-of-use assets and lease liabilities related to the Company’s operating lease agreements noted above. However, the Company does not expect the adoption of ASU No. 2016-02 will have a material impact$50.6 million on its consolidated statements of income as the majority of its leases will remain operating in nature. As such, the expense recognition will be similar to previously required straight-line expense treatment. In conjunction with the Company’s adoption of ASU No. 2016-02, management

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is also assessing internal controls to ensure that complete, accurate and up-to-date records of all lease agreements are not only available at commencement of a lease, but also throughout the term of the lease agreement.

~~In June 2016, the FASB issued ASU No. 2016-13,~~ ~~Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments~~. This guidance eliminates the probable recognition threshold for credit losses on financial assets measured at amortized cost. For loans and held-to-maturity debt securities, this update requires a current expected credit loss (“CECL”) approach to determine the allowance for credit losses. CECL requires loss estimates for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. In addition, this guidance modifies the other-than-temporary impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for a reversal of credit losses in future periods. This guidance requires entities to record a cumulative effect adjustment to the consolidated balance sheet ~~as of the beginning of the first reporting period in which the guidance is effective. This update is effective~~on January 1, 2019. See “Note 16. Leases” for ~~fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with earlier adoption permitted. The~~required disclosures related to this new guidance will require significant operational changes, particularly in data collection and analysis. The Company has formed a working group comprised of teams from different disciplines, including credit, finance and information technology, to evaluate the requirements of the new standard and the impact it will have on the Company’s current processes. Management has evaluated the Company’s existing credit loss forecasting models to determine their appropriateness for CECL, has performed a data gap analysis, and is developing analytical approaches to determine CECL model inputs. The Company has also engaged a software vendor to assist in implementing a CECL production platform. However, as the impact of adopting the new guidance is expected to be heavily influenced by an assessment of the composition, characteristics, and credit quality of the Company’s loan and investment securities portfolio as well as the economic conditions in effect at the adoption date, management is currently unable to reasonably estimate the impact of adopting the new standard.guidance.

~~In January 2017, the FASB issued ASU No. 2017-04,~~ ~~Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment~~. This guidance simplifies the subsequent measurement of goodwill by eliminating Step 2 from the current two-step goodwill impairment test. This guidance provides that a goodwill impairment test be conducted by comparing the fair value of a reporting unit with its carrying amount. Entities are to recognize an impairment charge for goodwill by the amount by which the carrying amount exceeds the reporting unit’s fair value. Entities will continue to have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of ASU No. 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt ~~Securities.~~ ~~Under current GAAP,~~Securities. Prior to the adoption of ASU No. 2017-08, entities ~~normally amortize~~typically amortized the premium as an adjustment of yield over the contractual life of ~~the instrument.~~debt securities. This guidance shortens the amortization period for certain callable debt securities held at a premium to the earliest call date. ~~This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.~~ The ~~adoption~~Company adopted the provisions of ASU No. 2017-08 ison January 1, 2019, and it did not ~~expected to~~ have a material impact on the Company’s consolidated financial statements.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815), Targeted Improvements to Accounting for Hedging Activities. The objectives of the new guidance ~~are~~were to: (1) improve the transparency and understandability of information conveyed to financial statement users about an entity’s risk management activities by better aligning the entity’s financial reporting for hedging relationships with those risk management activities, and (2) reduce the complexity of and simplify the application of hedge accounting by preparers. ~~This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.~~ Historically, the Company has participated in limited activities in fair value and cash flow hedging relationships. As a result, the adoption of ASU No. 2017-12 ison January 1, 2019, did not ~~expected to~~ have a material impact on the Company’s consolidated financial statements. See “Note 12. Derivative Financial Instruments” for required disclosures related to this new guidance.

~~In August 2018, the FASB issued ASU No. 2018-13,~~ ~~Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.~~ This guidance is a part of the FASB’s disclosure framework project to improve disclosure effectiveness. This guidance eliminates certain disclosure requirements for fair value measurements: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, an entity’s policy for the timing of transfers between levels of the fair value hierarchy and an entity’s valuation processes for Level 3 fair value measurements. This guidance also adds new disclosure requirements for public entities: changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value

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measurements of instruments held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements, including how the weighted average is calculated. Furthermore, this guidance modifies certain requirements which will involve disclosing: transfers into and out of Level 3 of the fair value hierarchy, purchases and issuances of Level 3 assets and liabilities, and information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date. This update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of ASU No. 2018-13 is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract. This guidance aligns the accounting for implementation costs related to a hosting arrangement that is a service contract with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Common examples of hosting arrangements include software as a service, platform or infrastructure as a service and other similar types of hosting arrangements. While capitalized costs related to internal-use software is generally considered an intangible asset, costs incurred to implement a cloud computing arrangement that is a service contract would typically be characterized in the company’s financial statements in the same manner as other service costs (e.g., ~~prepaid expense)~~other assets). The new guidance ~~provides~~provided that an entity would be required to amortize capitalized implementation costs over the term of the hosting arrangement on a straight-line basis unless another systematic and rational basis iswas more representative of the pattern in which the entity ~~expects~~expected to benefit from access to the hosted software. This ~~update~~guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with earlier adoption permitted in any annual or interim period for which financial statements have not yet been issued or made available for issuance. The Company ~~expects to~~ early ~~adopt~~adopted the provisions of ASU No. 2018-15 on January 1, 2019 due to the Company’s shift towards utilizing more hosting arrangements that isare service contracts. For the nine months ended September 30, 2019, the Company capitalized $6.3 million related to hosting arrangements that are service contracts.

In October 2018, the FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 815), Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a ~~service contract. Management is currently evaluating~~Benchmark Interest Rate for Hedge Accounting Purposes. This guidance expands the ~~impact that~~list of U.S. benchmark interest rates permitted in the ~~adoption~~application of hedge accounting by adding the OIS rate based on the SOFR. Due to concerns about the sustainability of the London Interbank Offered Rate (“LIBOR”), a committee convened by the Federal Reserve Board and the Federal Reserve Bank of New York initiated an effort to introduce an alternative reference rate in the U.S. The committee identified SOFR as the preferred alternative reference rate to LIBOR. The OIS rate based on SOFR was added as a U.S. benchmark interest rate to facilitate broader use in the marketplace and provide sufficient lead time for entities to prepare for changes to interest rate risk hedging strategies. The Company adopted the provisions of ASU No. ~~2018-15~~2018-16 on January 1, 2019 and it did not have a material impact on the Company’s consolidated financial statements.

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Recent Accounting Pronouncements

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

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This guidance eliminates the probable recognition threshold for credit losses on financial assets measured at amortized cost. For loans and held-to-maturity debt securities, this guidance requires a current expected credit loss (“CECL”) approach to determine the allowance for credit losses (“ACL”). CECL requires loss estimates for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. CECL also applies to off-balance sheet credit exposures, except for unconditionally cancellable commitments. In addition, this guidance modifies the other-than-temporary-impairment model for available-for-sale debt securities to require an allowance for credit impairment instead of a direct write-down, which allows for a reversal of credit losses in future periods. This guidance requires entities to record a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with earlier adoption permitted. In April 2019, the FASB also issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments. As it relates to CECL, this guidance amended certain provisions contained in ASU No. 2016-13, particularly with regards to the inclusion of accrued interest in the definition of amortized cost, as well as clarifying that extension and renewal options that are not unconditionally cancelable by the entity that are included in the original or modified contract should be considered in the entity’s determination of expected credit losses. As permitted by ASU No. 2016-13, the Company expects to elect the practical expedient to use the fair value of the collateral at the reporting date when recording the net carrying amount of the asset and determining the ACL for a financial asset for which the repayment is expected to be provided substantially through the operation or sale of the collateral when the borrower is experiencing financial difficulty based on the Company’s assessment as of the reporting date. Furthermore, as permitted by ASU No. 2019-04, the Company expects to make accounting policy elections not to measure an ACL on accrued interest receivable, write-off accrued interest receivable by reversing interest income and to present accrued interest receivable separately from the related financial asset on the balance sheet.

The implementation of CECL will require significant operational changes, particularly in data collection and analysis. The Company formed a working group comprised of teams from different disciplines, including credit, finance and information technology, to evaluate the requirements of the new standard and the impact it will have on the Company’s current processes. The Company also engaged a software vendor and has run several CECL parallel productions during 2019. Based on the Company’s portfolio balances and forecasted economic conditions as of September 30, 2019, management believes that the adoption of the CECL standard could result in an increase in the ACL of approximately 10% to 15%, as compared to the Company’s current reserve levels. The estimated impact of the implementation of the CECL standard is based on the current state of our end-to-end CECL process. However, certain processes are still under development, including refinement of certain models, the qualitative framework, internal control design, testing, model validation and the build-out of the operational control structure supporting the end-to-end process.

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

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. This guidance simplifies the subsequent measurement of goodwill by eliminating Step 2 from the current two-step goodwill impairment test. This guidance provides that a goodwill impairment test be conducted by comparing the fair value of a reporting unit with its carrying amount. Entities are to recognize an impairment charge for goodwill by the amount by which the carrying amount exceeds the reporting unit’s fair value. Entities will continue to have the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of ASU No. 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.

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In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. This guidance is a part of the FASB’s disclosure framework project to improve disclosure effectiveness. This guidance eliminates certain disclosure requirements for fair value measurements: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, an entity’s policy for the timing of transfers between levels of the fair value hierarchy and an entity’s valuation processes for Level 3 fair value measurements. This guidance also adds new disclosure requirements for public entities: changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period, and the range and weighted average of significant unobservable inputs used to develop recurring and nonrecurring Level 3 fair value measurements, including how the weighted average is calculated. Furthermore, this guidance modifies certain requirements which will involve disclosing: transfers into and out of Level 3 of the fair value hierarchy, purchases and issuances of Level 3 assets and liabilities, and information about the measurement uncertainty of Level 3 fair value measurements as of the reporting date. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The adoption of ASU No. 2018-13 is not expected to have a material impact on the Company’s consolidated financial statements.

2. Investment Securities

As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, investment securities consisted predominantly of the following investment categories:

U.S. Treasury and debt securities– includes U.S. Treasury notes and debt securities issued by ~~government- sponsored~~agencies and government-sponsored enterprises.

Mortgage-backed securities– includes securities backed by notes or receivables secured by mortgage assets with cash flows based on actual or scheduled payments.

Collateralized mortgageobligations– includes securities backed by a pool of mortgages with cash flows distributed based on certain rules rather than pass through payments.

Debt securities issued by states and political subdivisions – includes general obligation bonds issued by state and local governments.

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As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, all of the Company’s investment securities were classified as ~~debt securities and~~ available-for-sale. Amortized cost and fair value of securities as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:


	September 30, 2018								December 31, 2017
	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair

																	September 30, 2019								December 31, 2018
																	Amortized		Unrealized		Unrealized		Fair		Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value		Cost		Gains		Losses		Value		Cost		Gains		Losses		Value		Cost		Gains		Losses		Value
U.S. Treasury securities	$	403,425	$	—	$	(19,535)	$	383,890	$	404,376	$	—	$	(12,121)	$	392,255	$	29,653	$	85	$	—	$	29,738	$	389,470	$	—	$	—	$	389,470
Government agency debt securities																		24,387		85		—		24,472		—		—		—		—
Government-sponsored enterprises debt securities		249,716		—		(12,499)		237,217		249,712		—		(7,111)		242,601		126,696		28		(75)		126,649		248,372		—		(6,778)		241,594
Government agency mortgage-backed securities		439,773		—		(20,480)		419,293		356,858		—		(5,468)		351,390		342,326		2,738		(1,159)		343,905		426,710		—		(15,174)		411,536
Government-sponsored enterprises mortgage-backed securities		161,975		93		(7,935)		154,133		178,702		169		(4,130)		174,741		366,346		6,831		(1,228)		371,949		156,056		85		(5,294)		150,847
Collateralized mortgage obligations:
Government agency		2,906,962		—		(152,996)		2,753,966		3,367,173		47		(76,746)		3,290,474		2,479,961		13,900		(7,337)		2,486,524		2,779,620		—		(97,171)		2,682,449
Government-sponsored enterprises		657,793		—		(30,554)		627,239		779,911		25		(17,218)		762,718		773,755		3,964		(3,874)		773,845		620,337		—		(17,745)		602,592
Debt securities issued by states and political subdivisions		20,344		—		(781)		19,563		20,543		—		(64)		20,479		—		—		—		—		19,854		—		—		19,854
Total available-for-sale securities	$	4,839,988	$	93	$	(244,780)	$	4,595,301	$	5,357,275	$	241	$	(122,858)	$	5,234,658	$	4,143,124	$	27,631	$	(13,673)	$	4,157,082	$	4,640,419	$	85	$	(142,162)	$	4,498,342

Proceeds from calls and sales of investment securities were $38.0 million and nil, respectively, for the three months ended September 30, 2019 and $38.0 million and $905.6 million, respectively, for the nine months ended September 30, 2019. Proceeds from both calls and sales of investment securities were nil for both the three and nine months ended September 30, ~~2018 and 2017.~~2018. The Company recorded no0 gross realized gains and no0 gross realized losses for ~~both~~the three months ended September 30, 2019 and gross realized gains of $0.1 million and gross realized losses of $2.7 million

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for the nine months ended September 30, 2019. The Company recorded 0 gross realized gains and 0 gross realized losses for the three and nine months ended September 30, ~~2018 and 2017. Accordingly, no~~2018. The income tax expense related to the Company’s net realized gain on the sale of investment securities was nil for the three months ended September 30, 2019. The income tax benefit related to the Company’s net realized loss on the sale of investment securities was $0.7 million for the nine months ended September 30, 2019. NaN provision for income taxes related to net realized gains on the sale of investment securities was recorded for the three and nine months ended September 30, ~~2018 and 2017.~~2018. Gains and losses realized on sales of securities are determined using the specific identification method.

Interest income from taxable investment securities was ~~$25.1~~$22.3 million and ~~$24.2~~$25.1 million for the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$81.2~~$71.5 million and ~~$75.7~~$81.2 million for the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Interest income from non-taxable investment securities was NaN and $0.1 million for the three months ended September 30, 2019 and 2018, respectively, and NaN and $0.4 million ~~during~~for the ~~three and~~ nine months ended September 30, 2019 and 2018, respectively. ~~The Company did not own any non-taxable investment securities during the three and nine months ended September 30, 2017.~~

The amortized cost and fair value of debt securities issued by the U.S. Treasury and government-sponsored enterprises ~~and states and political subdivisions~~ as of September 30, ~~2018,~~2019, by contractual maturity, are shown below. ~~Mortgage-backed~~Debt securities issued by government agencies, mortgage-backed securities and collateralized mortgage obligations are disclosed separately in the table below as remaining expected maturities will differ from contractual maturities as borrowers have the right to prepay obligations.


	September 30, 2018
	Amortized		Fair

					September 30, 2019
					Amortized		Fair
(dollars in thousands)	Cost		Value		Cost		Value
Due in one year or less					$	29,653	$	29,738
Due after one year through five years	$	503,416	$	479,725		126,696		126,649
Due after five years through ten years		149,725		141,382		—		—
Due after ten years		20,344		19,563		—		—
		673,485		640,670

						156,349		156,387

Government agency debt securities						24,387		24,472
Government agency mortgage-backed securities		439,773		419,293		342,326		343,905
Government-sponsored enterprises mortgage-backed securities		161,975		154,133		366,346		371,949
Collateralized mortgage obligations:
Government agency		2,906,962		2,753,966		2,479,961		2,486,524
Government-sponsored enterprises		657,793		627,239		773,755		773,845
Total mortgage-backed securities and collateralized mortgage obligations		4,166,503		3,954,631
Total collateralized mortgage obligations						3,253,716		3,260,369
Total available-for-sale securities	$	4,839,988	$	4,595,301	$	4,143,124	$	4,157,082

At September 30, ~~2018,~~2019, pledged securities totaled ~~$2.4~~$2.0 billion, of which ~~$2.2~~$1.8 billion was pledged to secure public deposits and ~~$229.8~~$239.1 million was pledged to secure other financial transactions. At December 31, ~~2017,~~2018, pledged securities totaled ~~$3.0~~$2.0 billion, of which ~~$2.8~~$1.7 billion was pledged to secure public deposits and ~~$229.2~~$232.7 million was pledged to secure other financial transactions.

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The Company held no0 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, ~~2018~~2019 and December 31, ~~2017.~~2018.

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The following table presents the unrealized gross losses and fair values of securities in the available-for-sale portfolio by length of time that the ~~202~~90 and ~~196~~154 individual securities in each category have been in a continuous loss position as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The unrealized losses on investment securities were attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.


	Time in Continuous Loss as of September 30, 2018
	Less Than 12 Months				12 Months or More				Total
	Unrealized				Unrealized				Unrealized

													Time in Continuous Loss as of September 30, 2019
													Less Than 12 Months				12 Months or More				Total
													Unrealized				Unrealized				Unrealized
(dollars in thousands)	Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value
U.S. Treasury securities	$	—	$	—	$	(19,535)	$	383,890	$	(19,535)	$	383,890
Government-sponsored enterprises debt securities		(967)		34,033		(11,532)		203,184		(12,499)		237,217	$	(75)	$	24,917	$	—	$	—	$	(75)	$	24,917
Government agency mortgage-backed securities		(11,097)		291,901		(9,383)		127,392		(20,480)		419,293		—		—		(1,159)		115,069		(1,159)		115,069
Government-sponsored enterprises mortgage-backed securities		(1)		181		(7,934)		148,966		(7,935)		149,147		—		—		(1,228)		115,456		(1,228)		115,456
Collateralized mortgage obligations:
Government agency		(1,166)		44,805		(151,830)		2,709,161		(152,996)		2,753,966		(820)		407,961		(6,517)		652,211		(7,337)		1,060,172
Government-sponsored enterprises		(6,167)		182,303		(24,387)		444,936		(30,554)		627,239		(161)		107,250		(3,713)		226,823		(3,874)		334,073
Debt securities issued by states and political subdivisions		(368)		9,402		(413)		10,161		(781)		19,563
Total available-for-sale securities with unrealized losses	$	(19,766)	$	562,625	$	(225,014)	$	4,027,690	$	(244,780)	$	4,590,315	$	(1,056)	$	540,128	$	(12,617)	$	1,109,559	$	(13,673)	$	1,649,687


	Time in Continuous Loss as of December 31, 2017
	Less Than 12 Months				12 Months or More				Total
	Unrealized				Unrealized				Unrealized

													Time in Continuous Loss as of December 31, 2018
													Less Than 12 Months				12 Months or More				Total
													Unrealized				Unrealized				Unrealized
(dollars in thousands)	Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value		Losses		Fair Value
U.S. Treasury securities	$	(994)	$	48,182	$	(11,127)	$	344,073	$	(12,121)	$	392,255
Government-sponsored enterprises debt securities		(642)		59,358		(6,469)		183,243		(7,111)		242,601	$	—	$	—	$	(6,778)	$	157,939	$	(6,778)	$	157,939
Government agency mortgage-backed securities		(976)		200,963		(4,492)		150,427		(5,468)		351,390		—		—		(15,174)		373,891		(15,174)		373,891
Government-sponsored enterprises mortgage-backed securities		(1)		63		(4,129)		168,342		(4,130)		168,405		(1)		172		(5,293)		125,869		(5,294)		126,041
Collateralized mortgage obligations:
Government agency		(23,236)		1,473,170		(53,510)		1,803,338		(76,746)		3,276,508		—		—		(97,171)		2,475,532		(97,171)		2,475,532
Government-sponsored enterprises		(3,203)		327,435		(14,015)		403,321		(17,218)		730,756		—		—		(17,745)		486,175		(17,745)		486,175
Debt securities issued by states and political subdivisions		(64)		10,641		—		—		(64)		10,641
Total available-for-sale securities with unrealized losses	$	(29,116)	$	2,119,812	$	(93,742)	$	3,052,744	$	(122,858)	$	5,172,556	$	(1)	$	172	$	(142,161)	$	3,619,406	$	(142,162)	$	3,619,578

Other-Than-Temporary Impairment (“OTTI”)

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

The term “other-than-temporary” is not intended to indicate that the decline is permanent, but indicates that the prospects for a near-term recovery of value are not necessarily favorable, or that there is a general lack of evidence to support a realizable value equal to or greater than the carrying value of the investment. The decline in value is not related to any issuer- or industry-specific credit event. At September 30, ~~2018 and December 31, 2017,~~2019, the Company did not have the intent to sell and determined it was more likely than not that the Company would not be required to sell the securities prior to recovery of the amortized cost basis. As the Company has the intent and ability to hold securities in an unrealized loss position, each security with an unrealized loss position in the above tables has been further assessed to determine if a credit loss exists. If it is probable that the Company will not collect all amounts due according to the contractual terms of an investment security, an OTTI is considered to have occurred. In determining whether a credit loss exists, the Company estimates the present value of future cash flows expected to be collected from the investment security. If the present value of future cash flows is less than the amortized cost basis of the security, an OTTI exists. As of ~~September 30, 2018 and~~ December 31, ~~2017,~~2018, the Company ~~did not expect any credit losses~~had the intent to sell 48 securities with an aggregated amortized cost basis of $898.2 million. As a result, the Company recorded an OTTI write-down of $24.1 million in December 2018. The OTTI write-down represented the difference between the amortized cost basis and the fair value of the securities as of December 31, 2018. In January 2019, the Company completed its ~~debt~~sale of the 48 securities and ~~no OTTI was recognized on securities during the three and nine months ended September 30, 2018 and for the year ended December 31, 2017.~~recorded an additional loss of $2.6 million.

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Visa Class B Restricted Shares

In 2008, the Company received 394,000 Visa Class B restricted shares as part of Visa’s ~~initial public offering.~~IPO. Visa Class B restricted shares are not currently convertible to publicly traded Visa Class A common shares, and only transferable in limited circumstances, until the settlement of certain litigation which are indemnified by Visa members, including the Company. As there are existing transfer restrictions and the outcome of the aforementioned litigation is uncertain, these shares were included in the consolidated balance sheets at their historical cost of $0.

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In 2016, the Company recorded a $22.7 million net realized gain related to the sale of 274,000 Visa Class B restricted shares. Concurrent with the sale of the Visa Class B restricted shares, the Company entered into an agreement with the buyer that requires payment to the buyer in the event Visa reduces each member bank’s Class B conversion rate to unrestricted Class A common shares. On June 28, 2018, Visa additionally funded its litigation escrow account, thereby reducing each member bank’s Class B conversion rate to unrestricted Class A common shares. Accordingly, on July 5, 2018, Visa announced a decrease in conversion rate from 1.6483 to 1.6298, effective June 28, 2018. In July 2018, the Company made a payment of approximately $0.7 million to the buyer as a result of the reduction in the Visa Class B conversion rate. On September 27, 2019, Visa additionally funded its litigation escrow account, thereby further reducing each member bank’s Class B conversion rate to unrestricted Class A common shares. Accordingly, on September 30, 2019, Visa announced a decrease in conversion rate from 1.6298 to 1.6228, effective September 27, 2019. As of September 30, 2019, the Company recorded an estimated $0.3 million liability to be paid to the buyer as a result of the reduction in the Visa Class B conversion rate. See “Note ~~13.~~12. Derivative Financial Instruments” for more information.

The Company held approximately 120,000 Visa Class B restricted shares as of both September 30, ~~2018~~2019 and December 31, ~~2017.~~2018. These shares continued to be carried at $0 cost basis during each of the respective periods.

3. Loans and Leases

As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, loans and leases were comprised of the following:


	September 30,		December 31,

					September 30,		December 31,
(dollars in thousands)	2018		2017		2019		2018
Commercial and industrial	$	2,969,237	$	3,135,266	$	2,654,077	$	3,208,760
Real estate:
Commercial		2,891,753		2,667,597
Commercial real estate						3,309,389		2,990,783
Construction		612,794		632,911		486,977		626,757
Residential		4,313,489		4,090,053
Total real estate		7,818,036		7,390,561
Residential:
Residential mortgage						3,671,424		3,527,101
Home equity line						916,106		912,517
Total residential						4,587,530		4,439,618
Consumer		1,651,877		1,586,476		1,637,549		1,662,504
Lease financing		161,314		165,066		167,874		147,769
Total loans and leases	$	12,600,464	$	12,277,369	$	12,843,396	$	13,076,191

Outstanding loan balances are reported net of ~~unearned income, including~~ net deferred loan costs of ~~$35.8~~$41.2 million and ~~$31.2~~$36.3 million at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

As of September 30, ~~2018,~~2019, residential real estate loans totaling ~~$2.6~~$2.9 billion were pledged to collateralize the Company’s borrowing capacity at the Federal Home Loan Bank of Des Moines (“FHLB”), and consumer and commercial and industrial loans totaling ~~$969.9~~$675.3 million were pledged to collateralize the Company’s borrowing capacity at the Federal Reserve Bank of San Francisco (“FRB”). As of December 31, ~~2017,~~2018, residential real estate loans totaling ~~$2.4~~$2.5 billion were pledged to collateralize the Company’s borrowing capacity at the FHLB, and consumer and commercial and industrial loans totaling ~~$914.5~~$957.0 million were pledged to collateralize the Company’s borrowing capacity at the FRB. Residential real estate loans collateralized by properties that were in the process of foreclosure totaled ~~$3.5 million and $3.3~~$4.6 million at both September 30, ~~2018~~2019 and December 31, ~~2017, respectively.~~2018.

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

At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, remaining loan and lease commitments were comprised of the following:


	September 30,		December 31,

					September 30,		December 31,
(dollars in thousands)	2018		2017		2019		2018
Commercial and industrial	$	2,609,587	$	2,406,261	$	2,452,918	$	2,484,857
Real estate:
Commercial		108,911		78,266
Commercial real estate						126,033		114,186
Construction		511,666		450,856		627,675		526,938
Residential		944,619		980,792
Total real estate		1,565,196		1,509,914
Residential:
Residential mortgage						327		121
Home equity line						1,045,455		913,636
Total residential						1,045,782		913,757
Consumer		1,504,323		1,485,588		1,561,670		1,509,853
Total loan and lease commitments	$	5,679,106	$	5,401,763	$	5,814,078	$	5,549,591

4. Allowance for Loan and Lease Losses

The Company must maintain an allowance for loan and lease losses (the “Allowance”) that is adequate to absorb estimated probable credit losses associated with its loan and lease portfolio. The Allowance consists of an allocated portion, which covers estimated credit losses for specifically identified loans and pools of loans and leases, and an unallocated portion.

Segmentation

Management has identified ~~three~~3 primary portfolio segments in estimating the Allowance: commercial lending, residential real estate lending and consumer lending. Commercial lending is further segmented into ~~four~~4 distinct classes based on characteristics relating to the borrower, transaction, and collateral. These portfolio segments are: commercial and industrial, commercial real estate, construction, and lease financing. Residential real estate is not further segmented, but consists of ~~single-family~~ residential mortgages including real estate secured installment loans and home equity lines of credit. Consumer lending is not further segmented, but consists primarily of automobile loans, credit cards, and other installment loans. Management has developed a methodology for each segment and class taking into consideration portfolio segment-specific and class-specific factors such as product type, loan portfolio characteristics, management information systems, and other risk factors.

Specific Allocation

Commercial

A specific allocation is determined for individually impaired commercial loans. A loan is considered impaired when it is probable that the Company will be unable to collect the full amount of principal and interest according to the contractual terms of the loan agreement.

Management identifies material impaired loans based on their size in relation to the Company’s total loan and lease portfolio. Each impaired loan equal to or exceeding a specified threshold requires an analysis to determine the appropriate level of reserve for that specific loan. Impaired loans below the specified threshold are treated as a pool, with specific allocations established based on qualitative factors such as asset quality trends, risk identification, lending policies, portfolio growth, and portfolio concentrations.

Residential

A specific allocation is determined for residential real estate loans based on delinquency status. In addition, each impaired loan equal to or exceeding a specified threshold requires analysis to determine the appropriate level of reserve for that specific loan, generally based on the value of the underlying collateral less estimated costs to sell. The specific allocation will be ~~zero~~0 for impaired loans in which the value of the underlying collateral, less estimated costs to sell, exceeds the unpaid principal balance of the loan.

Consumer

A specific allocation is determined for the consumer loan portfolio using delinquency-based formula allocations. The Company uses a formula approach in determining the consumer loan specific allocation and recognizes the statistical validity of measuring losses predicated on past due status.

Pooled Allocation

Commercial

Pooled allocation for pass, special mention, substandard, and doubtful grade commercial loans and leases that share common risk characteristics and properties is determined using a historical loss rate analysis and qualitative factor considerations. Loan grade categories are discussed under “Credit Quality”.

Residential and Consumer

Pooled allocation for non-delinquent consumer and residential real estate loans is determined using a historical loss rate analysis and qualitative factor considerations.

Qualitative Adjustments

Qualitative adjustments to historical loss rates or other static sources may be necessary since these rates may not be an accurate indicator of losses inherent in the current portfolio. To estimate the level of adjustments, management considers factors including global, national and local economic conditions; levels and trends in problem loans; the effect of credit concentrations; collateral value trends; changes in risk due to changes in lending policies and practices; management expertise; industry and regulatory trends; and volume of loans.

Unallocated Allowance

The Company’s Allowance incorporates an unallocated portion to cover risk factors and events that may have occurred as of the evaluation date that have not been reflected in the risk measures utilized due to inherent limitations in the precision of the estimation process. These risk factors, in addition to past and current events based on facts at the unaudited interim consolidated balance sheet date and realistic courses of action that management expects to take, are assessed in determining the level of unallocated allowance.

The Allowance was comprised of the following for the periods indicated:


	Three Months Ended September 30, 2018
	Commercial Lending
	Commercial		Commercial
	and		Real				Lease

																	Three Months Ended September 30, 2019
																	Commercial Lending
																	Commercial		Commercial
																	and		Real				Lease
(dollars in thousands)	Industrial		Estate		Construction		Financing		Residential		Consumer		Unallocated		Total		Industrial		Estate		Construction		Financing		Residential		Consumer		Unallocated		Total
Allowance for loan and lease losses:
Balance at beginning of period	$	35,239	$	20,507	$	7,606	$	557	$	43,925	$	31,509	$	1,258	$	140,601	$	31,688	$	22,204	$	5,014	$	446	$	43,420	$	33,638	$	2,125	$	138,535
Charge-offs		(303)		—		—		—		(125)		(5,700)		—		(6,128)		(514)		—		—		—		(7)		(8,015)		—		(8,536)
Recoveries		51		21		—		—		442		1,803		—		2,317		241		30		—		—		425		2,269		—		2,965
Increase (decrease) in Provision		(1,551)		286		(1,388)		(29)		147		6,381		614		4,460		(4,098)		(358)		(361)		(54)		241		5,838		(1,208)		—
Balance at end of period	$	33,436	$	20,814	$	6,218	$	528	$	44,389	$	33,993	$	1,872	$	141,250	$	27,317	$	21,876	$	4,653	$	392	$	44,079	$	33,730	$	917	$	132,964


	Nine Months Ended September 30, 2017
	Commercial Lending
	Commercial		Commercial
	and		Real				Lease

																	Nine Months Ended September 30, 2018
																	Commercial Lending
																	Commercial		Commercial
																	and		Real				Lease
(dollars in thousands)	Industrial		Estate		Construction		Financing		Residential		Consumer		Unallocated		Total		Industrial		Estate		Construction		Financing		Residential		Consumer		Unallocated		Total
Allowance for loan and lease losses:
Balance at beginning of period	$	33,129	$	18,448	$	4,513	$	847	$	43,436	$	28,388	$	6,733	$	135,494	$	34,006	$	18,044	$	6,817	$	611	$	42,852	$	31,249	$	3,674	$	137,253
Charge-offs		(1,338)		—		—		(147)		(315)		(17,086)		—		(18,886)		(778)		—		—		—		(159)		(18,615)		—		(19,552)
Recoveries		825		468		—		—		610		5,416		—		7,319		154		175		—		—		684		6,106		—		7,119
Increase (decrease) in Provision		(778)		1,665		1,311		120		1,146		11,881		(1,945)		13,400		54		2,595		(599)		(83)		1,012		15,253		(1,802)		16,430
Balance at end of period	$	31,838	$	20,581	$	5,824	$	820	$	44,877	$	28,599	$	4,788	$	137,327	$	33,436	$	20,814	$	6,218	$	528	$	44,389	$	33,993	$	1,872	$	141,250

Special Mention – Loans and leases that have potential weaknesses deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for assets or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard – Loans and leases that are inadequately protected by the current financial condition and paying capacity of the obligor or by any collateral pledged. Loans and leases so classified must have a well-defined weakness or weaknesses that jeopardize the collection of the debt. They are characterized by the distinct possibility that the bank may sustain some loss if the deficiencies are not corrected.

Doubtful – Loans and leases that have weaknesses found in substandard borrowers with the added provision that the weaknesses make collection of debt in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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

The credit risk profiles by internally assigned grade for loans and leases as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:


	September 30, 2018
	Commercial		Commercial
	and		Real				Lease

											September 30, 2019
											Commercial		Commercial
											and		Real				Lease
(dollars in thousands)	Industrial		Estate		Construction		Financing		Total		Industrial		Estate		Construction		Financing		Total
Grade:
Pass	$	2,831,415	$	2,797,282	$	608,201	$	159,501	$	6,396,399	$	2,498,746	$	3,139,428	$	483,535	$	166,880	$	6,288,589
Special mention		64,966		69,992		1,630		1,544		138,132		119,553		125,082		308		878		245,821
Substandard		72,664		24,479		2,963		269		100,375		35,778		44,879		3,134		116		83,907
Doubtful		192		—		—		—		192
Total	$	2,969,237	$	2,891,753	$	612,794	$	161,314	$	6,635,098	$	2,654,077	$	3,309,389	$	486,977	$	167,874	$	6,618,317

Impaired and Nonaccrual Loans and Leases

The Company evaluates certain loans and leases individually for impairment. A loan or lease is considered to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan or lease. An allowance for impaired commercial loans, including commercial real estate and construction loans, is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. An allowance for impaired residential loans is measured based on the estimated fair value of the collateral, less any selling costs. Management exercises significant judgment in developing these estimates.

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

It is the Company’s policy to charge off a loan when the facts indicate that the loan is considered uncollectible.

The aging analyses of past due loans and leases as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:


	September 30, 2018
	Accruing Loans and Leases
					Greater								Total Non
					Than or						Total		Accruing
	30-59		60-89		Equal to		Total				Accruing		Loans
	Days		Days		90 Days		Past				Loans and		and		Total

																	September 30, 2019
																	Accruing Loans and Leases
																					Greater								Total Non
																					Than or						Total		Accruing
																	30-59		60-89		Equal to		Total				Accruing		Loans
																	Days		Days		90 Days		Past				Loans and		and		Total
(dollars in thousands)	Past Due		Past Due		Past Due		Due		Current		Leases		Leases		Outstanding		Past Due		Past Due		Past Due		Due		Current		Leases		Leases		Outstanding
Commercial and industrial	$	2,911	$	217	$	141	$	3,269	$	2,965,487	$	2,968,756	$	481	$	2,969,237	$	1,426	$	1,204	$	750	$	3,380	$	2,650,685	$	2,654,065	$	12	$	2,654,077
Commercial real estate		457		284		172		913		2,888,054		2,888,967		2,786		2,891,753		699		80		—		779		3,308,577		3,309,356		33		3,309,389
Construction		232		—		—		232		610,561		610,793		2,001		612,794		—		3,169		—		3,169		483,808		486,977		—		486,977
Lease financing		—		—		—		—		161,314		161,314		—		161,314		—		—		—		—		167,874		167,874		—		167,874
Residential		5,927		1,178		2,788		9,893		4,297,918		4,307,811		5,678		4,313,489
Residential mortgage																		2,499		1,553		139		4,191		3,663,274		3,667,465		3,959		3,671,424
Home equity line																		1,933		949		3,192		6,074		910,032		916,106		—		916,106
Consumer		32,943		6,513		2,813		42,269		1,609,608		1,651,877		—		1,651,877		24,375		6,111		3,076		33,562		1,603,787		1,637,349		200		1,637,549
Total	$	42,470	$	8,192	$	5,914	$	56,576	$	12,532,942	$	12,589,518	$	10,946	$	12,600,464	$	30,932	$	13,066	$	7,157	$	51,155	$	12,788,037	$	12,839,192	$	4,204	$	12,843,396


	December 31, 2017
	Accruing Loans and Leases
					Greater								Total Non
					Than or						Total		Accruing
	30-59		60-89		Equal to		Total				Accruing		Loans
	Days		Days		90 Days		Past				Loans and		and		Total

																	December 31, 2018
																	Accruing Loans and Leases
																					Greater								Total Non
																					Than or						Total		Accruing
																	30-59		60-89		Equal to		Total				Accruing		Loans
																	Days		Days		90 Days		Past				Loans and		and		Total
(dollars in thousands)	Past Due		Past Due		Past Due		Due		Current		Leases		Leases		Outstanding		Past Due		Past Due		Past Due		Due		Current		Leases		Leases		Outstanding
Commercial and industrial	$	156	$	—	$	220	$	376	$	3,131,958	$	3,132,334	$	2,932	$	3,135,266	$	1,293	$	—	$	141	$	1,434	$	3,207,052	$	3,208,486	$	274	$	3,208,760
Commercial real estate		—		1,099		1,400		2,499		2,663,312		2,665,811		1,786		2,667,597		—		—		—		—		2,989,125		2,989,125		1,658		2,990,783
Construction		—		2,001		—		2,001		630,910		632,911		—		632,911		91		—		—		91		626,666		626,757		—		626,757
Lease financing		—		—		—		—		165,066		165,066		—		165,066		47		—		—		47		147,722		147,769		—		147,769
Residential		8,463		1,289		1,360		11,112		4,073,834		4,084,946		5,107		4,090,053
Residential mortgage																		2,274		1,012		32		3,318		3,519,172		3,522,490		4,611		3,527,101
Home equity line																		5,616		775		2,842		9,233		903,284		912,517		—		912,517
Consumer		24,379		3,814		1,394		29,587		1,556,889		1,586,476		—		1,586,476		32,406		8,712		3,373		44,491		1,618,013		1,662,504		—		1,662,504
Total	$	32,998	$	8,203	$	4,374	$	45,575	$	12,221,969	$	12,267,544	$	9,825	$	12,277,369	$	41,727	$	10,499	$	6,388	$	58,614	$	13,011,034	$	13,069,648	$	6,543	$	13,076,191

The total carrying amounts and the total unpaid principal balances of impaired loans and leases as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:


	September 30, 2018
			Unpaid
	Recorded		Principal		Related

							September 30, 2019
									Unpaid
							Recorded		Principal		Related
(dollars in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans with no related allowance recorded:
Commercial and industrial	$	2,929	$	3,044	$	—	$	2,498	$	2,510	$	—
Commercial real estate		6,312		6,412		—		2,876		2,876		—
Construction		2,001		2,001		—
Residential		10,068		10,383		—
Residential mortgage								8,454		8,519		—
Consumer								200		632		—
Total	$	21,310	$	21,840	$	—	$	14,028	$	14,537	$	—
Impaired loans with a related allowance recorded:
Commercial and industrial	$	9,856	$	9,856	$	448	$	5,741	$	5,741	$	106
Commercial real estate		1,338		1,338		57		701		701		25
Residential		7,050		7,435		409
Residential mortgage								6,085		6,471		284
Total	$	18,244	$	18,629	$	914	$	12,527	$	12,913	$	415
Total impaired loans:
Commercial and industrial	$	12,785	$	12,900	$	448	$	8,239	$	8,251	$	106
Commercial real estate		7,650		7,750		57		3,577		3,577		25
Construction		2,001		2,001		—
Residential		17,118		17,818		409
Residential mortgage								14,539		14,990		284
Consumer								200		632		—
Total	$	39,554	$	40,469	$	914	$	26,555	$	27,450	$	415


	December 31, 2017
			Unpaid
	Recorded		Principal		Related

							December 31, 2018
									Unpaid
							Recorded		Principal		Related
(dollars in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans with no related allowance recorded:
Commercial and industrial	$	18,036	$	18,909	$	—	$	4,449	$	4,498	$	—
Commercial real estate		9,745		9,745		—		5,016		5,016		—
Residential		8,648		9,006		—
Residential mortgage								9,112		9,426		—
Total	$	36,429	$	37,660	$	—	$	18,577	$	18,940	$	—
Impaired loans with a related allowance recorded:
Commercial and industrial	$	147	$	147	$	4	$	4,270	$	4,270	$	108
Commercial real estate		891		891		6		727		727		32
Residential		7,882		8,162		484
Residential mortgage								7,002		7,387		396
Total	$	8,920	$	9,200	$	494	$	11,999	$	12,384	$	536
Total impaired loans:
Commercial and industrial	$	18,183	$	19,056	$	4	$	8,719	$	8,768	$	108
Commercial real estate		10,636		10,636		6		5,743		5,743		32
Residential		16,530		17,168		484
Residential mortgage								16,114		16,813		396
Total	$	45,349	$	46,860	$	494	$	30,576	$	31,324	$	536

The following tables provide information with respect to the Company’s average balances, and of interest income recognized from, impaired loans for the three and nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018:


	Three Months Ended				Nine Months Ended
	September 30, 2018				September 30, 2018
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income

									Three Months Ended				Nine Months Ended
									September 30, 2019				September 30, 2019
									Average		Interest		Average		Interest
									Recorded		Income		Recorded		Income
(dollars in thousands)	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
Impaired loans with no related allowance recorded:
Commercial and industrial	$	8,830	$	38	$	13,149	$	141	$	3,888	$	38	$	3,653	$	123
Commercial real estate		7,671		47		8,587		116		2,946		38		3,524		250
Construction		2,120		12		1,560		12
Residential		10,069		132		9,416		399
Residential mortgage										8,065		88		8,365		280
Consumer										100		—		50		—
Total	$	28,690	$	229	$	32,712	$	668	$	14,999	$	164	$	15,592	$	653
Impaired loans with a related allowance recorded:
Commercial and industrial	$	5,605	$	136	$	2,875	$	402	$	4,673	$	94	$	5,325	$	301
Commercial real estate		1,106		17		996		51		706		10		714		30
Residential		7,238		77		7,461		248
Residential mortgage										6,608		98		6,882		297
Total	$	13,949	$	230	$	11,332	$	701	$	11,987	$	202	$	12,921	$	628
Total impaired loans:
Commercial and industrial	$	14,435	$	174	$	16,024	$	543	$	8,561	$	132	$	8,978	$	424
Commercial real estate		8,777		64		9,583		167		3,652		48		4,238		280
Construction		2,120		12		1,560		12
Residential		17,307		209		16,877		647
Residential mortgage										14,673		186		15,247		577
Consumer										100		—		50		—
Total	$	42,639	$	459	$	44,044	$	1,369	$	26,986	$	366	$	28,513	$	1,281


	Three Months Ended				Nine Months Ended
	September 30, 2017				September 30, 2017
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income

									Three Months Ended				Nine Months Ended
									September 30, 2018				September 30, 2018
									Average		Interest		Average		Interest
									Recorded		Income		Recorded		Income
(dollars in thousands)	Investment		Recognized		Investment		Recognized		Investment		Recognized		Investment		Recognized
Impaired loans with no related allowance recorded:
Commercial and industrial	$	19,100	$	204	$	20,402	$	642	$	8,830	$	38	$	13,149	$	141
Commercial real estate		8,252		92		9,871		338		7,671		47		8,587		116
Lease financing		—		—		77		—
Residential		8,291		139		8,566		419
Construction										2,120		12		1,560		12
Residential mortgage										10,069		132		9,416		399
Total	$	35,643	$	435	$	38,916	$	1,399	$	28,690	$	229	$	32,712	$	668
Impaired loans with a related allowance recorded:
Commercial and industrial	$	154	$	2	$	3,179	$	52	$	5,605	$	136	$	2,875	$	402
Commercial real estate		910		10		925		32		1,106		17		996		51
Residential		8,875		96		9,150		285
Residential mortgage										7,238		77		7,461		248
Total	$	9,939	$	108	$	13,254	$	369	$	13,949	$	230	$	11,332	$	701
Total impaired loans:
Commercial and industrial	$	19,254	$	206	$	23,581	$	694	$	14,435	$	174	$	16,024	$	543
Commercial real estate		9,162		102		10,796		370		8,777		64		9,583		167
Lease financing		—		—		77		—
Residential		17,166		235		17,716		704
Construction										2,120		12		1,560		12
Residential mortgage										17,307		209		16,877		647
Total	$	45,582	$	543	$	52,170	$	1,768	$	42,639	$	459	$	44,044	$	1,369

Modifications

Commercial and industrial loans modified in a troubled debt restructuring (“TDR”) may involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. ~~Additional collateral, a co-borrower, or a guarantor may be requested.~~ Modifications of commercial real estate and construction loans in a TDR may involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a new borrower or guarantor. Modifications of construction loans in a TDR may also involve extending the interest-only payment period. Interest continues to accrue on the missed payments and as a result, the effective yield on the loan remains unchanged. As the forbearance period usually involves an insignificant payment delay, lease financing modifications typically do not meet the reporting criteria for a TDR. Residential real estate loans modified in a TDR may be comprised of loans where monthly payments are lowered to accommodate the borrowers' financial needs for a period of time, normally two years. Generally, consumer loans are not

classified as a TDR as they

Table of Contents

are normally charged off upon reaching a predetermined delinquency status that ranges from 120 to 180 days and varies by product type.

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

The following presents, by class, information related to loans modified in a TDR during the three and nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018:


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

Three Months Ended

Nine Months Ended

September 30, 2018

September 30, 2018

Number of

Recorded

Related

Number of

Recorded

Related
(dollars in thousands)

Contracts

Investment(1)

Allowance

Contracts

Investment(1)

Allowance
Commercial and industrial

—

$
—

$
—

1

$
450

$
12
Residential

3

883

30

3

883

30
Total

3

$
883

$
30

4

$
1,333

$
42

Three Months Ended

Nine Months Ended

September 30, 2017

September 30, 2017

Number of

Recorded

Related

Number of

Recorded

Related
(dollars in thousands)

Contracts

Investment(1)

Allowance

Contracts

Investment(1)

Allowance
Commercial and industrial

—

$
—

$
—

1

$
1,120

$
—
Residential

—

—

—

2

661

21
Total

—

$
—

$
—

3

$
1,781

$
21

(1)

⁽¹⁾

The recorded investment balances reflect all partial paydowns and charge-offs since the modification date and do not include TDRs that have been fully paid off, charged off, or foreclosed upon by the end of the period.


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

(1)	The recorded investment balances reflect all partial paydowns and charge-offs since the modification date and do not include TDRs that have been fully paid off, charged off, or foreclosed upon by the end of the period.

The above loans were modified in a TDR through an extension of maturity dates, temporary interest-only payments, reduced payments, or below-market interest rates.

The Company had commitments to extend credit, standby letters of credit, and commercial letters of credit totaling ~~$5.9~~$6.0 billion and ~~$5.6~~$5.8 billion as of September 30, ~~2018~~2019 and December 31, ~~2017, respectively.~~2018. Of the ~~$5.9~~$6.0 billion at September 30, ~~2018,~~2019, there were commitments of ~~$0.9~~$1.3 million related to borrowers who had loan terms modified in a TDR. Of the ~~$5.6~~$5.8 billion at December 31, ~~2017,~~2018, there were commitments of ~~$1.9~~$1.8 million related to borrowers who had loan terms modified in a TDR.

Table of Contents

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, 2018			September 30, 2018			September 30, 2017			September 30, 2017
	Number of	Recorded		Number of	Recorded		Number of	Recorded		Number of	Recorded

													Three Months Ended			Nine Months Ended			Three Months Ended			Nine Months Ended
													September 30, 2019			September 30, 2019			September 30, 2018			September 30, 2018
													Number of	Recorded		Number of	Recorded		Number of	Recorded		Number of	Recorded
(dollars in thousands)	Contracts	Investment(1)		Contracts	Investment(1)		Contracts	Investment(1)		Contracts	Investment(1)		Contracts	Investment⁽¹⁾		Contracts	Investment⁽¹⁾		Contracts	Investment⁽¹⁾		Contracts	Investment⁽¹⁾
Commercial and industrial(2)	—	$	—	2	$	254	—	$	—	1	$	2,496	2	$	588	4	$	588	—	$	—	2	$	254
Commercial real estate(3)	—		—	—		—	—		—	1		1,393
Residential(4)	—		—	—		—	—		—	1		510
Residential mortgage⁽³⁾													—		—	1		348	—		—	—		—
Total	—	$	—	2	$	254	—	$	—	3	$	4,399	2	$	588	5	$	936	—	$	—	2	$	254

(1)

⁽¹⁾

(2)

⁽²⁾

For ~~both~~the three and nine months ended September 30, 2019, the commercial and industrial loans that subsequently defaulted were temporarily modified to interest-only payments. For the nine months ended September 30, 2018, ~~and 2017,~~ the maturity dates for the commercial and industrial loans that subsequently defaulted were extended.

(3)

⁽³⁾

For the nine months ended September 30, ~~2017,~~2019, the ~~commercial real estate~~maturity date for the residential mortgage loan that subsequently defaulted was extended.

⁽⁴⁾

~~For~~ ~~the nine months ended September 30, 2017, the~~ ~~residential real estate loan that subsequently defaulted was modified for interest-only payments.~~

Foreclosure Proceedings

There was ~~one~~1 residential mortgage loan collateralized by real estate property of $0.3 million that was modified in a TDR that was in process of foreclosure as of both September 30, ~~2018. As of~~2019 and December 31, ~~2017, there was one separate residential mortgage loan collateralized by real estate property of $0.3 million that was modified in a TDR that was in process of foreclosure.~~2018.

Foreclosed Property

Residential real estate property held from ~~two~~1 foreclosed residential mortgage ~~loans~~ included in other real estate owned and repossessed personal property shown in the unaudited interim consolidated balance sheet was ~~$0.4~~$0.1 million as of September 30, ~~2018.~~2019. Residential real estate ~~property~~properties held from ~~one~~1 foreclosed ~~TDR of a~~ residential mortgage loan and 1 foreclosed home equity line included in other real estate owned and repossessed personal property shown in the unaudited interim consolidated balance ~~sheet was $0.3~~sheets were $0.8 million as of December 31, ~~2017.~~2018.

5. Mortgage Servicing Rights

Mortgage servicing activities include collecting principal, interest, tax, and insurance payments from borrowers while accounting for and remitting payments to investors, taxing authorities, and insurance companies. The Company also monitors delinquencies and administers foreclosure proceedings.

Mortgage loan servicing income is recorded in noninterest income as a part of other service charges and fees and amortization of the servicing assets is recorded in noninterest income as part of other income. The unpaid principal amount of residential real estate loans serviced for others was ~~$2.7~~$2.4 billion and ~~$2.3~~$2.7 billion as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. Servicing fees include contractually specified fees, late charges, and ancillary fees, and were ~~$1.7~~$1.6 million and ~~$1.6~~$1.7 million for the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$5.3~~$4.8 million and ~~$5.0~~$5.3 million for the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

Amortization of mortgage servicing rights (“MSRs”) was $1.0 million ~~and $0.9 million~~ for both the three months ended September 30, 2019 and 2018, and ~~2017, respectively,~~$2.6 million and $3.0 ~~million and $2.8~~ million for the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. The estimated future amortization expenses for MSRs over the next five years are as follows:


	Estimated

			Estimated
(dollars in thousands)	Amortization		Amortization
Under one year	$	2,452	$	2,467
One to two years		2,157		2,048
Two to three years		1,900		1,693
Three to four years		1,671		1,403
Four to five years		1,470		1,172

Table of Contents

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

~~Table of Contents~~


	September 30,		December 31,

					September 30,		December 31,
(dollars in thousands)	2018		2017		2019		2018
Gross carrying amount	$	63,276	$	56,571	$	63,401	$	63,342
Less: accumulated amortization		46,339		43,375		49,771		47,187
Net carrying value	$	16,937	$	13,196	$	13,630	$	16,155

The following table presents changes in amortized MSRs for the three and nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018:


	Three Months Ended September 30,				Nine Months Ended September 30,

									Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands)	2018		2017		2018		2017		2019		2018		2019		2018
Balance at beginning of period	$	17,660	$	14,877	$	13,196	$	16,809	$	14,573	$	17,660	$	16,155	$	13,196
Originations		233		12		262		16		35		233		59		262
Purchases		—		—		6,444		—		—		—		—		6,444
Amortization		(956)		(909)		(2,965)		(2,845)		(978)		(956)		(2,584)		(2,965)
Balance at end of period	$	16,937	$	13,980	$	16,937	$	13,980	$	13,630	$	16,937	$	13,630	$	16,937
Fair value of amortized MSRs at beginning of period	$	28,344	$	23,263	$	21,697	$	25,160	$	23,398	$	28,344	$	27,662	$	21,697
Fair value of amortized MSRs at end of period	$	27,945	$	21,777	$	27,945	$	21,777	$	19,678	$	27,945	$	19,678	$	27,945

The carrying amounts of the assets pledged as collateral to secure public deposits, borrowing arrangements and other transactions as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:



(dollars in thousands)	September 30, 2018		December 31, 2017		September 30, 2019		December 31, 2018
Public deposits	$	2,162,988	$	2,800,690	$	1,775,871	$	1,749,726
Federal Home Loan Bank		2,640,530		2,388,702		2,858,513		2,497,030
Federal Reserve Bank		969,888		914,454		675,347		957,017
ACH transactions		152,089		151,526		151,014		150,903
Interest rate swaps		25,483		27,502		47,129		28,843
Total	$	5,950,978	$	6,282,874	$	5,507,874	$	5,383,519

As the Company did not enter into reverse repurchase agreements noor repurchase agreements, 0 collateral was accepted or pledged as of September 30, ~~2018~~2019 and December 31, ~~2017.~~2018. In addition, no0 debt was extinguished by in-substance defeasance.

~~The Company did not have any repurchase agreements as of September 30, 2018 and December 31, 2017.~~

7. Deposits

As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, deposits were categorized as interest-bearing or noninterest-bearing as follows:



(dollars in thousands)	September 30, 2018		December 31, 2017		September 30, 2019		December 31, 2018
U.S.:
Interest-bearing	$	10,131,252	$	10,800,140	$	10,352,703	$	10,393,449
Noninterest-bearing		5,200,151		5,494,803		5,067,812		5,368,729
Foreign:
Interest-bearing		750,666		685,129		783,721		748,678
Noninterest-bearing		607,204		632,050		653,010		639,212
Total deposits	$	16,689,273	$	17,612,122	$	16,857,246	$	17,150,068

The following table presents the maturity distribution of time certificates of deposit as of September 30, ~~2018:~~2019:


	Under		$250,000

							Under		$250,000
(dollars in thousands)	$250,000		or More		Total		$250,000		or More		Total
Three months or less	$	243,274	$	1,027,571	$	1,270,845	$	241,794	$	548,437	$	790,231
Over three through six months		271,511		461,877		733,388		219,641		615,730		835,371
Over six through twelve months		365,416		404,365		769,781		353,128		241,884		595,012
One to two years		123,127		80,642		203,769		110,732		58,906		169,638
Two to three years		106,088		39,175		145,263		117,527		56,303		173,830
Three to four years		64,676		34,032		98,708		51,400		13,113		64,513
Four to five years		51,952		16,706		68,658		69,740		9,224		78,964
Thereafter		87		—		87		34		—		34
Total	$	1,226,131	$	2,064,368	$	3,290,499	$	1,163,996	$	1,543,597	$	2,707,593

Time certificates of deposit in denominations of $250,000 or more, in the aggregate, were ~~$2.1~~$1.5 billion and ~~$3.0~~$1.9 billion as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. Overdrawn deposit accounts are classified as loans and totaled ~~$2.3~~$2.0 million and ~~$2.7~~$2.4 million as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

Table of Contents

8.Short-Term Borrowings

At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, short-term borrowings were comprised of the following:

(dollars in thousands)

September 30, 2018

December 31, 2017
Federal funds purchased

$
30,000

$
—
Total short-term borrowings

$
30,000

$
—


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

~~Table of Contents~~

(1)	Interest is payable monthly.

~~9. Long-Term Borrowings~~

~~Long-term borrowings consisted of the following as of September 30, 2018 and December 31, 2017:~~

(dollars in thousands)

September 30, 2018

December 31, 2017
Capital lease(1)

$
26

$
34
FHLB fixed-rate advances(1)

400,000

—
Total long-term borrowings

$
400,026

$
34
(1) Interest is payable monthly.

As of September 30, ~~2018,~~2019, the Company’s ~~long-term~~short-term borrowings included $400.0 million in short-term FHLB fixed-rate advances with a weighted average interest rate of 2.84% and maturity dates in 2020. The short-term FHLB fixed-rate advances require monthly interest-only payments with the principal amount due on the maturity date. See “Note 6. Transfers of Financial Assets” for more information.

9. Long-Term Borrowings

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



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

(1)	Interest is payable monthly.

As of September 30, 2019 and December 31, 2018, the Company’s long-term borrowings included $200.0 million and $600.0 million, respectively, in FHLB fixed-rate advances with a weighted average interest rate of 2.73% and maturity dates ranging from 2023 to 2024. The FHLB fixed-rate advances require monthly interest-only payments with the principal amount due on the maturity date. As of September 30, 2019 and December 31, 2018, the available remaining borrowing capacity with the FHLB was ~~$1.7 billion.~~$1.6 billion and $1.3 billion, respectively. The FHLB fixed-rate advances and remaining borrowing capacity were secured by residential real estate loan collateral as of September 30, 2019 and December 31, 2018. See “Note 6. Transfers of Financial Assets” for more information.

As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company’s long-term borrowings included a ~~capital~~finance lease obligation with a 6.78% annual interest rate that matures in ~~2021.~~2022.

As of September 30, ~~2018,~~2019, future contractual principal payments and maturities on long-term borrowings were as follows:


	Principal

			Principal
(dollars in thousands)	Payments		Payments
2018	$	—
2019		8	$	—
2020		400,009		9
2021		9		9
2022				—
2023⁽¹⁾				100,000
Thereafter⁽²⁾				100,000
Total	$	400,026	$	200,018

(1)

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

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

Table of Contents

10. Accumulated Other Comprehensive Loss

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

~~Table of Contents~~

Changes in accumulated other comprehensive loss for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 are presented below:

Income

Tax

Pre-tax

Benefit

Net of
(dollars in thousands)

Amount

(Expense)

Tax
Accumulated other comprehensive loss at June 30, 2018

$
(249,648)

$
67,238

$
(182,410)
Three months ended September 30, 2018

Investment securities:

Unrealized net losses arising during the period

(30,682)

8,262

(22,420)
Net change in unrealized losses on investment securities

(30,682)

8,262

(22,420)
Cash flow derivative hedges:

Unrealized net gains on cash flow derivative hedges arising during the period

178

(47)

131
Net change in unrealized gains on cash flow derivative hedges

178

(47)

131
Other comprehensive loss

(30,504)

8,215

(22,289)
Accumulated other comprehensive loss at September 30, 2018

$
(280,152)

$
75,453

$
(204,699)


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


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


			Income
			Tax
	Pre-tax		Benefit		Net of

									Income
									Tax
							Pre-tax		Benefit		Net of
(dollars in thousands)	Amount		(Expense)		Tax		Amount		(Expense)		Tax
Accumulated other comprehensive loss at December 31, 2017	$	(159,423)	$	63,040	$	(96,383)
Nine months ended September 30, 2018
Early adoption of ASU No. 2018-02		—		(20,068)		(20,068)
Accumulated other comprehensive loss at June 30, 2018							$	(249,648)	$	67,238	$	(182,410)
Three months ended September 30, 2018
Investment securities:
Unrealized net losses arising during the period		(122,070)		32,834		(89,236)		(30,682)		8,262		(22,420)
Net change in unrealized losses on investment securities		(122,070)		32,834		(89,236)
Net change in investment securities								(30,682)		8,262		(22,420)
Cash flow derivative hedges:
Unrealized net gains on cash flow derivative hedges arising during the period		1,341		(353)		988		178		(47)		131
Net change in unrealized gains on cash flow derivative hedges		1,341		(353)		988
Net change in cash flow derivative hedges								178		(47)		131
Other comprehensive loss		(120,729)		32,481		(88,248)		(30,504)		8,215		(22,289)
Accumulated other comprehensive loss at September 30, 2018	$	(280,152)	$	75,453	$	(204,699)	$	(280,152)	$	75,453	$	(204,699)

Income

Tax

Pre-tax

Benefit

Net of
(dollars in thousands)

Amount

(Expense)

Tax
Accumulated other comprehensive loss at June 30, 2017

$
(111,823)

$
44,172

$
(67,651)
Three months ended September 30, 2017

Investment securities:

Unrealized net gains arising during the period

212

(84)

128
Net change in unrealized gains on investment securities

212

(84)

128
Cash flow derivative hedges:

Unrealized net gains on cash flow derivative hedges arising during the period

675

(266)

409
Net change in unrealized gains on cash flow derivative hedges

675

(266)

409
Other comprehensive income

887

(350)

537
Accumulated other comprehensive loss at September 30, 2017

$
(110,936)

$
43,822

$
(67,114)

Income

Tax

Pre-tax

Benefit

Net of
(dollars in thousands)

Amount

(Expense)

Tax
Accumulated other comprehensive loss at December 31, 2016

$
(145,472)

$
57,461

$
(88,011)
Nine months ended September 30, 2017

Investment securities:

Unrealized net gains arising during the period

33,005

(13,035)

19,970
Net change in unrealized gains on investment securities

33,005

(13,035)

19,970
Cash flow derivative hedges:

Unrealized net gains on cash flow derivative hedges arising during the period

1,531

(604)

927
Net change in unrealized gains on cash flow derivative hedges

1,531

(604)

927
Other comprehensive income

34,536

(13,639)

20,897
Accumulated other comprehensive loss at September 30, 2017

$
(110,936)

$
43,822

$
(67,114)


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

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


							Total
	Pensions		Unrealized		Unrealized		Accumulated
	and		(Losses) Gains		Gains on		Other
	Other		on Investment		Cash Flow		Comprehensive


									Pensions						Accumulated
									and						Other
									Other		Investment		Cash Flow		Comprehensive
(dollars in thousands)	Benefits		Securities		Derivative Hedges		Loss		Benefits		Securities		Derivative Hedges		Income (Loss)
Three Months Ended September 30, 2018
Three Months Ended September 30, 2019
Balance at beginning of period									$	(28,973)	$	(3,011)	$	—	$	(31,984)
Other comprehensive income										—		13,210		—		13,210
Balance at end of period									$	(28,973)	$	10,199	$	—	$	(18,774)

Nine Months Ended September 30, 2019
Balance at beginning of period	$	(31,339)	$	(156,373)	$	5,302	$	(182,410)	$	(28,379)	$	(103,816)	$	—	$	(132,195)
Other comprehensive (loss) income		—		(22,420)		131		(22,289)		(594)		114,015		—		113,421
Balance at end of period	$	(31,339)	$	(178,793)	$	5,433	$	(204,699)	$	(28,973)	$	10,199	$	—	$	(18,774)


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

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

Three Months Ended September 30, 2017
Balance at beginning of period	$	(30,237)	$	(40,116)	$	2,702	$	(67,651)
Other comprehensive income		—		128		409		537
Balance at end of period	$	(30,237)	$	(39,988)	$	3,111	$	(67,114)

Nine Months Ended September 30, 2017
Balance at beginning of period	$	(30,237)	$	(59,958)	$	2,184	$	(88,011)
Other comprehensive income		—		19,970		927		20,897
Balance at end of period	$	(30,237)	$	(39,988)	$	3,111	$	(67,114)

11. Regulatory Capital Requirements

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

The Company and the Bank are subject to various regulatory capital requirements imposed by federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s operating activities and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative

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measures of its assets and certain off-balance-sheet items. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

~~Table of Contents~~

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

The table below sets forth those ratios at September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


					First Hawaiian				Minimum		Well-
	First Hawaiian, Inc.				Bank				Capital		Capitalized
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Ratio⁽¹⁾		Ratio⁽¹⁾
September 30, 2019:
Common equity tier 1 capital to risk-weighted assets	$	1,677,840	12.15	%	$	1,662,785	12.04	%	4.50	%	6.50	%
Tier 1 capital to risk-weighted assets		1,677,840	12.15	%		1,662,785	12.04	%	6.00	%	8.00	%
Total capital to risk-weighted assets		1,811,404	13.11	%		1,796,349	13.00	%	8.00	%	10.00	%
Tier 1 capital to average assets (leverage ratio)		1,677,840	8.68	%		1,662,785	8.61	%	4.00	%	5.00	%

December 31, 2018:
Common equity tier 1 capital to risk-weighted assets	$	1,661,542	11.97	%	$	1,658,172	11.94	%	4.50	%	6.50	%
Tier 1 capital to risk-weighted assets		1,661,542	11.97	%		1,658,172	11.94	%	6.00	%	8.00	%
Total capital to risk-weighted assets		1,803,860	12.99	%		1,800,490	12.97	%	8.00	%	10.00	%
Tier 1 capital to average assets (leverage ratio)		1,661,542	8.72	%		1,658,172	8.70	%	4.00	%	5.00	%

First Hawaiian

Minimum

Well-

First Hawaiian, Inc.

Bank

Capital

Capitalized

(dollars in thousands)

Amount

Ratio

Amount

Ratio

Ratio(1)

Ratio(1)

September 30, 2018:

Common equity tier 1 capital to risk-weighted assets

$
1,632,669

12.09
%
$
1,629,109

12.06
%
4.50
%
6.50
%
Tier 1 capital to risk-weighted assets

1,632,669

12.09
%

1,629,109

12.06
%
6.00
%
8.00
%
Total capital to risk-weighted assets

1,774,519

13.14
%

1,770,959

13.11
%
8.00
%
10.00
%
Tier 1 capital to average assets (leverage ratio)

1,632,669

8.42
%

1,629,109

8.41
%
4.00
%
5.00
%

December 31, 2017:

Common equity tier 1 capital to risk-weighted assets

$
1,633,442

12.45
%
$
1,623,455

12.37
%
4.50
%
6.50
%
Tier 1 capital to risk-weighted assets

1,633,442

12.45
%

1,623,455

12.37
%
6.00
%
8.00
%
Total capital to risk-weighted assets

1,771,295

13.50
%

1,761,308

13.42
%
8.00
%
10.00
%
Tier 1 capital to average assets (leverage ratio)

1,633,442

8.52
%

1,623,455

8.47
%
4.00
%
5.00
%

(1)

⁽¹⁾

As defined by the regulations issued by the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and Federal Deposit Insurance Corporation (“FDIC”).

A ~~new~~ capital conservation buffer, comprised of CET1 capital, was established above the regulatory minimum capital requirements. This capital conservation buffer was phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and ~~will increase~~increased each subsequent year by an additional 0.625% until reaching ~~its final level of~~ 2.5% on January 1, 2019. As a result the Company and the Bank are effectively required to maintain minimum ratios of (i) 7% CET1 capital to risk-weighted assets, (ii) 8.5% Tier 1 capital to risk-weighted assets, and (iii) 10.5% total capital to risk-weighted assets. As of September 30, ~~2018,~~2019, under the bank regulatory capital guidelines, the Company and Bank were both classified as well-capitalized. Management is not aware of any conditions or events that have occurred since September 30, ~~2018,~~2019, to change the capital adequacy category of the Company or the Bank.

12. ~~Income Taxes~~

On December 22, 2017, President Trump signed into law the Tax Act. The Tax Act makes many significant amendments to the Internal Revenue Code of 1986, as amended (the “Code”), including reducing the corporate tax rate from 35% to 21%, effective January 1, 2018. GAAP requires that companies record and reflect the impact of the Tax Act in their financial statements for the quarter during which the Tax Act becomes law, even if provisions of the Tax Act become effective at a future date. Accordingly, the Company reported the impact of the Tax Act on its results of operations in its consolidated financial statements for the fourth quarter and year ended December 31, 2017. The reduction in the corporate tax rate under the Tax Act required a one-time revaluation of certain tax-related assets, which resulted in the Company recording $47.6 million in additional income tax expense in our consolidated statements of income in the fourth quarter of 2017.

The Company’s effective tax rate was 25.99% and 37.71% for the three months ended September 30, 2018 and 2017, respectively, and 26.00% and 37.25% for the nine months ended September 30, 2018 and 2017, respectively.

The Company is subject to examination by the Internal Revenue Service (“IRS”) and tax authorities in states in which the Company has significant business operations. The tax years under examination and open for examination vary by jurisdiction. There are currently no federal examinations under way; however, tax returns for certain years are being reviewed by state jurisdictions. No material unanticipated adjustments were made by the IRS in the years most recently examined. The Company’s income tax returns for 2014 and subsequent tax years generally remain subject to examination by U.S. federal and foreign jurisdictions, and 2013 and subsequent years are subject to examination by state taxing authorities.

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~~A reconciliation of the amount of unrecognized tax benefits is as follows for the nine months ended September 30, 2018 and 2017:~~

Nine Months Ended September 30,

2018

2017

Interest

Interest

and

and

(dollars in thousands)

Tax

Penalties

Total

Tax

Penalties

Total
Balance at January 1,

$
130,619

$
10,660

$
141,279

$
127,085

$
9,965

$
137,050
Additions for current year tax positions

1,213

—

1,213

1,727

—

1,727
Additions for Reorganization Transactions

—

—

—

—

226

226
Additions for prior years' tax positions:

Accrual of interest and penalties

—

760

760

—

295

295
Reductions for prior years' tax positions:

Expiration of statute of limitations

(209)

(93)

(302)

(258)

(152)

(410)
Other

(773)

—

(773)

—

—

—
Balance at September 30,

$
130,850

$
11,327

$
142,177

$
128,554

$
10,334

$
138,888

Included in the balance of unrecognized tax benefits was $15.4 million and $11.2 million of unrecognized tax benefits for the nine months ended September 30, 2018 and 2017, respectively that, if recognized, would impact the effective tax rate.

In connection with the Reorganization Transactions discussed below, the Company recorded unrecognized tax benefits and interest and penalties of $121.4 million and $7.0 million, respectively, for the year ended December 31, 2016. Included in the balance of the unrecognized tax benefits as of September 30, 2018 was $93.9 million attributable to tax refund claims with respect to tax years 2005 through 2012 in the State of California. Such refund claims were filed by the Company in 2015, on behalf of the Company and its affiliates, including BOW, concerning the determination of taxes for which no benefit is currently recognized. It is reasonably possible that the amount of unrecognized tax benefits could decrease within the next 12 months by as much as $13.6 million of taxes and $5.8 million of accrued interest and penalties as a result of settlements and the expiration of the statute of limitations in various states.

The Company recognizes interest and penalties attributable to both unrecognized tax benefits and undisputed tax adjustments in the provision for income taxes. For the nine months ended September 30, 2018 and 2017, the Company recorded nil and $0.4 million, respectively, of net expense attributable to interest and penalties. The Company had a liability of $12.9 million and $12.8 million as of September 30, 2018 and December 31, 2017, respectively, for accrued interest and penalties, of which $11.3 million and $10.7 million as of September 30, 2018 and December 31, 2017, respectively, were attributable to unrecognized tax benefits and the remainder was attributable to tax adjustments which are not expected to be in dispute.

Prior to the Reorganization Transactions, the Company filed consolidated U.S. Federal and combined state tax returns that incorporated the tax receivables and unrecognized tax benefits of FHB and BOW. The consummation of the Reorganization Transactions did not relieve the Company of the pre-Reorganization Transactions tax receivables and unrecognized tax benefits recognized by BOW that were included in the Company's consolidated and combined tax returns. As of September 30, 2018, the Company maintained balances of $93.9 million related to current tax receivables, $116.5 million related to unrecognized tax benefits, and an indemnification receivable of $22.6 million. Additionally, in connection with the Reorganization Transactions, the Company incurred certain tax-related liabilities related to the distribution of its interest in BWHI amounting to $95.4 million. The amount necessary to pay the distribution taxes (net of the expected federal tax benefit of $33.4 million) was paid by BNPP to the Company on April 1, 2016. The Company reported total distribution taxes of $92.1 million in the 2016 tax returns of various state and local jurisdictions, and reimbursed BWHI approximately $2.1 million pursuant to a tax sharing agreement entered into on April 1, 2016 and pursuant to certain tax allocation agreements entered into among the parties. The Company expects that any future adjustment to such taxes will be similarly reimbursed to, or funded by, BWHI or its affiliates. Accordingly, the assumption of the pre-Reorganization Transactions tax receivables, unrecognized tax benefits and distribution tax liabilities and the offsetting indemnification receivables or payables were reflected as equity contributions and distributions on April 1, 2016. The reimbursement of distribution taxes to BWHI was also reflected as an adjustment to equity. If there are any future adjustments to the indemnified tax receivables or unrecognized tax benefits, an offsetting adjustment to the indemnification receivables or payables will be recorded to the provision for income taxes and other noninterest income or expense.

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With the completion of the February 2017 offering, BNPP’s beneficial ownership of the Company fell below 80% of the total outstanding FHI common stock. As a result, the Company ceased to be a member of the BNPP USA affiliated group and began filing stand-alone returns with the IRS and certain state jurisdictions. With the completion of the May 2018 offering and concurrent share repurchase, BNPP’s beneficial ownership of the Company fell below 50% of the total outstanding FHI common stock, resulting in the Company filing stand-alone returns in all remaining jurisdictions.

~~13.~~ Derivative Financial Instruments

The Company enters into derivative contracts primarily to manage its interest rate risk, as well as for customer accommodation purposes. Derivatives used for risk management purposes consist of interest rate swaps that are designated as either a fair value hedge or a cash flow hedge. The derivatives are recognized on the unaudited interim consolidated balance sheets as either assets or liabilities at fair value. Derivatives entered into for customer accommodation purposes consist of various free-standing interest rate derivative products and foreign exchange contracts. The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes.

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The following table summarizes notional amounts and fair values of derivatives held by the Company as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


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

September 30, 2018

December 31, 2017

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

$
192,880

$
504

$
(135)

$
194,687

$
—

$
(2,032)
Derivatives not designated as hedging instruments:

Interest rate swaps

2,166,248

1,540

(28,388)

1,820,442

14,658

(13,017)
Funding swap

59,770

—

(3,385)

43,113

—

(5,439)
Foreign exchange contracts

5,301

—

(34)

3,658

24

—

(1)

⁽¹⁾

The positive fair values of derivative assets are included in other assets.

(2)

⁽²⁾

The negative fair values of derivative liabilities are included in other liabilities.

Certain interest rate swaps noted above, are cleared through clearinghouses, rather than directly with counterparties. Those transactions cleared through a clearinghouse require initial margin collateral and variation margin payments depending on the contracts being in a net asset or liability position. The amount of initial margin cash collateral posted by the Company was ~~$1.4~~$11.9 million and ~~$2.9~~$2.1 million as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

~~Effective January 3,~~In 2017 and 2018, each of the Chicago Mercantile Exchange (“CME”) and the London Clearing House (“LCH”) amended its rulebook to legally characterize variation margin payments for derivative contracts that are referred to as settled-to-market (“STM”), as settlements of the derivative’s mark-to-market exposure and not collateral. Based on these changes, the Company has treated the CME and LCH variation ~~margin~~margins as ~~a settlement,~~settlements, which treatment has resulted in a decrease in ~~our~~the Company’s cash collateral, and a corresponding decrease in ~~our~~the Company’s derivative asset and liability. ~~The change was applied prospectively effective January 3, 2017.~~ As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the CME variation margin was ~~$0.6~~$1.3 million and ~~$3.1~~$0.5 million, respectively.

Effective January 16, 2018, the London Clearing House (“LCH”) also amended its rulebook to legally characterize variation margin payments, for derivative contracts that are referred to as STM, as settlements of the derivative’s mark-to-market exposure and not collateral. Consistent with the CME’s amended requirements discussed above, the Company has treated the LCH variation margin as a settlement, which has resulted in a decrease in our cash collateral, and a corresponding decrease in our derivative asset and liability. The change was applied prospectively effective January 16, 2018. As of September 30, 2019 and December 31, 2018 the LCH variation margin was ~~$25.7 million.~~$84.6 million and $0.6 million, respectively.

As of September 30, ~~2018,~~2019, the Company pledged ~~$23.5~~$29.7 million in financial instruments and ~~$2.0~~$17.4 million in cash as collateral for interest rate swaps. As of December 31, 2018, the Company pledged $26.2 million in financial instruments and $2.6 million in cash as collateral for interest rate swaps. As of September 30, 2019 and December 31, 2018, the cash collateral includes the excess initial margin for interest rate swaps cleared through clearinghouses and cash collateral for interest rate swaps with financial institution counterparties. ~~As of December 31, 2017, the Company pledged $22.6 million in financial instruments and $4.9 million~~

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in cash as collateral for interest rate swaps. As of December 31, 2017, the cash collateral includes the excess initial margin for interest rate swaps cleared through clearinghouses, the LCH variation margin which was not treated as settlements prior to January 16, 2018 and cash collateral for interest rate swaps with financial institution counterparties.

Fair Value Hedges

To manage the risk related to the Company’s net interest margin, interest rate swaps are utilized to hedge certain fixed-rate loans. These swaps have maturity, amortization and prepayment features that correspond to the loans hedged, and are designated and qualify as fair value hedges. Any gain or loss on the swaps, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, is recognized in current period earnings.

At September 30, 2019, the Company carried 1 interest rate swap with a notional amount of $23.5 million with a negative fair value of $0.9 million that was categorized as a fair value hedge for a commercial and industrial loan. The Company received a USD Prime floating rate and paid a fixed rate of 2.90%. The swap matures in 2023. At December 31, 2018, the Company carried interest rate swaps with notional amounts totaling ~~$42.9~~$41.3 million with a positive fair value of ~~$0.5 million~~nil and a negative fair value of ~~nil~~NaN that were categorized as fair value hedges for commercial and industrial loans and commercial real estate loans. The Company received 6-month London Interbank Offered Rate (“LIBOR”) and paid fixed rates ranging from 2.59% to 3.44%. The swaps mature between 2019 and 2023. At December 31, 2017, the Company carried interest rate swaps with notional amounts totaling $44.7 million with a positive fair value

Table of ~~nil and a negative fair value of $0.5 million that were categorized as fair value hedges for commercial and industrial loans and commercial real estate loans.~~Contents

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


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

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

(1)	In connection with the adoption of ASU 2017-12, beginning January 1, 2019, gain (loss) amounts for the interest rate swap qualifying as fair value hedging and the hedged item are included in interest income from loans and lease financing.

(2)	Prior to January 1, 2019, gain (loss) amounts for the interest rate swaps qualifying as fair value hedging and the hedged items were included in other noninterest income.

As of September 30, 2019 and December 31, 2018, ~~and 2017:~~the following amounts were recorded in the unaudited interim consolidated balance sheets related to the cumulative basis adjustments for fair value hedges:

Three Months Ended

Nine Months Ended

September 30,

September 30,
(dollars in thousands)

2018

2017

2018

2017
Interest expense recorded in net interest income

$
(30)

$
(142)

$
(203)

$
(511)
Gains (losses) recorded in noninterest income:

Recognized on derivatives

273

150

1,231

274
Recognized on hedged item

(261)

(224)

(1,348)

(222)
Net gains (losses) recognized on fair value hedges (ineffective portion)

12

(74)

(117)

52
Net losses recognized on fair value hedges

$
(18)

$
(216)

$
(320)

$
(459)

Cumulative Amount of Fair Value

Hedging Adjustment Included in the

Carrying Amount of the Hedged Asset

(dollars in thousands)

September 30, 2019

December 31, 2018

September 30, 2019

December 31, 2018

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

Loans and leases

24,797

42,496

1,226

293

Cash Flow Hedges

During 2018, the Company carried 2 interest rate swaps with notional amounts totaling $150.0 million, in order to reduce exposure to interest rate increases associated with short-term fixed-rate liabilities. The Company ~~utilizes~~received 6-month LIBOR and paid fixed rates ranging from 2.98% to 3.03%. The swaps matured in December 2018. As of September 30, 2019 and December 31, 2018, the Company held 0 cash flow hedges. The interest rate swaps designated as cash flow hedges resulted in net interest expense of $0.2 million and $1.1 million during the three and nine months ended September 30, 2018, respectively.

The Company utilized interest rate swaps to reduce exposure to interest rates associated with short-term fixed-rate liabilities. The Company ~~enters~~entered into interest rate swaps paying fixed rates and receiving LIBOR. The LIBOR index ~~will correspond~~corresponded to the short-term fixed-rate nature of the liabilities being hedged. If interest rates ~~rise,~~rose, the increase in interest received on the swaps ~~will~~ offset increases in interest costs associated with these liabilities. By hedging with interest rate swaps, the Company ~~minimizes~~minimized the adverse impact on interest expense associated with increasing rates on short-term liabilities.

The interest rate swaps ~~are~~were designated and ~~qualify~~qualified as cash flow hedges. The effective portion of the gain or loss on the interest rate swaps iswas reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction ~~affects~~affected earnings. There were no0 recognized expenses related to the ineffective portion of the change in fair value of derivatives designated as a cash flow hedge ~~for~~during the three and nine months ended September 30, ~~2018 and 2017.~~2018.

As of September 30, 2018 and December 31, 2017, the Company carried two interest rate swaps with notional amounts totaling $150.0 million, with a negative fair value of $0.1 million as of September 30, 2018 and a negative fair value of $1.5 million as of December 31, 2017, in order to reduce exposure to interest rate increases associated with short-term fixed-rate liabilities. The swaps mature in December 2018. The Company received 6-month LIBOR and paid fixed rates ranging from 2.98% to 3.03%. The interest rate swaps designated as cash flow hedges resulted in net interest expense of $0.2 million and $0.6 million during the three months ended September 30, 2018 and 2017, respectively, and $1.1 million and $1.9 million during the nine months ended September 30, 2018 and 2017, respectively.

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The following table summarizes the effect of cash flow hedging relationships for the three and nine months ended September 30, ~~2018 and 2017:~~2018:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,

									Three Months Ended		Nine Months Ended
(dollars in thousands)	2018		2017		2018		2017		September 30, 2018		September 30, 2018
Pretax gains recognized in other comprehensive income on derivatives (effective portion)	$	178	$	675	$	1,341	$	1,531	$	178	$	1,341

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There were no0 gains or losses reclassified from accumulated other comprehensive loss to earnings during the three and nine months ended September 30, ~~2018 and 2017.~~2018.

Free-Standing Derivative Instruments

For the derivatives that are not designated as hedges, changes in fair value are reported in current period earnings. The following table summarizes the impact on pretax earnings of derivatives not designated as hedges, as reported on the unaudited interim consolidated statements of income for the three and nine months ended September 30, ~~2018~~2019 and ~~2017:~~ 2018.


	Net gains (losses) recognized	Three Months Ended					Nine Months Ended
	in the consolidated statements	September 30,				September 30,

										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	2018		2017		2018		2017		of income line item	2019		2018		2019		2018
Derivatives Not Designated As Hedging Instruments:
Interest rate swaps	Other noninterest income	$	112	$	234	$	744	$	587	Other noninterest income	$	—	$	112	$	16	$	744
Funding swap	Other noninterest income		(43)		(41)		(123)		(74)	Other noninterest income		(417)		(43)		(659)		(123)
Foreign exchange contracts	Other noninterest income		34		(149)		(58)		78	Other noninterest income		30		34		29		(58)

As of September 30, 2019, the Company carried multiple interest rate swaps with notional amounts totaling $2.7 billion, all of which were related to the Company’s customer swap program, with a positive fair value of $85.9 million and a negative fair value of NaN. The Company received 1-month LIBOR and paid fixed rates ranging from 2.02% to 8.73%. The swaps mature between November 2019 and January 2039. As of December 31, 2018, the Company carried multiple interest rate swaps with notional amounts totaling ~~$2.2~~$2.3 billion, including ~~$2.1~~$2.2 billion related to the Company’s customer swap program, with a positive fair value of ~~$1.5~~$12.3 million and a negative fair value of ~~$28.4~~$12.0 million. The Company received 1-month ~~and 3-month~~ LIBOR and paid fixed rates ranging from 2.02% to 5.78%. The swaps mature between December 2018 and April 2037. As of December 31, 2017, the Company carried multiple interest rate swaps with notional amounts totaling $1.8 billion, including $1.7 billion related to the Company’s customer swap program, with a positive fair value of $14.7 million and a negative fair value of $13.0 million. The Company received 1-month and 3-month LIBOR and paid fixed rates ranging from 1.36% to 5.33%. These swaps resulted in net interest expense of ~~$0.1 million~~NaN and ~~$0.2~~$0.1 million for the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$0.4 million~~NaN and ~~$0.7~~$0.4 million for the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

The Company’s customer swap program is designed by offering customers a variable-rate loan that is swapped to fixed-rate through an interest rate swap. The Company simultaneously executes an offsetting interest rate swap with a swap dealer. Upfront fees on the dealer swap are recorded in other noninterest income and totaled ~~$0.3~~$1.9 million and ~~$1.3~~$0.3 million for the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively, and ~~$5.3~~$3.8 million and ~~$5.9~~$5.3 million for the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Interest rate swaps related to the program had asset fair values of ~~$1.5~~$85.9 million and ~~$14.7~~$12.3 million as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, and liability fair values of ~~$27.8 million~~NaN and ~~$11.7~~$11.2 million as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

In conjunction with the 2016 sale of Class B restricted shares of common stock issued by Visa, the Company entered into a funding swap agreement with the buyer that requires payment to the buyer in the event Visa reduces each member bank’s Class B conversion rate to unrestricted Class A common shares. On June 28, 2018, Visa additionally funded its litigation escrow account, thereby reducing each member bank’s Class B conversion rate to unrestricted Class A common shares. Accordingly, on July 5, 2018, Visa announced a decrease in conversion rate from 1.6483 to 1.6298 effective June 28, 2018. In July 2018, the Company made a payment of approximately $0.7 million to the buyer as a result of the reduction in the Visa Class B conversion rate. On September 27, 2019, Visa additionally funded its litigation escrow account, thereby further reducing each member bank’s Class B conversion rate to unrestricted Class A common shares. Accordingly, on September 30, 2019, Visa announced a decrease in conversion rate from 1.6298 to 1.6228 effective September 27, 2019. As of September 30, 2019, the Company recorded an estimated $0.3 million liability to be paid to the buyer as a result of the reduction in the Visa Class B conversion rate. Under the terms of the funding swap agreement, the Company will make monthly payments to the buyer based on Visa’s Class A stock price and the number of Visa Class B restricted shares that were sold until the date on which the covered litigation is settled. A derivative liability (“Visa derivative”) of ~~$3.4~~$0.6 million and ~~$5.4~~$2.6 million was included in the unaudited interim consolidated balance sheets at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, to provide for the fair value of this liability. There were no0 sales of these shares prior to 2016. See “Note 18. Fair Value” for more information.

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Counterparty Credit Risk

By using derivatives, the Company is exposed to counterparty credit risk if counterparties to the derivative contracts do not perform as expected. If a counterparty fails to perform,, the Company’s counterparty credit risk is equal to the amount reported as a derivative asset, net of cash or other collateral received, and net of derivatives in a loss position with the same counterparty to the extent master netting arrangements exist. The Company minimizes counterparty credit

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risk through credit approvals, limits, monitoring procedures, executing master netting arrangements and obtaining collateral, where appropriate. Counterparty credit risk related to derivatives is considered in determining fair value.

The Company’s interest rate swap agreements include bilateral collateral agreements with collateral requirements, which begin with exposures in excess of $0.5 million. For each counterparty, the Company reviews the interest rate swap collateral daily. Collateral for customer interest rate swap agreements, calculated as the pledged asset less loan balance, requires valuation of the pledged asset. Counterparty credit risk adjustments of $0.1 million were recognized during both the nine months ended September 30, ~~2018~~2019 and ~~2017~~.2018.

Credit-Risk Related Contingent Features

Certain of our derivative contracts contain provisions whereby if the Company’s credit rating were to be downgraded by certain major credit rating agencies as a result of a merger or material adverse change in the Company’s financial condition, the counterparty could require an early termination of derivative instruments in a net liability position. The aggregate fair value of all derivative instruments with such credit-risk related contingent features that are in a net liability position was ~~$0.2~~$5.1 million and ~~$4.5~~$0.8 million at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, for which we posted ~~$0.5~~$5.5 million and ~~$4.8~~$0.5 million, respectively, in collateral in the normal course of business. If the Company’s credit rating had been downgraded as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, we may have been required to settle the ~~contract~~contracts in an amount equal to ~~its~~their fair value.

~~14.~~13. Commitments and Contingent Liabilities

Contingencies

OnIn January ~~27,~~ 2017, a putative class action lawsuit was filed by a Bank customer alleging that FHB improperly ~~charges~~charged an overdraft fee in circumstances where an account had sufficient funds to cover the transaction at the time the transaction iswas authorized but not at the time the transaction iswas presented for payment, and that this practice ~~constitutes~~constituted an unjust and deceptive trade practice and a breach of contract. The lawsuit further alleged that FHB’s practice of assessing a one-time continuous negative balance overdraft fee on accounts remaining in a negative balance for a seven-day period ~~constitutes~~constituted a usurious interest charge and an unfair and deceptive trade practice. OnIn October 2, 2018, the parties reached an agreement in principle to resolve this class action lawsuit. In connection with the anticipated settlement agreement, the Company recorded an expense of approximately $4.1 million during the three months ended September 30, 2018. ~~The~~In August 2019, the Court approved the settlement agreement ~~will be subject~~executed by the parties, pursuant to ~~court approval.~~which the Company funded a $4.1 million settlement account.

~~In addition to the litigation noted above, various~~Various other legal proceedings are pending or threatened against the Company. After consultation with legal counsel, management does not expect that the aggregate liability, if any, resulting from these proceedings would have a material effect on the Company’s unaudited interim consolidated financial position, results of operations or cash flows.

Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby and commercial letters of credit which are not reflected in the unaudited interim consolidated financial statements.

Unfunded Commitments to Extend Credit

A commitment to extend credit is a legally binding agreement to lend funds to a customer, usually at a stated interest rate and for a specified purpose. Commitments are reported net of participations sold to other institutions. Such commitments have fixed expiration dates and generally require a fee. The extension of a commitment gives rise to credit risk. The actual liquidity requirements or credit risk that the Company will experience is expected to be lower than the contractual amount of commitments to extend credit because a significant portion of those commitments are expected to expire without being drawn upon. Certain commitments are subject to loan agreements containing covenants regarding the financial performance of the customer that must be met before the Company is required to fund the commitment. The Company uses the same credit policies in making commitments to extend credit as it does in making loans. In addition, the Company manages the potential credit risk in commitments to extend credit by limiting the total amount of

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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 ~~$99.4~~$100.6 million and ~~$49.1~~$92.3 million at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively.

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Standby and Commercial Letters of Credit

Standby letters of credit are issued on behalf of customers in connection with contracts between the customers and third parties. Under standby letters of credit, the Company assures that the third parties will receive specified funds if customers fail to meet their contractual obligations. The credit risk to the Company arises from its obligation to make payment in the event of a customer’s contractual default. Standby letters of credit are reported net of participations sold to other institutions of ~~$17.8~~$9.2 million and $17.3 million as of ~~both~~ September 30, ~~2018~~2019 and December 31, ~~2017.~~2018, respectively. The Company also had commitments for commercial and similar letters of credit. Commercial letters of credit are issued specifically to facilitate commerce whereby the commitment is typically drawn upon when the underlying transaction between the customer and a third-party is consummated. The maximum amount of potential future payments guaranteed by the Company is limited to the contractual amount of these letters. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held supports those commitments for which collateral is deemed necessary. The commitments outstanding as of September 30, ~~2018~~2019 have maturities ranging from October ~~2018~~2019 to ~~March 2021.~~May 2022. Substantially all fees received from the issuance of such commitments are deferred and amortized on a straight-line basis over the term of the commitment.

Financial instruments with off-balance sheet risk at September 30, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:


	September 30,		December 31,

					September 30,		December 31,
(dollars in thousands)	2018		2017		2019		2018
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit	$	5,679,106	$	5,401,763	$	5,814,078	$	5,549,591
Standby letters of credit		193,089		161,798		183,992		204,324
Commercial letters of credit		4,509		5,540		5,024		7,535

Guarantees

The Company sells residential mortgage loans in the secondary market primarily to The Federal National Mortgage Association (“~~FNMA” or “Fannie~~Fannie Mae”) and The Federal Home Loan Mortgage Corporation (“~~FHLMC” or “Freddie~~Freddie Mac”) that may potentially require repurchase under certain conditions. This risk is managed through the Company’s underwriting practices. The Company services loans sold to investors and loans originated by other originators under agreements that may include repurchase remedies if certain servicing requirements are not met. This risk is managed through the Company’s quality assurance and monitoring procedures. Management does not anticipate any material losses as a result of these transactions.

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 ~~13.~~12. Derivative Financial Instruments” for more information.

Reorganization Transactions

On April 1, 2016, a series of reorganization transactions (the “Reorganization Transactions”) were undertaken to facilitate FHI’s IPO. In connection with the Reorganization Transactions, ~~as discussed in Note 1,~~ FHI ~~(formerly BancWest)~~ distributed its interest in ~~BWHI (including BOW)~~BancWest Holding Inc. (“BWHI”), including Bank of the West (“BOW”) to BNPP so that BWHI was held directly by BNPP. ~~BWHI is now held indirectly by BNPP through its intermediate holding company.~~ As a result of the Reorganization Transactions that occurred on April 1, 2016, various tax or other contingent liabilities could arise related to the business of BOW, or related to the Company’s operations prior to the restructuring when it was known as ~~BancWest,~~BWC, including its then wholly owned subsidiary, BOW. The Company is not able to determine the ultimate outcome or estimate the amounts of these contingent liabilities, if any, at this time.

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~~15.~~14. Revenue from Contracts with Customers

~~As noted in Note 1, the Company adopted the provisions of ASU No. 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606),~~ on January 1, 2018. Results for reporting periods beginning after December 31, 2017 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with Topic 605.

Revenue Recognition

In accordance with Topic 606, revenues are recognized when control of promised goods or services is transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the

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

Disaggregation of Revenue

The following table summarizes the Company’s revenues, which includes net interest income on financial instruments and noninterest income, disaggregated by type of service and business segments for the periods indicated:


		Three Months Ended September 30, 2018
					Treasury
	Retail		Commercial		and

										Three Months Ended September 30, 2019
													Treasury
									Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total		Banking		Banking		Other		Total
Net interest income (1)	$	111,804	$	29,639	$	(185)	$	141,258	$	111,529	$	29,359	$	2,193	$	143,081


Service charges on deposit accounts		7,494		4		435		7,933		8,073		3		478		8,554
Credit and debit card fees		—		19,602		1,783		21,385		—		14,623		1,718		16,341
Other service charges and fees		5,161		1,063		374		6,598		5,155		306		537		5,998
Trust and investment services income		7,487		—		—		7,487		8,698		—		—		8,698
Other		134		1,427		255		1,816		138		726		191		1,055
Not in scope of Topic 606(1)		2,400		(4,295)		4,081		2,186		2,185		1,488		5,661		9,334
Total noninterest income		22,676		17,801		6,928		47,405		24,249		17,146		8,585		49,980
Total revenue	$	134,480	$	47,440	$	6,743	$	188,663	$	135,778	$	46,505	$	10,778	$	193,061

Nine Months Ended September 30, 2019

Treasury

Retail

Commercial

and

(dollars in thousands)

Banking

Other

Total

Net interest income⁽¹⁾

339,559

85,920

8,304

433,783

Service charges on deposit accounts

23,051

1,677

24,737

Credit and debit card fees

—

43,564

5,135

48,699

Other service charges and fees

15,429

1,543

1,659

18,631

Trust and investment services income

26,247

—

26,247

Other

493

2,996

729

4,218

Not in scope of Topic 606⁽¹⁾

6,887

5,533

10,873

23,293

Total noninterest income

72,107

53,645

20,073

145,825

Total revenue

411,666

139,565

28,377

579,608

(1)

⁽¹⁾

Most of the Company’s revenue is not within the scope of ASU No. 2014-09, Revenue from Contracts with Customers. The guidance explicitly excludes net interest income from financial assets and liabilities as well as other noninterest income from loans, leases, investment securities and derivative financial instruments.

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

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


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

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

Nine Months Ended September 30, 2018

Treasury

Retail

Commercial

and

(dollars in thousands)

Banking

Banking

Other

Total
Net interest income (1)

$
332,731

$
86,320

$
3,282

$
422,333

Service charges on deposit accounts

22,077

11

1,521

23,609
Credit and debit card fees

—

58,409

5,380

63,789
Other service charges and fees

15,004

2,997

1,527

19,528
Trust and investment services income

23,429

—

—

23,429
Other

430

5,224

924

6,578
Not in scope of Topic 606(1)

6,626

(7,377)

9,720

8,969
Total noninterest income

67,566

59,264

19,072

145,902
Total revenue

$
400,297

$
145,584

$
22,354

$
568,235

(1)

⁽¹⁾

For the three and nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, substantially all of the Company’s revenues under the scope of Topic 606 were related to performance obligations satisfied at a point in time.

The following is a discussion of revenues within the scope of Topic 606.

Service Charges on Deposit Accounts

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

Credit and Debit Card Fees

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

Trust and Investment Services Fees

Trust and investment services fees represent revenue earned by directing, holding and managing customers’ assets. Fees are generally computed based on a percentage of the previous period’s value of assets under management. The transaction price (i.e., percentage of assets under management) is established at the inception of each contract. Trust and investment services fees also include ~~broker dealer~~ fees ~~which represent revenue earned from buying~~collected when the Company acts as agent or personal representative and ~~selling securities on behalf~~executes security transactions, performs collection and disbursement of ~~customers. Such fees are recognized at the end~~income, and completes investment management and other administrative tasks.

Table of ~~a valuation period or concurrently with the execution of a buy or sell transaction.~~Contents

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 ~~two~~2 vendors which are being amortized over the term of the respective contracts. As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had contract liabilities of ~~$2.8~~$2.0 million and ~~$3.4~~$2.6 million, respectively, which will be recognized over the remaining term of the respective contracts with the vendors. For the three and nine months ended September 30, 2019 and 2018, the ~~Company~~Company’s recognized revenues and contract liabilities decreased by approximately $0.2 million and $0.6 million, respectively, due to the passage of time. There were no0 changes in contract liabilities due to changes in transaction price estimates.

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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, ~~2018~~2019 and December 31, ~~2017,~~2018, there were no0 receivables from contracts with customers or contract assets recorded on the Company’s consolidated balance sheets.

Other

Except for the contract liabilities noted above, the Company did not have any significant performance obligations as of September 30, 2019 and December 31, 2018. The Company also did not have any material contract acquisition costs or use any significant judgments or estimates in recognizing revenue for financial reporting purposes.

~~16.~~15. Earnings per Share

For the three and nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the Company made no0 adjustments to net income for the purpose of computing earnings per share and there were no0 antidilutive securities. For the three and nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the computations of basic and diluted earnings per share were as follows:


	Three Months Ended				Nine Months Ended
	September 30,				September 30,

									Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in thousands, except shares and per share amounts)	2018		2017		2018		2017		2019		2018		2019		2018
Numerator:
Net income	$	67,388	$	58,363	$	204,399	$	171,998	$	74,199	$	67,388	$	216,556	$	204,399


Denominator:
Basic: weighted-average shares outstanding		135,466,669		139,556,532		137,643,005		139,549,665		132,583,902		135,466,669		133,957,192		137,643,005
Add: weighted-average equity-based awards		208,829		139,798		166,568		120,822		293,867		208,829		274,570		166,568
Diluted: weighted-average shares outstanding		135,675,498		139,696,330		137,809,573		139,670,487		132,877,769		135,675,498		134,231,762		137,809,573


Basic earnings per share	$	0.50	$	0.42	$	1.48	$	1.23	$	0.56	$	0.50	$	1.62	$	1.48
Diluted earnings per share	$	0.50	$	0.42	$	1.48	$	1.23	$	0.56	$	0.50	$	1.61	$	1.48

16. Leases

The Company, as lessee, is obligated under a number of noncancelable operating leases primarily for branch premises and related real estate. Terms of such leases extend for periods up to 44 years, many of which provide for periodic adjustment of rent payments based on changes in various economic indicators. Renewal options are included in the Company’s lease liabilities and related right-of-use assets to the extent that the Company is reasonably certain to exercise such options. For all of the Company’s short-term leases (i.e., leases with an initial term of 12 months or less), the Company recognizes lease expense on a straight-line basis over the lease term. Variable lease payments are recognized in the period in which the obligation for those payments is incurred.

The Company’s branch premises leases typically require that the Company is responsible to pay for variable lease expense, primarily maintenance expense, as well as real property taxes, property insurance and sales taxes. Maintenance expense is paid to maintain common areas and covers costs including landscaping, cleaning and general maintenance.

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Such variable costs are typically re-evaluated by the landlord on an annual basis and are charged to the Company based on the portion of the total building premises that is occupied by the Company.

The Company subleases certain premises and real estate to third parties. The sublease portfolio consists of operating leases for space connected with 3 of the Company’s branch properties.

The components of the Company’s net lease expense for the three and nine months ended September 30, 2019 were as follows:



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

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


(dollars in thousands)	Nine Months Ended September 30, 2019
Supplemental Cash Flows Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows paid for operating leases	$	7,166
Operating cash flows paid for finance leases		89
Financing cash flows paid for finance leases		10
Right-of-use assets obtained in exchange for new lease obligations:
Operating leases	$	1,401
Weighted Average Remaining Lease Term
Operating leases (years)		15.6
Finance leases (years)		2.8
Weighted Average Discount Rate
Operating leases		3.34	%
Finance leases		6.78	%

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

The most significant assumption related to the Company’s application of Topic 842 was the discount rate assumption. As most of the Company’s lease agreements do not provide for an implicit interest rate, the Company used the collateralized interest rate that the Company would have to pay to borrow over a similar term to estimate the Company’s lease liability as of January 1, 2019.

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


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

The following table presents future minimum rental payments under operating leases with terms in excess of one year as of December 31, 2018 presented in accordance with Topic 840, “Leases”:


	Operating		Less		Net Operating
	Lease		Sublease		Lease
(dollars in thousands)	Payments		Income		Payments
Year ending December 31:
2019	$	8,780	$	903	$	7,877
2020		8,668		903		7,765
2021		7,961		892		7,069
2022		5,101		—		5,101
2023		2,632		—		2,632
Thereafter		34,638		—		34,638
Total future minimum lease payments	$	67,780	$	2,698	$	65,082

The Company has several operating leases with related parties associated with its branch premises. The lease payments to related parties were $0.1 million and $0.3 million for the three and nine months ended September 30, 2019, respectively. The future minimum rental payments due to related parties are not material (remainder of 2019), $0.3 million (2020), $0.3 million (2021), $0.2 million (2022), $0.2 million (2023), and $7.5 million thereafter.

The Company, as lessor, rents office space in its headquarters office building as well as office space located primarily in Hawaii to third party lessees. The cost and accumulated depreciation related to leased properties were $288.8 million and $139.3 million, respectively, as of September 30, 2019, and $289.2 million and $133.7 million, respectively, as of December 31, 2018. Terms of such leases, including renewal options, may be extended for up to ten years, many of which provide for periodic adjustment of rent payments based on changes in consumer or other price indices. The Company recognizes lease income on a straight-line basis over the lease term. Non-lease components, primarily consisting of costs incurred by the Company for maintenance and utilities, are recognized as income in the period in which the payments are due.

The Company recognized operating lease income related to lease payments of $1.5 million and $4.4 million for the three and nine months ended September 30, 2019, respectively. In addition, the Company recognized $1.4 million and $4.0 million of lease income related to variable lease payments for the three and nine months ended September 30, 2019, respectively.

Certain of the Company’s leases are with related parties for the use of space at the Company’s headquarters office building. The rental income paid by the related parties for the three and nine months ended September 30, 2019 was $0.1 million and $0.3 million, respectively. The future minimum rental income from related parties as of September 30, 2019 was not material.

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


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

17. Benefit Plans

The Company sponsors an unfunded supplemental executive retirement plan (“SERP”) for certain key executives. In March 2019, the Company’s board of directors approved an amendment to the SERP to freeze the SERP, which became effective on July 1, 2019. As a result of the amendment, since the effective date, there have not been any, and there will be no, new accruals of benefits, including service accruals. Existing benefits under the SERP, as of the effective date of the amendment described above, will otherwise continue in accordance with the terms of the SERP.

The following table sets forth the components of net periodic benefit cost for the Company’s pension and postretirement benefit plans for the three and nine months ended September 30, ~~2018~~2019 and ~~2017:~~2018:


	Income line item where recognized in	Pension Benefits				Other Benefits

										Income line item where recognized in	Pension Benefits				Other Benefits
(dollars in thousands)	the consolidated statements of income	2018		2017		2018		2017		the consolidated statements of income	2019		2018		2019		2018
Three Months Ended September 30,
Service cost	Salaries and employee benefits	$	174	$	157	$	80	$	179	Salaries and employee benefits	$	18	$	174	$	160	$	80
Interest cost	Other noninterest expense		1,840		2,041		293		201	Other noninterest expense		2,044		1,840		203		293
Expected return on plan assets	Other noninterest expense		(1,318)		(1,242)		—		—	Other noninterest expense		(1,195)		(1,318)		—		—
Prior service credit	Other noninterest expense		—		—		(108)		(107)	Other noninterest expense		—		—		(107)		(108)
Recognized net actuarial loss	Other noninterest expense		1,829		2,000		—		—
Recognized net actuarial loss (gain)										Other noninterest expense		1,564		1,829		(76)		—
Total net periodic benefit cost		$	2,525	$	2,956	$	265	$	273		$	2,431	$	2,525	$	180	$	265


Nine Months Ended September 30,
Service cost	Salaries and employee benefits	$	522	$	472	$	505	$	537	Salaries and employee benefits	$	52	$	522	$	478	$	505
Interest cost	Other noninterest expense		5,429		6,124		662		603	Other noninterest expense		6,132		5,429		615		662
Expected return on plan assets	Other noninterest expense		(3,797)		(3,726)		—		—	Other noninterest expense		(3,585)		(3,797)		—		—
Prior service credit	Other noninterest expense		—		—		(322)		(322)	Other noninterest expense		—		—		(321)		(322)
Recognized net actuarial loss	Other noninterest expense		5,049		5,998		—		—
Recognized net actuarial loss (gain)										Other noninterest expense		4,692		5,049		(228)		—
Total net periodic benefit cost		$	7,203	$	8,868	$	845	$	818		$	7,291	$	7,203	$	544	$	845

~~Table of Contents~~

18. Fair Value

The Company determines the fair values of its financial instruments based on the requirements established in Accounting Standards Codification ~~(“ASC”)~~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. ~~ASC~~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

~~ASC~~Topic 820 establishes three levels of fair values based on the markets in which the assets or liabilities are traded and the reliability of the assumptions used to determine fair value. The levels are:

◾

Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

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◾

Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

◾

Level 3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect the Company’s own estimates of assumptions that market participants would use in pricing the asset or liability (“Company-level data”). Level 3 assets and liabilities include financial instruments whose value is determined using unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

~~ASC~~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, ~~interest rate~~ swaps and other instruments as defined by the standard. The Company has an organized and established process for determining and reviewing the fair value of financial instruments reported in the Company’s financial statements. The fair value measurements are reviewed to ensure they are reasonable and in line with market experience in similar asset and liability classes.

Additionally, the Company may be required to record at fair value other assets on a nonrecurring basis, such as other real estate owned, other customer relationships, and other intangible assets. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-fair-value accounting or write-downs of individual assets.

Disclosure of fair values is not required for certain items such as lease financing, obligations for pension and other postretirement benefits, premises and equipment, prepaid expenses, deposit liabilities with no defined or contractual maturity, and income tax assets and liabilities.

Reasonable comparisons of fair value information with that of other financial institutions cannot necessarily be made because the standard permits many alternative calculation techniques, and numerous assumptions have been used to estimate the Company’s fair values.

Valuation Techniques Used in the Fair Value Measurement of Assets and Liabilities Carried at Fair Value

For the assets and liabilities measured at fair value on a recurring basis (categorized in the valuation hierarchy table below), the Company applies the following valuation techniques:

Available-for-sale securities

Available-for-sale debt securities are recorded at fair value on a recurring basis. Fair value measurement is based on quoted prices, including estimates by third-party pricing services, if available. If quoted prices are not available, fair values are measured using proprietary valuation models that utilize market observable parameters from active market makers and inter-dealer brokers whereby securities are valued based upon available market data for securities with similar characteristics. Management reviews the pricing information received from the Company’s third-party pricing service to evaluate the inputs and valuation methodologies used to place securities into the appropriate level of the fair value hierarchy and transfers of securities within the fair value hierarchy are made if necessary. On a monthly basis, management reviews the pricing information received from the third-party pricing service which includes a comparison to non-binding

~~Table of Contents~~

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, ~~2018~~2019 and December 31, ~~2017,~~2018, management did not make adjustments to prices provided by the third-party pricing services as a result of illiquid or inactive markets. The Company’s third-party pricing service has also established processes for the Company to submit inquiries regarding quoted prices. Periodically, the Company will challenge the quoted prices provided by the third-party pricing service. The Company’s third-party pricing service will review the inputs to the evaluation in light of the new market data presented by the Company. The Company’s third-party pricing service may then affirm the original quoted price or may update the evaluation on a going forward basis. The Company classifies all available-for-sale securities as Level ~~2 in the fair value hierarchy.~~2.

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Derivatives

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

Concurrent with the sale of the Visa Class B restricted shares, the Company entered into an agreement with the buyer that requires payment to the buyer in the event Visa reduces each member bank’s Class B conversion rate to unrestricted Class A common shares. On July 5, 2018, Visa announced a decrease in conversion rate from 1.6483 to 1.6298 effective June 28, 2018. On September 27, 2019, Visa additionally funded its litigation escrow account, thereby further reducing each member bank’s Class B conversion rate to unrestricted Class A common shares. Accordingly, on September 30, 2019, Visa announced a decrease in conversion rate from 1.6298 to 1.6228 effective September 27, 2019. The Visa derivative of ~~$3.4~~$0.6 million and ~~$5.4~~$2.6 million was included in the unaudited interim consolidated balance sheets at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, to provide for the fair value of this liability. The potential liability related to this funding swap agreement was determined based on management’s estimate of the timing and the amount of Visa’s litigation settlement and the resulting payments due to the counterparty under the terms of the contract. As such, the funding swap agreement is classified as Level 3 in the fair value hierarchy. The significant unobservable inputs used in the fair value measurement of the Company’s funding swap agreement are the potential future changes in the conversion rate, expected term and growth rate of the market price of Visa Class A common shares. Material increases or (decreases) in any of those inputs may result in a significantly higher or (lower) fair value measurement.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 are summarized below:

Fair Value Measurements as of September 30, 2019

Quoted Prices in

Significant

Active Markets for

Other

Significant

Identical Assets

Observable

Unobservable

(dollars in thousands)

(Level 1)

Inputs (Level 2)

Inputs (Level 3)

Total

Assets

U.S. Treasury securities

—

29,738

—

29,738

Government agency debt securities

—

24,472

—

24,472

Government-sponsored enterprises debt securities

—

126,649

—

126,649

Government agency mortgage-backed securities⁽¹⁾

—

343,905

—

343,905

Government-sponsored enterprises mortgage-backed securities⁽¹⁾

—

371,949

—

371,949

Collateralized mortgage obligations:

Government agency

—

2,486,524

—

2,486,524

Government-sponsored enterprises

—

773,845

—

773,845

Total available-for-sale securities

—

4,157,082

—

4,157,082

Other assets⁽²⁾

—

85,883

—

85,883

Liabilities

Other liabilities⁽³⁾

—

(958)

(584)

(1,542)

Total

—

4,242,007

(584)

4,241,423

Fair Value Measurements as of September 30, 2018

Quoted Prices in

Significant

Active Markets for

Other

Significant

Identical Assets

Observable

Unobservable

(dollars in thousands)

(Level 1)

Inputs (Level 2)

Inputs (Level 3)

Total
Assets

U.S. Treasury securities

$
—

$
383,890

$
—

$
383,890
Government-sponsored enterprises debt securities

—

237,217

—

237,217
Government agency mortgage-backed securities(1)

—

419,293

—

419,293
Government-sponsored enterprises mortgage-backed securities(1)

—

154,133

—

154,133
Collateralized mortgage obligations:

Government agency

—

2,753,966

—

2,753,966
Government-sponsored enterprises

—

627,239

—

627,239
Debt securities issued by states and political subdivisions

—

19,563

—

19,563
Total available-for-sale securities

—

4,595,301

—

4,595,301
Other assets(2)

—

2,044

—

2,044
Liabilities

Other liabilities(3)

—

(28,557)

(3,385)

(31,942)
Total

$
—

$
4,568,788

$
(3,385)

$
4,565,403

~~Table of Contents~~

Fair Value Measurements as of December 31, 2017

Quoted Prices in

Significant

Active Markets for

Other

Significant

Identical Assets

Observable

Unobservable

(dollars in thousands)

(Level 1)

Inputs (Level 2)

Inputs (Level 3)

Total
Assets

U.S. Treasury securities

$
—

$
392,255

$
—

$
392,255
Government-sponsored enterprises debt securities

—

242,601

—

242,601
Government agency mortgage-backed securities(1)

—

351,390

—

351,390
Government-sponsored enterprises mortgage-backed securities(1)

—

174,741

—

174,741
Collateralized mortgage obligations:

Government agency

—

3,290,474

—

3,290,474
Government-sponsored enterprises

—

762,718

—

762,718
Debt securities issued by states and political subdivisions

—

20,479

—

20,479
Total available-for-sale securities

—

5,234,658

—

5,234,658
Other assets(2)

—

14,682

—

14,682
Liabilities

Other liabilities(3)

—

(15,049)

(5,439)

(20,488)
Total

$
—

$
5,234,291

$
(5,439)

$
5,228,852

(1)

⁽¹⁾

Backed by residential real estate.

(2)

⁽²⁾

Other assets include derivative assets.

(3)

⁽³⁾

Other liabilities include derivative liabilities.

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	Fair Value Measurements as of December 31, 2018
	Quoted Prices in		Significant
	Active Markets for		Other		Significant
	Identical Assets		Observable		Unobservable
(dollars in thousands)	(Level 1)		Inputs (Level 2)		Inputs (Level 3)		Total
Assets
U.S. Treasury securities	$	—	$	389,470	$	—	$	389,470
Government-sponsored enterprises debt securities		—		241,594		—		241,594
Government agency mortgage-backed securities⁽¹⁾		—		411,536		—		411,536
Government-sponsored enterprises mortgage-backed securities⁽¹⁾		—		150,847		—		150,847
Collateralized mortgage obligations:
Government agency		—		2,682,449		—		2,682,449
Government-sponsored enterprises		—		602,592		—		602,592
Debt securities issued by states and political subdivisions		—		19,854		—		19,854
Total available-for-sale securities		—		4,498,342		—		4,498,342
Other assets⁽²⁾		—		12,336		—		12,336
Liabilities
Other liabilities⁽³⁾		—		(12,085)		(2,607)		(14,692)
Total	$	—	$	4,498,593	$	(2,607)	$	4,495,986

(1)	Backed by residential real estate.

(2)	Other assets include derivative assets.

(3)	Other liabilities include derivative liabilities.

Changes in Fair Value Levels

For the three and nine months ended September 30, ~~2018,~~2019, there were no0 transfers between fair value hierarchy levels.

The changes in Level 3 liabilities measured at fair value on a recurring basis for the three and nine months ended September 30, 2019 and 2018 are summarized below.


	Visa Derivative

					Visa Derivative
(dollars in thousands)	2018		2017		2019		2018
Three Months Ended September 30,
Balance as of July 1,	$	(4,114)	$	(6,493)	$	(1,179)	$	(4,114)
Total net losses included in other noninterest income		(43)		(41)		(417)		(43)
Settlements		772		559		1,012		772
Balance as of September 30,	$	(3,385)	$	(5,975)	$	(584)	$	(3,385)
Total net losses included in net income attributable to the change in unrealized gains or losses related to liabilities still held as of September 30,	$	(43)	$	(41)	$	(417)	$	(43)


Nine Months Ended September 30,
Balance as of January 1,	$	(5,439)	$	(7,460)	$	(2,607)	$	(5,439)
Total net losses included in other noninterest income		(123)		(73)		(659)		(123)
Settlements		2,177		1,558		2,682		2,177
Balance as of September 30,	$	(3,385)	$	(5,975)	$	(584)	$	(3,385)
Total net losses included in net income attributable to the change in unrealized gains or losses related to liabilities still held as of September 30,	$	(123)	$	(73)	$	(659)	$	(123)

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Assets and Liabilities Carried at Other Than Fair Value

The following tables summarize for the periods indicated the estimated fair value of the Company’s financial instruments that are not required to be carried at fair value on a recurring basis, excluding leases and deposit liabilities with no defined or contractual maturity.


	September 30, 2018
			Fair Value Measurements
			Quoted Prices in		Significant		Significant
			Active Markets		Other		Unobservable
			for Identical		Observable		Inputs

											September 30, 2019
													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		Book Value		Assets (Level 1)		Inputs (Level 2)		(Level 3)		Total
Financial assets:
Cash and cash equivalents	$	699,493	$	350,967	$	348,518	$	—	$	699,485	$	1,344,017	$	358,863	$	985,154	$	—	$	1,344,017
Loans(1)(2)		12,439,150		—		—		12,164,831		12,164,831

Loans held for sale												1,594		—		1,594		—		1,594
Loans⁽¹⁾												12,675,522		—		—		12,844,384		12,844,384

Financial liabilities:
Time deposits(3)	$	3,290,499	$	—	$	3,253,036	$	—	$	3,253,036
Time deposits⁽²⁾											$	2,707,593	$	—	$	2,699,798	$	—	$	2,699,798
Short-term borrowings		30,000		—		30,000		—		30,000		400,000		—		402,133		—		402,133
Long-term borrowings(4)		400,000		—		400,935		—		400,935
Long-term borrowings⁽³⁾												200,000		—		209,149		—		209,149


	December 31, 2018
			Fair Value Measurements
			Quoted Prices in		Significant		Significant
			Active Markets		Other		Unobservable
			for Identical		Observable		Inputs
(dollars in thousands)	Book Value		Assets (Level 1)		Inputs (Level 2)		(Level 3)		Total
Financial assets:
Cash and cash equivalents	$	1,003,637	$	396,836	$	606,801	$	—	$	1,003,637
Loans held for sale		432		—		432		—		432
Loans⁽¹⁾		12,928,422		—		—		12,664,170		12,664,170

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

December 31, 2017

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

$
1,034,644

$
367,084

$
667,560

$
—

$
1,034,644

Loans held for sale

556

—

559

—

559

Loans(1)(2)

12,112,303

—

—

12,426,506

12,426,506

Financial liabilities:

Time deposits(3)

$
4,173,882

$
—

$
4,160,393

$
—

$
4,160,393

(1)

⁽¹⁾

Excludes financing leases of ~~$161.3~~$167.9 million at September 30, ~~2018~~2019 and ~~$165.1~~$147.8 million at December 31, ~~2017.~~

2018.

(2)

⁽²⁾

In connection with the prospective adoption of ASU 2016-01 on July 1, 2018, the valuation methodology used to estimate the fair value of loans was changed to conform to an exit price notion. The fair value estimate at December 31, 2017 has not been revised to reflect application of the modified methodology.

⁽³⁾

Excludes deposit liabilities with no defined or contractual maturity of ~~$13.4~~$14.1 billion as of both September 30, ~~2018~~2019 and December 31, ~~2017.~~

2018.

(3)

⁽⁴⁾

Excludes capital lease obligations of $18 thousand and $26 thousand at September 30, ~~2018.~~

2019 and December 31, 2018, respectively.

Unfunded loan and lease commitments and letters of credit are not included in the tables above. As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company had ~~$5.9~~$6.0 billion and ~~$5.6~~$5.8 billion, respectively, of unfunded loan and lease commitments and letters of credit. A reasonable estimate of the fair value of these instruments is the carrying value of deferred fees plus the related reserve for unfunded commitments, which totaled ~~$11.8~~$13.7 million and ~~$11.7~~$14.2 million at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. No active trading market exists for these instruments, and the estimated fair value does not include value associated with the borrower relationship. The Company does not estimate the fair values of certain unfunded loan and lease commitments that can be canceled by providing notice to the borrower. As Company-level data is incorporated into the fair value measurement, unfunded loan and lease commitments and letters of credit are classified as Level 3.

Valuation Techniques Used in the Fair Value Measurement of Assets and Liabilities Carried at the Lower of Cost or Fair Value

The Company applies the following valuation techniques to assets measured at the lower of cost or fair value:

Mortgage servicing rights

MSRs are carried at the lower of cost or fair value and are therefore subject to fair value measurements on a nonrecurring basis. The fair value of MSRs is determined using models which use significant unobservable inputs, such as estimates of prepayment rates, the resultant weighted average lives of the MSRs and the option-adjusted spread levels. Accordingly, the Company classifies MSRs as Level 3.

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Impaired loans

A large portion of the Company’s impaired loans are collateral dependent and are measured at fair value on a nonrecurring basis using collateral values as a practical expedient. The fair values of collateral for impaired loans are primarily based on real estate appraisal reports prepared by third-party appraisers less disposition costs, present value of the expected future cash flows or the loan’s observable market price. Certain loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective rate, which is not a fair value measurement. The Company measures the impairment on certain loans and leases by performing a lower-of-cost-or-fair-value analysis. If impairment is determined by the value of the collateral or an observable market price, it is written down to fair value on a nonrecurring basis as Level 3.

Other real estate owned

The Company values these properties at fair value at the time the Company acquires them, which establishes their new cost basis. After acquisition, the Company carries such properties at the lower of cost or fair value less estimated selling costs on a nonrecurring basis. Fair value is measured on a nonrecurring basis using collateral values as a practical expedient. The fair values of collateral for other real estate owned are primarily based on real estate appraisal reports prepared by third-party appraisers less disposition costs, and are classified as Level 3.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required to record certain assets at fair value on a nonrecurring basis in accordance with GAAP. These assets are subject to fair value adjustments that result from the application of lower of cost or fair value accounting or write-downs of individual assets to fair value.

The following table provides the level of valuation inputs used to determine each fair value adjustment and the fair value of the related individual assets or portfolio of assets with fair value adjustments on a nonrecurring basis as of September 30, ~~2018~~2019 and December 31, ~~2017:~~2018:



(dollars in thousands)	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
September 30, 2018
September 30, 2019
Impaired loans	$	—	$	—	$	402	$	—	$	—	$	882
December 31, 2017
December 31, 2018
Impaired loans	$	—	$	—	$	87	$	—	$	—	$	402

Total losses on impaired loans were ~~$0.1~~$0.5 million and ~~$0.2~~$0.1 million for the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively and ~~$0.6~~$0.5 million and ~~$0.7~~$0.6 million for the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

For Level 3 assets and liabilities measured at fair value on a recurring or nonrecurring basis as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the significant unobservable inputs used in the fair value measurements were as follows:


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


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

Quantitative Information about Level 3 Fair Value Measurements at September 30, 2018

Significant

Range
(dollars in thousands)

Fair value

Valuation Technique

Unobservable Input

(Weighted Average)
Impaired loans

$
402

Appraisal Value

Appraisal Value

n/m(1)
Other liabilities

$
(3,385)

Discounted Cash Flow

Expected Conversion Rate

1.6298

Expected Term

4 years

Growth Rate

15%

Quantitative Information about Level 3 Fair Value Measurements at December 31, 2017

Range
(dollars in thousands)

Fair value

Valuation Technique

Unobservable Input

(Weighted Average)
Impaired loans

$
87

Appraisal Value

Appraisal Value

n/m(1)
Other liabilities

$
(5,439)

Discounted Cash Flow

Expected Conversion Rate

1.6483

Expected Term

4 years

Growth Rate

15%

(1)

⁽¹⁾

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

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19. Reportable Operating Segments

The Company’s operations are organized into ~~three~~3 business segments – Retail Banking, Commercial Banking, and Treasury and Other. These segments reflect how discrete financial information is currently evaluated by the chief operating decision maker and how performance is assessed and resources allocated. The Company’s internal management process measures the performance of these business segments. This process, which is not necessarily comparable with similar information for any other financial institution, uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of income, expense, the provision for loan and lease losses, and capital. This process is dynamic and requires certain allocations based on judgment and other subjective factors. Unlike financial accounting, there is no comprehensive authoritative guidance for management accounting that is equivalent to GAAP.

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

The Company allocates the provision for loan and lease losses to each segment based on management’s estimate of the inherent loss content in each of the specific loan and lease portfolios.

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

Business Segments

Retail Banking

Retail Banking offers a broad range of financial products and services to consumers and small businesses. Loan and lease products offered include residential and commercial mortgage loans, home equity lines of credit, automobile loans and leases, personal lines of credit, installment loans and small business loans and leases. Deposit products offered include checking, savings, and time deposit accounts. Retail Banking also offers wealth management services. Products and services from Retail Banking are delivered to customers through 6058 banking locations throughout the State of Hawaii, Guam, and Saipan.

Commercial Banking

Commercial Banking offers products that include corporate banking, residential and commercial real estate loans, commercial lease financing, automobile loans and auto dealer financing, business deposit products and credit cards. Commercial lending and deposit products are offered primarily to middle-market and large companies locally, nationally, and internationally.

Treasury and Other

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

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

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


					Treasury
	Retail		Commercial		and

													Treasury
									Retail		Commercial		and
(dollars in thousands)	Banking		Banking		Other		Total		Banking		Banking		Other		Total
Three Months Ended September 30, 2018
Net interest income (expense)	$	111,804	$	29,639	$	(185)	$	141,258
Three Months Ended September 30, 2019
Net interest income									$	111,529	$	29,359	$	2,193	$	143,081
Provision for loan and lease losses		(1,760)		(2,700)		—		(4,460)		—		—		—		—
Net interest income (expense) after provision for loan and lease losses		110,044		26,939		(185)		136,798

Net interest income after provision for loan and lease losses										111,529		29,359		2,193		143,081

Noninterest income		22,676		17,801		6,928		47,405		24,249		17,146		8,585		49,980
Noninterest expense		(58,069)		(19,731)		(15,347)		(93,147)		(57,280)		(20,073)		(16,113)		(93,466)
Income (loss) before (provision) benefit for income taxes		74,651		25,009		(8,604)		91,056		78,498		26,432		(5,335)		99,595


(Provision) benefit for income taxes		(19,450)		(6,435)		2,217		(23,668)		(19,941)		(6,781)		1,326		(25,396)
Net income (loss)	$	55,201	$	18,574	$	(6,387)	$	67,388	$	58,557	$	19,651	$	(4,009)	$	74,199
Total assets as of September 30, 2018	$	6,884,429	$	6,020,137	$	7,079,272	$	19,983,838

⁽¹⁾

Certain prior period noninterest income and noninterest expense amounts have been revised from the amounts previously reported to conform to the current year’s presentations. For the three months ended September 30, 2017, noninterest income and noninterest expense for Commercial banking were both understated by $0.7 million and both noninterest income and noninterest expense for Treasury and Other were understated by $0.4 million. See “Note 1. Organization and Basis of Presentation” for more information.

⁽²⁾

~~Includes a $2.7 million gain on the sale of bank properties.~~

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

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

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

Treasury

Retail

Commercial

and

(dollars in thousands)

Banking

Banking

Other(2)

Total

Nine Months Ended September 30, 2017

Net interest income (expense)

$
321,498

$
83,707

$
(11,287)

$
393,918

Provision for loan and lease losses

(4,952)

(8,448)

—

(13,400)

Net interest income (expense) after provision for loan and lease losses

316,546

75,259

(11,287)

380,518

Noninterest income(1)

68,587

56,552

26,142

151,281

Noninterest expense(1)

(165,015)

(49,988)

(42,701)

(257,704)

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

220,118

81,823

(27,846)

274,095

(Provision) benefit for income taxes

(81,974)

(30,436)

10,313

(102,097)

Net income (loss)

$
138,144

$
51,387

$
(17,533)

$
171,998

Total assets as of September 30, 2017

$
6,868,484

$
5,421,428

$
8,275,715

$
20,565,627

⁽¹⁾

Certain prior period noninterest income and noninterest expense amounts have been revised from the amounts previously reported to conform to the current year’s presentations. For the nine months ended September 30, 2017, noninterest income and noninterest expense for Commercial banking were both understated by $3.3 million and both noninterest income and noninterest expense for Treasury and Other were understated by $1.2 million. See “Note 1. Organization and Basis of Presentation” for more information.

⁽²⁾

~~Includes a $2.7 million gain on the sale of bank properties.~~

4648

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

Cautionary Note Regarding Forward-Looking Statements

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

A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including the following: the geographic concentration of our business; current and future economic and market conditions in the United States generally or in Hawaii, Guam and Saipan in particular; concentrated exposures to certain asset classes and individual obligors; the effect of the current low interest rate environment or changes in interest rates on our business including our net interest income, net interest margin, the fair value of our investment securities, and our mortgage loan originations, mortgage servicing rights and mortgage loans held for sale; the replacement of LIBOR and changes to the method that other benchmark rates are determined, as well as our program relating to the transition from LIBOR to alternative rates, the possibility we might underestimate the credit losses inherent in our loan and lease portfolio; our inability to receive dividends from ~~our bank,~~the Bank, pay dividends to our common stockholders and satisfy obligations as they become due; the effects of geopolitical instability, including war, terrorist attacks, pandemics and man-made and natural disasters; our ability to maintain ~~our bank's~~the Bank’s reputation; our ability to attract and retain skilled employees or changes in our management personnel; our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business; our ability to successfully develop and commercialize new or enhanced products and services; changes in the demand for our products and services; the effectiveness of our risk management and internal disclosure controls and procedures; any failure or interruption of our information and communications systems; our ability to identify and address cybersecurity risks; the effect of a material breach of, or disruption to, the security of any of our or our vendors’ systems; the failure to properly use and protect our customer and employee information and data; our ability to keep pace with technological changes; our ability to attract and retain customer deposits; the effects of problems encountered by other financial institutions; our access to sources of liquidity and capital to address our liquidity needs; our use of the secondary mortgage market as a source of liquidity; risks associated with the sale of loans and with our use of appraisals in valuing and monitoring loans; the possibility that actual results may differ from estimates and forecasts; the potential for environmental liability; fluctuations in the fair value of our assets and liabilities and off-balance sheet exposures; the effects of the failure of any component of our business infrastructure provided by a third-party; the impact of, and changes in, applicable laws, regulations and accounting standards and ~~policies, including the enactment of the Tax Act (Public Law 115-97) on December 22, 2017;~~policies; possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations; our likelihood of success in, and the impact of, litigation or regulatory actions; ~~market perceptions associated with~~ our ~~separation from BNPP and other aspects of~~ability to continue to pay dividends on our ~~business;~~common stock; contingent liabilities and unexpected tax liabilities that may be applicable to us as a result of the Reorganization Transactions; the effect of BNPP’s beneficial ownership of our outstanding common stock; our ability to retain service providers to perform oversight or control functions or services that have otherwise been performed in the pastreorganization transactions effected by ~~affiliates of~~ BNPP; the ~~one-time and~~ incremental costs of operating as a stand-alone public company; our ability to meet our obligations as a public company, including our obligations under Section 404 of the Sarbanes-Oxley Act of 2002; ~~the fact that we are no longer an “emerging growth company” and the reduced disclosure requirements applicable to emerging growth companies no longer apply to us;~~ and damage to our reputation from any of the factors described above.

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

The foregoing factors should not be considered an exhaustive list and should be read together with the other cautionary statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not

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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.

~~Reorganization Transactions~~Transition to an Independent Public Company

On July 1, 2016, FHI became a direct wholly owned subsidiary of BWC, a Delaware corporation and an indirect wholly owned subsidiary of BNPP. In connection with FHI’s ~~IPO~~initial public offering in August 2016, ~~in which BNPP sold approximately 17% of its interest in FHI,~~ BNPP announced its intent to sell ~~a controlling~~its interest in FHI, including ~~its~~FHI’s wholly owned subsidiary FHB, over time, subject to market conditions and other considerations. ~~On April~~

Following a series of secondary offerings completed in 2017 and 2018, on February 1, ~~2016, BNPP effected~~2019, BWC completed the Reorganization Transactions pursuant to which FHI, which was then known as BancWest, contributed BOW, its subsidiary at the time, to BWHI, a newly formed bank holding company and a wholly owned subsidiary of BNPP. Upon formation, BWHI was a direct wholly owned subsidiary of BancWest and, as part of the Reorganization Transactions, BancWest contributed 100%sale of its interest in BOW to BWHI. Following the contribution of BOW to BWHI, BancWest distributed its interest in BWHI to BNPP, and BWHI became a wholly owned subsidiary of BNPP. As part of these transactions, we amended our certificate of incorporation to change our name to First Hawaiian, Inc., with the Bank remaining ~~our only direct wholly owned subsidiary.~~

The Reorganization Transactions were made in connection with our transition to a stand-alone public company and our separation from BNPP. On July 1, 2016, in order to comply with the Federal Reserve’s requirement (under Regulation YY) applicable to BNPP that a foreign banking organization with $50 billion or more in U.S. non-branch assets as of June 30, 2015 establish a U.S. intermediate holding company and hold its interest in the substantial majority of its U.S. subsidiaries through the intermediate holding company by July 1, 2016, we became an indirect wholly owned subsidiary of BNP Paribas USA, BNPP’s U.S. intermediate holding company. As part of that reorganization, we became a direct wholly owned subsidiary of BWC, the BNPP selling stockholder and a direct wholly owned subsidiary of BNP Paribas USA.

~~Public Offerings and Separation from BNPP~~

Shares of FHI’s common stock began trading on the NASDAQ Global Select Market (“NASDAQ”) under the ticker symbol “FHB” on August 4, 2016. In August 2016, FHI completed its initial public offering (“IPO”) of 24,250,000 shares of common stock sold by BWC. In February 2017, BWC sold an additional 28,750,00024,859,750 shares of FHI common stock in a secondary offering. In May and June 2018, BWC sold an additional 16,830,000 shares of FHI common stock in the aggregate in a secondary offering. BWC sold 20,000,000 additional shares of FHI common stock in secondary offerings completed in each of August and September 2018, respectively. BWC sold shares of FHI common stock of 2,968,069 and 1,801,801 in May and August 2018, respectively, to the Company pursuant to share repurchase agreements.public offering (“IPO”). FHI did not receive any of the proceeds from the ~~aforementioned~~ sales of shares of ~~its~~FHI common stock ~~by BWC. BNPP is~~in that offering, any of the ~~beneficial owner~~secondary offerings described above or the IPO. As a result of ~~approximately 18% of FHI’s common stock as of September 30, 2018.~~

~~Effective upon~~ the completion of the ~~August 2018~~February 1, 2019 public offering, ~~two~~BNPP (through BWC, the selling stockholder) fully exited its ownership interest in FHI common stock.

Following the completion of the February 2019 offering, each of the remaining BNPP designees to the FHI board of directors, ~~Jean-Milan Givadinovitch and Xavier Antiglio,~~ resigned from the board of directors. ~~The FHI board of~~As a result, all directors ~~appointed Faye Kurren and Jenai Wall to fill such vacancies. Effective upon completion of the September 2018 offering, one~~designated by BNPP ~~designee to the FHI board of directors, J. Michael Shepherd,~~have resigned from the FHI board of directors. ~~On October 24, 2018, the FHI board of directors appointed C. Scott Wo to fill such vacancy.~~

Following the completion of the secondary offering completed in August 2018, BNPP confirmed that it will cease consolidating the Company’s financial statements with (i) the BNPP consolidated financial statements under International Financial Reporting Standards and (ii) the BNP Paribas USA, Inc. (“BNP Paribas USA”) consolidated financial statements under generally accepted accounting principles in the United States. As a result, from August 1, 2018, the Company has

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not been included within the scope of (i) BNPP’s capital requirements for purposes of the fourth EU Capital Requirements Directive and EU Capital Requirements Regulation or (ii) BNP Paribas USA’s capital plans for purposes of the Federal Reserve’s Comprehensive Capital Analysis and Review (“CCAR”) processes.

The Company and the Bank entered into a Transitional Services Agreement pursuant to which BNPP, BWHI and BOW continue to provide us with certain services they provided prior to the IPO either directly or on a pass-through basis, and we have agreed to continue to provide, or arrange to provide, BNPP, BWHI and BOW with certain services we provided to them prior to the IPO, either directly or on a pass-through basis. The Transitional Services Agreement will terminate on December 31, 2018, although the provision of certain services have already terminated, the provision of certain other services will terminate prior to the agreement termination date and certain other services may continue to be provided beyond the agreement termination date as may be agreed by the parties. In connection with our transition to a stand-alone public company and our separation from BNPP, we have incurred, and expect to continue to incur, incremental ongoing and one-time expenses, including those incurred under the Transitional Services Agreement, as well as increases in audit fees, insurance premiums, employee salaries and benefits (including stock-based compensation expenses for employees and non-employee directors), and fees and expenses that may have been previously reimbursed by BNPP or its affiliates and consulting fees. These costs also include increases that we expect to result from the higher pricing of services by third-party vendors whose future contracts with us do not reflect BOW volumes or the benefits of BNPP bargaining power. Our one-time expenses incurred in connection with our IPO included professional fees, consulting fees and certain filing and listing fees. The actual amount of the incremental expenses we will incur as a stand-alone public company and as part of our separation from BNPP may be higher, perhaps significantly, from our current estimates for a number of reasons, including, among others, the final terms we are able to negotiate with service providers prior to the termination of the Transitional Services Agreement, as well as additional costs we may incur that we have not currently anticipated.

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. ~~Intercompany account balances~~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 ~~U.S. generally accepted accounting principles (“GAAP”)~~GAAP for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and accompanying notes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect normal recurring adjustments necessary for a fair presentation of the results for the interim periods.

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The accompanying unaudited interim consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 and filed with the U.S. Securities and Exchange Commission (the “SEC”).

Hawaii Economy

Hawaii’s economy continued to ~~perform well~~reflect growth during the three and nine months ended September 30, ~~2018,~~2019, led in large part by a ~~strong~~steady tourism industry, real estate ~~and labor~~ market, ~~conditions~~ and growth in tax revenues. Visitor arrivals for the first eight months in ~~2018~~2019 increased by ~~7.2%~~5.2% compared to the same period in ~~2017, and~~2018, while total visitor spending for the first eight months in ~~2018 increased~~2019 decreased by ~~8.8%~~0.5% compared to the same period in ~~2017,~~2018, according to the Hawaii Tourism Authority. ~~Visitor arrivals and spending increased, in particular, from U.S. mainland visitors.~~ The statewide seasonally-adjusted unemployment rate was 2.7% in September 2019 compared to 2.2% in ~~both~~ September 2018, ~~and September 2017,~~ according to the ~~Hawaii State~~Bureau of Labor Statistics of the U.S. Department of ~~Labor & Industrial Relations.~~Labor. The national seasonally-adjusted unemployment rate was 3.5% in September 2019 compared to 3.7% in September ~~2018 compared~~2018. With regards to ~~4.2% for~~housing on Oahu, the ~~same period in 2017. The~~ volume of single-family home sales ~~on Oahu~~slightly increased by 0.8%, while condominium sales decreased by ~~3.7%~~6.7%, for the nine months ended September 30, ~~2018~~2019 compared to the same period in ~~2017 and the volume of condominium sales on Oahu decreased by 0.1% for the nine months ended September 30,~~ 2018 ~~compared to the same period in 2017~~ according to the Honolulu Board of Realtors. ~~However, the~~The median price of single-family home sales and condominium sales on Oahu was ~~$789,000~~$785,000 and ~~$429,500~~$425,000, respectively, or ~~an increase~~a decrease of ~~4.2%~~0.5% and ~~5.5%~~1.0%, respectively, for the nine months ended September 30, ~~2018~~2019 as compared to the same period in ~~2017.~~2018. As of September 30, ~~2018,~~2019, months of inventory of single family homes and condominiums on Oahu remained low at approximately ~~2.8~~3.5 and ~~2.9~~3.9 months, respectively. Lastly, state

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general excise and use tax revenues increased by ~~2.1%~~6.3% for the first eight months of ~~2018~~2019 as compared to the same period in ~~2017~~2018, according to the Hawaii Department of Taxation.

Although Hawaii’s economy continued to ~~grow~~reflect growth during the three and nine months ended September 30, ~~2018, but is~~2019, we are significantly dependent on U.S. mainland economic conditions as well as key international economies, ~~particularly Japan. We~~and in particular, Japan, along with monetary policies that impact the shape of the Treasury yield curve. In addition, we continue to monitor construction activity and tourism in Hawaii and the local economy’s ability to absorb further planned expansion, given deteriorating home ~~affordability,~~affordability. Locally, an ordinance recently enacted affecting vacation rentals on Oahu could impact the tourism ~~in Hawaii, rising interest rates~~industry. Nationally and globally, we are monitoring the potential for a lower federal funds rate in the U.S., the uncertainties related to trade tensions and the strength of the global economy as well as the agenda of the U.S. administration and its impact on existing banking ~~regulations, changes in Japan’s economic conditions including the exchange rate of its currency, and the economic and regulatory conditions of the European Union, as such~~regulations. These factors could impact our profitability in future reporting periods.

~~Recent Regulatory Events~~

On May 24, 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”) was enacted. EGRRCPA provided certain limited amendments to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), as well as certain targeted modifications to other post-financial crisis regulatory requirements. On July 6, 2018, three Federal banking agencies issued statements providing, among other things, that (i) bank holding companies and banks with less than $100 billion in total consolidated assets, such as the Company and the Bank, would be immediately exempt from the Dodd-Frank company-run stress testing requirement (commonly referred to as “DFAST”) and (ii) banking organizations may calculate their capital requirements for “high volatility commercial real estate” using the definition in EGRRCPA, which has broader exemptions and is narrower in scope than the current definition in the Federal banking agencies’ capital rules.

~~Contingencies~~

On October 2, 2018, the Company reached an agreement in principle to resolve a putative class action lawsuit alleging that the Bank improperly charged certain overdraft fees. In connection with the anticipated settlement agreement, the Company recorded an expense of approximately $4.1 million during the nine months ended September 30, 2018. For further information, see “Note 14. Commitments and Contingent Liabilities”.

Selected Financial Data

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



Financial Highlights										Table 1													Table 1
	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
													For the Three Months Ended						For the Nine Months Ended
													September 30,						September 30,
(dollars in thousands, except per share data)	2018			2017			2018			2017			2019			2018			2019			2018
Income Statement Data:
Interest income	$	164,052		$	145,270		$	478,007		$	422,210		$	170,181		$	164,052		$	516,560		$	478,007
Interest expense		22,794			11,951			55,674			28,292			27,100			22,794			82,777			55,674
Net interest income		141,258			133,319			422,333			393,918			143,081			141,258			433,783			422,333
Provision for loan and lease losses		4,460			4,500			16,430			13,400			—			4,460			9,550			16,430
Net interest income after provision for loan and lease losses		136,798			128,819			405,903			380,518			143,081			136,798			424,233			405,903
Noninterest income~~(2)~~		47,405			49,664			145,902			151,281			49,980			47,405			145,825			145,902
Noninterest expense~~(2)~~		93,147			84,784			275,599			257,704			93,466			93,147			279,379			275,599
Income before provision for income taxes		91,056			93,699			276,206			274,095			99,595			91,056			290,679			276,206
Provision for income taxes		23,668			35,336			71,807			102,097			25,396			23,668			74,123			71,807
Net income	$	67,388		$	58,363		$	204,399		$	171,998		$	74,199		$	67,388		$	216,556		$	204,399
Basic earnings per share	$	0.50		$	0.42		$	1.48		$	1.23		$	0.56		$	0.50		$	1.62		$	1.48
Diluted earnings per share	$	0.50		$	0.42		$	1.48		$	1.23		$	0.56		$	0.50		$	1.61		$	1.48
Basic weighted-average outstanding shares		135,466,669			139,556,532			137,643,005			139,549,665			132,583,902			135,466,669			133,957,192			137,643,005
Diluted weighted-average outstanding shares		135,675,498			139,696,330			137,809,573			139,670,487			132,877,769			135,675,498			134,231,762			137,809,573
Dividends declared per share	$	0.24		$	0.22		$	0.72		$	0.66		$	0.26		$	0.24		$	0.78		$	0.72
Dividend payout ratio		48.00	%		52.38	%		48.65	%		53.66	%		46.43	%		48.00	%		48.45	%		48.65	%
Supplemental Income Statement Data (non-GAAP)(1):
Core net interest income	$	141,258		$	133,319		$	422,333		$	393,918		$	143,081		$	141,258		$	433,783		$	422,333
Core noninterest income~~(2)~~		47,405			46,997			145,902			148,614			49,980			47,405			148,417			145,902
Core noninterest expense~~(2)~~		88,511			84,241			269,642			256,320			91,222			88,511			276,613			269,642
Core net income		70,818			57,040			208,797			171,203			75,871			70,818			220,535			208,797
Core basic earnings per share		0.52			0.41			1.52			1.23			0.57			0.52			1.65			1.52
Core diluted earnings per share		0.52			0.41			1.52			1.23			0.57			0.52			1.64			1.52
Other Financial Information / Performance Ratios(3):
Other Financial Information / Performance Ratios⁽²⁾:
Net interest margin		3.11	%		2.96	%		3.14	%		2.99	%		3.19	%		3.11	%		3.22	%		3.14	%
Core net interest margin (non-GAAP)(1),~~(4)~~(3)		3.11	%		2.96	%		3.14	%		2.99	%		3.19	%		3.11	%		3.22	%		3.14	%
Efficiency ratio~~(2)~~		49.36	%		46.33	%		48.49	%		47.26	%		48.41	%		49.36	%		48.20	%		48.49	%
Core efficiency ratio (non-GAAP)(1),(2),(5)		46.90	%		46.72	%		47.44	%		47.24	%
Core efficiency ratio (non-GAAP)^(1),(4)														47.25	%		46.90	%		47.51	%		47.44	%
Return on average total assets		1.31	%		1.15	%		1.35	%		1.16	%		1.45	%		1.31	%		1.42	%		1.35	%
Core return on average total assets (non-GAAP)(1),~~(6)~~(5)		1.38	%		1.13	%		1.37	%		1.15	%		1.48	%		1.38	%		1.44	%		1.37	%
Return on average tangible assets (non-GAAP)(12)		1.38	%		1.21	%		1.42	%		1.22	%
Return on average tangible assets (non-GAAP)⁽¹¹⁾														1.52	%		1.38	%		1.49	%		1.42	%
Core return on average tangible assets (non-GAAP)(1),~~(7)~~(6)		1.45	%		1.18	%		1.45	%		1.21	%		1.56	%		1.45	%		1.52	%		1.45	%
Return on average total stockholders' equity		11.01	%		9.03	%		11.09	%		9.10	%		11.12	%		11.01	%		11.13	%		11.09	%
Core return on average total stockholders' equity (non-GAAP)(1),~~(8)~~(7)		11.57	%		8.82	%		11.33	%		9.06	%		11.37	%		11.57	%		11.34	%		11.33	%
Return on average tangible stockholders' equity (non-GAAP)(12)		18.66	%		14.76	%		18.60	%		15.01	%
Return on average tangible stockholders' equity (non-GAAP)⁽¹¹⁾														17.81	%		18.66	%		18.04	%		18.60	%
Core return on average tangible stockholders' equity (non-GAAP)(1),~~(9)~~(8)		19.61	%		14.42	%		19.00	%		14.94	%		18.21	%		19.61	%		18.37	%		19.00	%
Noninterest expense to average assets~~(2)~~		1.81	%		1.67	%		1.81	%		1.74	%		1.82	%		1.81	%		1.83	%		1.81	%
Core noninterest expense to average assets (non-GAAP)(1),(2),(10)		1.72	%		1.66	%		1.78	%		1.73	%
Core noninterest expense to average assets (non-GAAP)^(1),(9)														1.78	%		1.72	%		1.81	%		1.78	%


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

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


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

September 30,

December 31,

2018

2017

Balance Sheet Data:

Cash and cash equivalents

$
699,493

$
1,034,644

Investment securities

4,595,301

5,234,658

Loans and leases

12,600,464

12,277,369

Allowance for loan and lease losses

141,250

137,253

Goodwill

995,492

995,492

Total assets

19,983,838

20,549,461

Total deposits

16,689,273

17,612,122

Short-term borrowings

30,000

—

Long-term borrowings

400,026

34

Total liabilities

17,560,376

18,016,910

Total stockholders' equity

2,423,462

2,532,551

Book value per share

$
17.97

$
18.14

Tangible book value per share (non-GAAP)(12)

$
10.59

$
11.01

Asset Quality Ratios:

Non-accrual loans and leases / total loans and leases

0.09
%

0.08
%
Allowance for loan and lease losses / total loans and leases

1.12
%

1.12
%
Net charge-offs / average total loans and leases(11)

0.13
%

0.14
%

September 30,

December 31,

Capital Ratios:

2018

2017

Common Equity Tier 1 Capital Ratio


12.09
%

12.45
%
Tier 1 Capital Ratio

12.09
%

12.45
%
Total Capital Ratio

13.14
%

13.50
%
Tier 1 Leverage Ratio

8.42
%

8.52
%
Total stockholders' equity to total assets

12.13
%

12.32
%
Tangible stockholders' equity to tangible assets (non-GAAP)(12)

7.52
%

7.86
%

(1)

⁽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.

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													Table 2
	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
										For the Three Months Ended						For the Nine Months Ended
										September 30,						September 30,
(dollars in thousands, except per share data)	2018		2017		2018			2017		2019			2018			2019			2018
Net interest income	$	141,258	$	133,319	$	422,333		$	393,918	$	143,081		$	141,258		$	433,783		$	422,333
Core net interest income (non-GAAP)	$	141,258	$	133,319	$	422,333		$	393,918	$	143,081		$	141,258		$	433,783		$	422,333


Noninterest income	$	47,405	$	49,664	$	145,902		$	151,281	$	49,980		$	47,405		$	145,825		$	145,902
Gains on sale of bank properties		—		(2,667)		—			(2,667)
Loss on sale of securities											—			—			2,592			—
Core noninterest income (non-GAAP)	$	47,405	$	46,997	$	145,902		$	148,614	$	49,980		$	47,405		$	148,417		$	145,902


Noninterest expense	$	93,147	$	84,784	$	275,599		$	257,704	$	93,466		$	93,147		$	279,379		$	275,599
Loss on litigation settlement(a)		(4,125)		—		(4,125)			—		—			(4,125)			—			(4,125)
One-time items(b)		(511)		(543)		(1,832)			(1,384)		(2,244)			(511)			(2,766)			(1,832)
Core noninterest expense (non-GAAP)	$	88,511	$	84,241	$	269,642		$	256,320	$	91,222		$	88,511		$	276,613		$	269,642


Net income	$	67,388	$	58,363	$	204,399		$	171,998	$	74,199		$	67,388		$	216,556		$	204,399
Gains on sale of bank properties		—		(2,667)		—			(2,667)
Loss on sale of securities											—			—			2,592			—
Loss on litigation settlement(a)		4,125		—		4,125			—		—			4,125			—			4,125
One-time items(b)		511		543		1,832			1,384
One-time noninterest expense items^(b)											2,244			511			2,766			1,832
Tax adjustments(c)		(1,206)		801		(1,559)			488		(572)			(1,206)			(1,379)			(1,559)
Total core adjustments		3,430		(1,323)		4,398			(795)		1,672			3,430			3,979			4,398
Core net income (non-GAAP)	$	70,818	$	57,040	$	208,797		$	171,203	$	75,871		$	70,818		$	220,535		$	208,797

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

Core basic earnings per share (non-GAAP)	$	0.52	$	0.41	$	1.52		$	1.23	$	0.57		$	0.52		$	1.65		$	1.52
Core diluted earnings per share (non-GAAP)	$	0.52	$	0.41	$	1.52		$	1.23	$	0.57		$	0.52		$	1.64		$	1.52
Core efficiency ratio (non-GAAP)											47.25	%		46.90	%		47.51	%		47.44	%

^(b)

One-time items ~~include~~for the three and nine months ended September 30, 2019 included costs related to a nonrecurring payment to a former executive of the Company pursuant to the Bank’s Executive Change-in-Control Retention Plan, nonrecurring offering costs and the loss on our funding swap as a result of a 2019 decrease in the conversion rate of our Visa Class B restricted shares sold in ~~2016~~2016. One-time items for the three and nine months ended September 30, 2018 included nonrecurring offering costs and public company transition-related costs. Additionally, one-time items for the nine months ended September 30, 2018 also included the loss on our funding swap as ~~well as public offering related costs.~~

a result of a 2018 decrease in the conversion rate of our Visa Class B restricted shares sold in 2016.

^(c)

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

(2)

⁽²⁾

Subsequent to the issuance of the Company’s unaudited interim 2017 consolidated financial statements, the Company’s management determined that certain expenses were incorrectly offset against income in the unaudited interim consolidated statements of income for the three and nine months ended September 30, 2017. See “Note 1. Organization and Basis of Presentation – Correction of an Immaterial Error to the Financial Statements” for more information.

⁽³⁾

Except for the efficiency ratio and the core efficiency ratio, amounts are annualized for the three and nine months ended September 30, ~~2018~~2019 and ~~2017.~~

2018.

(3)

⁽⁴⁾

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)

⁽⁵⁾

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)

⁽⁶⁾

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.

Table of Contents

(6)

⁽⁷⁾

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

reconciliation to the most directly comparable GAAP financial measure for core net income, see Table 2, GAAP to Non-GAAP Reconciliation.

(7)

⁽⁸⁾

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)

⁽⁹⁾

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)

⁽¹⁰⁾

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)

⁽¹¹⁾

Net charge-offs / average total loans and leases are annualized for the nine months ended September 30, ~~2018.~~

2019.

(11)

⁽¹²⁾

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

Table of Contents

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												Table 3
	For the three months ended						For the nine months ended
	September 30,						September 30,
													For the Three Months Ended						For the Nine Months Ended
													September 30,						September 30,
(dollars in thousands, except per share data)	2018			2017			2018			2017			2019			2018			2019			2018
Income Statement Data:
Noninterest expense													$	93,466		$	93,147		$	279,379		$	275,599
Core noninterest expense													$	91,222		$	88,511		$	276,613		$	269,642

Net income	$	67,388		$	58,363		$	204,399		$	171,998		$	74,199		$	67,388		$	216,556		$	204,399

Core net income													$	75,871		$	70,818		$	220,535		$	208,797

Average total stockholders' equity	$	2,427,907		$	2,564,563		$	2,464,601		$	2,527,435		$	2,648,428		$	2,427,907		$	2,600,259		$	2,464,601
Less: average goodwill		995,492			995,492			995,492			995,492			995,492			995,492			995,492			995,492
Average tangible stockholders' equity	$	1,432,415		$	1,569,071		$	1,469,109		$	1,531,943		$	1,652,936		$	1,432,415		$	1,604,767		$	1,469,109


Average total assets	$	20,391,456		$	20,109,090		$	20,306,833		$	19,858,184		$	20,332,457		$	20,391,456		$	20,405,261		$	20,306,833
Less: average goodwill		995,492			995,492			995,492			995,492			995,492			995,492			995,492			995,492
Average tangible assets	$	19,395,964		$	19,113,598		$	19,311,341		$	18,862,692		$	19,336,965		$	19,395,964		$	19,409,769		$	19,311,341


Return on average total stockholders' equity(a)		11.01	%		9.03	%		11.09	%		9.10	%		11.12	%		11.01	%		11.13	%		11.09	%
Core return on average total stockholders' equity (non-GAAP)^(a)														11.37	%		11.57	%		11.34	%		11.33	%
Return on average tangible stockholders' equity (non-GAAP)(a)		18.66	%		14.76	%		18.60	%		15.01	%		17.81	%		18.66	%		18.04	%		18.60	%

Core return on average tangible stockholders' equity (non-GAAP)^(a)														18.21	%		19.61	%		18.37	%		19.00	%

Return on average total assets(a)		1.31	%		1.15	%		1.35	%		1.16	%		1.45	%		1.31	%		1.42	%		1.35	%
Core return on average total assets (non-GAAP)^(a)														1.48	%		1.38	%		1.44	%		1.37	%
Return on average tangible assets (non-GAAP)(a)		1.38	%		1.21	%		1.42	%		1.22	%		1.52	%		1.38	%		1.49	%		1.42	%
Core return on average tangible assets (non-GAAP)^(a)														1.56	%		1.45	%		1.52	%		1.45	%

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


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

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

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

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

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

As of

As of

September 30,

December 31,


2018

2017

Balance Sheet Data:

Total stockholders' equity

$
2,423,462

$
2,532,551

Less: goodwill

995,492

995,492

Tangible stockholders' equity

$
1,427,970

$
1,537,059

Total assets

$
19,983,838

$
20,549,461

Less: goodwill

995,492

995,492

Tangible assets

$
18,988,346

$
19,553,969

Shares outstanding

134,873,728

139,588,782

Total stockholders' equity to total assets

12.13
%

12.32
%
Tangible stockholders' equity to tangible assets (non-GAAP)

7.52
%

7.86
%

Book value per share

$
17.97

$
18.14

Tangible book value per share (non-GAAP)

$
10.59

$
11.01

^(a)

Annualized for the three and nine months ended September 30, ~~2018~~2019 and ~~2017.~~

2018.

Financial Highlights

Net income was ~~$67.4~~$74.2 million for the three months ended September 30, ~~2018,~~2019, an increase of ~~$9.0~~$6.8 million or ~~15%~~10% as compared to the same period in ~~2017.~~2018. Basic and diluted earnings per share were ~~$0.50~~$0.56 per share for the three months ended September 30, ~~2018,~~2019, an increase of ~~$0.08~~$0.06 per share or ~~19%~~12% as compared to the same period in ~~2017.~~2018. The increase in net income was primarily due ~~an $11.7~~a $4.5 million decrease in the provision for loan and lease losses (the “Provision”), a $2.6 million increase in noninterest income ~~taxes~~ and a ~~$7.9~~$1.8 million increase in net interest income, partially offset by ~~an $8.4~~a $1.7 million increase in the provision for income taxes and a $0.3 million increase in noninterest expense ~~and a $2.3 million decrease in noninterest income~~ for the three months ended September 30, ~~2018.~~2019.

Table of Contents

Our return on average total assets was ~~1.31%~~1.45% for the three months ended September 30, 2019, an increase of 14 basis points from the same period in 2018, and our return on average total stockholders’ equity was ~~11.01%~~11.12% for the three months ended September 30, 2019, an increase of 11 basis points from the same period in 2018. Our return on average tangible assets was ~~1.38%~~1.52% for the three months ended September 30, ~~2018,~~2019, an increase of 1714 basis points from the same period in ~~2017,~~2018, and our return on average tangible stockholders’ equity was ~~18.66%~~17.81% for the three months ended September 30, ~~2018, an increase~~2019, a decrease of ~~390~~85 basis points from the same period in ~~2017.~~2018. We continued to prudently manage our expenses, as our efficiency ratio was ~~49.36%~~48.41% for the three months ended September 30, ~~2018~~2019 compared to ~~46.33%~~49.36% for the same period in 2017. The increase in the efficiency ratio during the three months ended September 30, 2018 was primarily due to a nonrecurring expense of $4.1 million related to the anticipated settlement of a putative class action lawsuit.2018.

Our results for the three months ended September 30, ~~2018~~2019 were highlighted by the following:

●

Net interest income was ~~$141.3~~$143.1 million for the three months ended September 30, ~~2018,~~2019, an increase of ~~$8.0~~$1.8 million or 6%1% as compared to the same period in ~~2017.~~2018. Our net interest margin was ~~3.11%~~3.19% for the three months ended September 30, ~~2018,~~2019, an increase of 15eight basis points as compared to the same period in ~~2017.~~2018. The increase in net interest income, on a fully taxable-equivalent basis, was primarily due to higher average balances and yields in most loan categories, and higher yields in our investment securities portfolio. This was partially offset by higher deposit funding costs and higher than anticipated liquidity held during the quarter ended September 30, 2018.

The provision for loan and lease losses (the “Provision”) was $4.5 million for the three months ended September 30, 2018, approximately flat as compared to the same period in 2017. The Provision is recorded to maintain the allowance for loan and lease losses (the “Allowance”) at levels deemed adequate to absorb probable credit losses that have been incurred in our loan and lease portfolio as of the balance sheet date.

Noninterest income was $47.4 million for the three months ended September 30, 2018, a decrease of $2.3 million or 5% as compared to the same period in 2017. The decrease was primarily due to a $3.1 million decrease in other noninterest income and a $1.0 million decrease in service charges on deposit accounts, partially offset by a $1.1 million increase in other service charges and fees and a $0.6 million increase in bank-owned life insurance (“BOLI”) income.

~~Table of Contents~~

Noninterest expense was $93.1 million for the three months ended September 30, 2018, an increase of $8.4 million or 10% as compared to the same period in 2017. The increase in noninterest expense was primarily due to a $4.2 million increase in other noninterest expense, a $3.3 million increase in salaries and employee benefits expense, a $0.6 million increase in contracted services and professional fees and a $0.5 million increase in occupancy expense, partially offset by a $0.9 million decrease in advertising and marketing expenses.

Net income was $204.4 million for the nine months ended September 30, 2018, an increase of $32.4 million or 19% as compared to the same period in 2017. Basic and diluted earnings per share were $1.48 per share for the nine months ended September 30, 2018, an increase of $0.25 per share or 20% as compared to the same period in 2017. The increase was primarily due to a $30.3 million decrease in the provision for income taxes and a $28.4 million increase in net interest income, partially offset by a $17.9 million increase in noninterest expense, a $5.4 million decrease in noninterest income and a $3.0 million increase in the Provision for the nine months ended September 30, 2018.

Our return on average total assets was 1.35% for the nine months ended September 30, 2018 and our return on average total stockholders’ equity was 11.09% for the nine months ended September 30, 2018. Our return on average tangible assets was 1.42% for the nine months ended September 30, 2018, an increase of 20 basis points from the same period in 2017, and our return on average tangible stockholders’ equity was 18.60% for the nine months ended September 30, 2018, an increase of 359 basis points from the same period in 2017. We continued to prudently manage our expenses as our efficiency ratio was 48.49% for the nine months ended September 30, 2018 compared to 47.26% for the same period in 2017. The increase in the efficiency ratio during the nine months ended September 30, 2018 was primarily due to a nonrecurring expense of $4.1 million related to the anticipated settlement of a putative class action lawsuit.

~~Our results for the nine months ended September 30, 2018 were highlighted by the following:~~

Net interest income was $422.3 million for the nine months ended September 30, 2018, an increase of $28.4 million or 7% as compared to the same period in 2017. Our net interest margin was 3.14% for the nine months ended September 30, 2018, an increase of 15 basis points as compared to the same period in 2017. The increase in net interest income was primarily due to higher average balances and yields in most loan categories and higher yields in our investment securities portfolio. This was partially offset by lower average balances in our investment securities portfolio, ~~and~~ higher deposit funding ~~costs.~~

~~The Provision was $16.4 million for~~costs and higher average balances in total borrowings during the ~~nine~~three months ended September 30, ~~2018, an increase~~2019.

●

The Provision was nil for the three months ended September 30, 2019, a decrease of ~~$3.0~~$4.5 million, ~~or 23%~~ as compared to the same period in ~~2017.~~2018. This decrease was partially due to the sale of $408.9 million commercial and industrial loans during the three months ended September 30, 2019. The Provision is recorded to maintain the Allowance at levels deemed adequate to absorb probable credit losses that have been incurred in our loan and lease portfolio as of the balance sheet date.

●

Noninterest income was ~~$145.9~~$50.0 million for the ~~nine~~three months ended September 30, ~~2018, a decrease~~2019, an increase of ~~$5.4~~$2.6 million or 4%5% as compared to the same period in ~~2017.~~2018. The ~~decrease~~increase was primarily due to a ~~$3.9~~$2.1 million ~~decrease~~increase in ~~service charges on deposit accounts, a $3.2 million decrease in other noninterest~~bank-owned life insurance (“BOLI”) income and a ~~$2.5 million decrease in BOLI income, partially offset by a $2.8 million increase in other service charges and fees and a $0.9~~$1.2 million increase in trust and investment services income, partially offset by a $0.9 million decrease in other noninterest income.

●

Noninterest expense was ~~$275.6~~$93.5 million for the ~~nine~~three months ended September 30, ~~2018,~~2019, an increase of ~~$17.9~~$0.3 million ~~or 7% as~~ compared to the same period in ~~2017.~~2018. The increase in noninterest expense was primarily due to a $3.2 million increase in contracted services and professional fees, a $3.0 million increase in salaries and employee benefits expense, a $1.1 million increase in card rewards program expense, a $0.6 million increase in advertising and marketing expenses and a $0.5 million increase in occupancy expense. This was partially offset by a $5.9 million decrease in other noninterest expense and a $2.0 million decrease in regulatory assessment and fees.

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

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

Table of Contents

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

●

Net interest income was $433.8 million for the nine months ended September 30, 2019, an increase of $11.5 million or 3% as compared to the same period in 2018. Our net interest margin was 3.22% for the nine months ended September 30, 2019, an increase of eight basis points as compared to the same period in 2018. The increase in net interest income, on a fully taxable-equivalent basis, was primarily due to higher average balances and yields in most loan categories. This was partially offset by lower average balances in our investment securities portfolio, higher deposit funding costs and higher average balances in total borrowings.

●

The Provision was $9.6 million for the nine months ended September 30, 2019, a decrease of $6.9 million or 42% as compared to the same period in 2018. This decrease was partially due to the sale of $408.9 million commercial and industrial loans during the nine months ended September 30, 2019. The Provision is recorded to maintain the Allowance at levels deemed adequate to absorb probable credit losses that have been incurred in our loan and lease portfolio as of the balance sheet date.

●

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

●

Noninterest expense was $279.4 million for the nine months ended September 30, 2019, an increase of $3.8 million or 1% as compared to the same period in 2018. The increase in noninterest expense was primarily due to a $6.2 million increase in salaries and employee benefits expense, a $5.8 million increase in ~~other noninterest expense, a $3.2 million increase in~~ contracted services and professional fees, a $3.4 million increase in card rewards program expense, a $2.5 million increase in advertising and marketing expenses and a ~~$2.8~~$1.4 million increase in occupancy expense, partially offset by a ~~$2.1~~$8.7 million decrease in ~~advertising~~other noninterest expense and ~~marketing expenses.~~

a $6.6 million decrease in regulatory assessment and fees.

During the nine months ended September 30, ~~2018,~~2019, we continued to benefit from a ~~strong~~steady Hawaii economy as reflected in the continued growth ofin our commercial real estate and residential real estate loan ~~portfolio.~~portfolios. Our investment securities portfolio remained strong as we continued to invest in high-grade investment securities. We also continued to maintain adequate reserves for loan and lease losses and high levels of capital.

●

Total loans and leases were ~~$12.6~~$12.8 billion as of September 30, ~~2018, an increase~~2019, a decrease of ~~$323.1~~$232.8 million or 3%2% from December 31, ~~2017. We~~2018. This decrease was primarily due to the sale of $408.9 million commercial and industrial loans during the nine months ended September 30, 2019. This was partially offset by continued ~~to experience~~ strong growth in our commercial real estate and residential real estate portfolios. This was a reflection of ~~a strong real estate market in Hawaii and~~ the demand by both investors and owner occupants to acquire new real estate ~~assets.~~

assets in a low interest rate environment.

~~Table of Contents~~

●

The Allowance was ~~$141.3~~$133.0 million as of September 30, ~~2018, an increase~~2019, a decrease of ~~$4.0~~$8.8 million or 3%6% from December 31, ~~2017.~~2018. The ratio of our Allowance to total loans and leases outstanding was ~~1.12%~~1.04% as of September 30, ~~2018, approximately flat~~2019, a decrease of four basis points compared to December 31, ~~2017.~~2018. The decrease related to our aforementioned sale of commercial and industrial loans. The overall level of the Allowance was commensurate with our stable credit risk profile ~~loan portfolio growth and composition~~ and a ~~strong~~steady Hawaii economy.

●

We continued to invest in high-grade investment securities, primarily collateralized mortgage obligations issued by the Government National Mortgage Association (“Ginnie Mae”), ~~Federal National Mortgage Association (“~~Fannie ~~Mae”)~~Mae and ~~the Federal Home Loan Mortgage Corporation (“~~Freddie ~~Mac”).~~Mac. The total fair value of our investment securities portfolio was ~~$4.6~~$4.2 billion as of September 30, ~~2018,~~2019, a decrease of ~~$639.4~~$341.3 million ~~or 12%~~ compared to December 31, ~~2017.~~2018. This decrease was primarily due to ~~our use~~the sale of ~~paydowns and maturities to fund loan growth.~~

48 securities in January 2019.

Table of Contents

●

Total deposits were ~~$16.7~~$16.9 billion as of September 30, ~~2018,~~2019, a decrease of ~~$922.8~~$292.8 million or 5%2% as compared to December 31, ~~2017.~~2018. The decrease in total deposits was primarily due to a ~~$788.3~~$384.6 million decrease in ~~public~~ time ~~deposits~~deposit balances and a ~~$324.7~~$287.1 million decrease in demand ~~business analyzed~~ deposit ~~accounts,~~balances, partially offset by a ~~$176.0 million increase in savings deposit balances and a $104.0~~$332.7 million increase in money market deposit balances.

●

Total stockholders’ equity was ~~$2.4~~$2.7 billion as of September 30, ~~2018, a decrease~~2019, an increase of ~~$109.1~~$129.7 million or 4%5% from December 31, ~~2017.~~2018. The ~~decrease~~increase in stockholders’ equity was primarily due to earnings for the ~~repurchases~~period of $216.6 million and a net change in the ~~Company’s common stock from BWC totaling $131.8 million concurrently with the secondary offerings completed in May and August 2018,~~fair value of our investment securities of $114.0 million. This was partially offset by dividends ~~of $98.7 million~~ declared and paid to ~~our~~the Company’s stockholders of $104.4 million and common stock repurchased of $98.8 million during the nine months ended September 30, ~~2018 and the increase in unrealized net losses on investment securities of $89.2 million, partially offset by earnings of $204.4 million for the nine months ended September 30, 2018.~~

2019.

5759

Analysis of Results of Operations

Net Interest Income

For the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, average balances, related income and expenses, on a fully taxable-equivalent basis, and resulting yields and rates are presented in Table 4. An analysis of the change in net interest income, on a fully taxable-equivalent basis, is presented in Table 5.


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

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

Average Balances and Interest Rates

Table 4

Three Months Ended

Three Months Ended

September 30, 2018

September 30, 2017

Average

Income/

Yield/

Average

Income/

Yield/

(dollars in millions)

Balance

Expense

Rate

Balance

Expense

Rate

Earning Assets

Interest-Bearing Deposits in Other Banks

$
656.7

$
3.3

1.99
%
$
597.5

$
2.0

1.30
%
Available-for-Sale Investment Securities

4,737.3

25.2

2.11

5,124.9

24.2

1.88

Loans Held for Sale

1.8

—

3.83

0.1

—

3.62

Loans and Leases (1)

Commercial and industrial

3,019.9

31.0

4.08

3,276.4

27.3

3.31

Real estate - commercial

2,975.3

31.0

4.13

2,696.4

25.1

3.69

Real estate - construction

629.5

6.7

4.20

570.6

5.1

3.54

Real estate - residential

4,159.0

43.1

4.11

3,846.8

39.2

4.04

Consumer

1,649.7

22.4

5.39

1,546.9

21.0

5.39

Lease financing

162.3

1.2

3.00

177.9

1.3

2.91

Total Loans and Leases

12,595.7

135.4

4.26

12,115.0

119.0

3.90

Other Earning Assets

50.0

0.2

1.29

29.5

0.1

1.22

Total Earning Assets (2)

18,041.5

164.1

3.61

17,867.0

145.3

3.23

Cash and Due from Banks

336.5

324.0

Other Assets

2,013.5

1,918.1

Total Assets

$
20,391.5

$
20,109.1

Interest-Bearing Liabilities

Interest-Bearing Deposits

Savings

$
4,727.2

$
3.3

0.28
%
$
4,505.1

$
1.1

0.10
%
Money Market

2,871.0

4.6

0.63

2,607.7

0.9

0.13

Time

3,705.7

12.3

1.32

4,208.0

10.0

0.94

Total Interest-Bearing Deposits

11,303.9

20.2

0.71

11,320.8

12.0

0.42

Short-Term Borrowings

3.3

—

1.30

0.8

—

0.91

Long-Term Borrowings

358.7

2.6

2.85

—

—

—

Total Interest-Bearing Liabilities

11,665.9

22.8

0.78

11,321.6

12.0

0.42

Net Interest Income

$
141.3

$
133.3

Interest Rate Spread

2.83
%

2.81
%
Net Interest Margin

3.11
%

2.96
%
Noninterest-Bearing Demand Deposits

5,854.9

5,844.6

Other Liabilities

442.8

378.3

Stockholders' Equity

2,427.9

2,564.6

Total Liabilities and Stockholders' Equity

$
20,391.5

$
20,109.1

(1)

⁽¹⁾

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

(2)

⁽²⁾

For the three months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the taxable-equivalent basis adjustments made to the table above were not material.


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

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

Analysis of Change in Net Interest Income

Table 5

Three Months Ended September 30, 2018

Compared to September 30, 2017
(dollars in millions)

Volume

Rate

Total (1)
Change in Interest Income:






Interest-Bearing Deposits in Other Banks

$
0.2

$
1.1

$
1.3
Available-for-Sale Investment Securities

(1.9)

2.9

1.0
Loans and Leases

Commercial and industrial

(2.3)

6.0

3.7
Real estate - commercial

2.7

3.2

5.9
Real estate - construction

0.6

1.0

1.6
Real estate - residential

3.3

0.6

3.9
Consumer

1.4

—

1.4
Lease financing

(0.1)

—

(0.1)
Total Loans and Leases

5.6

10.8

16.4
Other Earning Assets

0.1

—

0.1
Total Change in Interest Income

4.0

14.8

18.8

Change in Interest Expense:

Interest-Bearing Deposits

Savings

0.1

2.1

2.2
Money Market

0.1

3.6

3.7
Time

(1.3)

3.6

2.3
Total Interest-Bearing Deposits

(1.1)

9.3

8.2
Long-term Borrowings

2.6

—

2.6
Total Change in Interest Expense

1.5

9.3

10.8
Change in Net Interest Income

$
2.5

$
5.5

$
8.0

(1)

⁽¹⁾

The change in interest income and expense not solely due to changes in volume or rate has been allocated on a pro-rata basis to the volume and rate columns.

Net interest income, on a fully taxable-equivalent basis, was ~~$141.3~~$143.1 million for the three months ended September 30, ~~2018,~~2019, an increase of ~~$8.0~~$1.8 million or 6%1% compared to the same period in ~~2017.~~2018. Our net interest margin was ~~3.11%~~3.19% for the three months ended September 30, ~~2018,~~2019, an increase of 15eight basis points from the same period in ~~2017.~~2018. The increase in net interest income, on a fully taxable-equivalent basis, was primarily due to higher average balances and yields in most loan categories, ~~and higher yields~~partially offset by lower average balances in our investment securities ~~portfolio. This was partially offset by~~portfolio, higher deposit funding costs and higher ~~than anticipated liquidity held~~average balances in total borrowings during the ~~quarter~~three months ended September 30, ~~2018.~~2019. For the three months ended September 30, ~~2018,~~2019, the average balance of our loans and leases was ~~$12.6~~$13.0 billion, an increase of ~~$480.7~~$436.6 million or 4%3% compared to the same period in ~~2017.~~2018. The higher average balance in loans and leases was primarily due to growth in our residential real estate and commercial real estate ~~and consumer lending~~ portfolios, partially offset by ~~declines~~lower balances in our construction and commercial and industrial ~~portfolio.~~portfolios. Yields on our loans and leases were ~~4.26%~~4.41% for the three months ended September 30, ~~2018,~~2019, an increase of 3615 basis points as compared to the same period in ~~2017.~~2018. We experienced ~~higher~~an increase in our yields from total loans primarily due to increases in ~~most of our loan categories, particularly~~adjustable rate commercial real estate and construction loans, ~~many of~~ which ~~have variable rates. For~~are typically based on the ~~three months ended September 30, 2018, the average balance~~LIBOR. Average balances of our investment securities portfolio ~~was $4.7~~were $4.3 billion ~~a decrease of $387.6 million or 8% compared to the same period in 2017. Yields on our investment securities portfolio were 2.11%~~ for the three months ended September 30, ~~2018, an increase~~2019, a decrease of ~~23 basis points~~$441.0 million or 9% from the same period in ~~2017.~~2018. Deposit funding costs were ~~$20.2~~$22.8 million for the three months ended September 30, ~~2018,~~2019, an increase of ~~$8.2~~$2.6 million compared to the same period in ~~2017.~~2018. Rates paid on our interest-bearing deposits were 7183 basis points for the three months ended September 30, ~~2018,~~2019, an increase of 2912 basis points compared to the same period in ~~2017. We~~2018. While we experienced higher rates paid on all interest-bearing deposit categories in the three months ended September 30, ~~2018 and~~2019, particularly high rates were paid on our ~~time~~money market deposits with an increase of 3829 basis points compared to the same period in ~~2017.~~2018. For the three months ended September 30, 2019, the average balance of our total borrowings was $609.1 million, an increase of $247.1 million from the same period in 2018. This was due to increases in FHLB fixed-rate advances held during the three months ended September 30, 2019 compared to the same period in 2018.

Table of Contents

For the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, average balances, related income and expenses, on a fully taxable-equivalent basis, and resulting yields and rates are presented in Table 6. An analysis of the change in net interest income, on a fully taxable-equivalent basis, is presented in Table 7.


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

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

~~Table of Contents~~

Average Balances and Interest Rates

Table 6

Nine Months Ended

Nine Months Ended

September 30, 2018

September 30, 2017

Average

Income/

Yield/

Average

Income/

Yield/

(dollars in millions)

Balance

Expense

Rate

Balance

Expense

Rate

Earning Assets











Interest-Bearing Deposits in Other Banks

$
518.4

$
6.9

1.77
%
$
516.8

$
4.0

1.02
%
Available-for-Sale Investment Securities

4,951.4

81.6

2.20

5,189.7

75.7

1.95

Loans Held for Sale

1.3

—

3.60

—

—

—

Loans and Leases(1)

Commercial and industrial

3,100.1

89.2

3.85

3,263.3

77.3

3.17

Real estate - commercial

2,886.7

86.3

4.00

2,606.1

71.1

3.65

Real estate - construction

623.9

18.6

4.00

514.1

13.1

3.41

Real estate - residential

4,085.7

126.0

4.12

3,784.5

115.5

4.08

Consumer

1,625.0

65.5

5.38

1,528.8

61.8

5.41

Lease financing

161.3

3.6

2.98

172.1

3.6

2.84

Total Loans and Leases

12,482.7

389.2

4.17

11,868.9

342.4

3.86

Other Earning Assets

28.6

0.3

1.58

30.0

0.1

0.62

Total Earning Assets(2)

17,982.4

478.0

3.55

17,605.4

422.2

3.21

Cash and Due from Banks

324.4

322.7

Other Assets

2,000.0

1,930.1

Total Assets

$
20,306.8

$
19,858.2

Interest-Bearing Liabilities

Interest-Bearing Deposits

Savings

$
4,615.1

$
7.4

0.21
%
$
4,500.1

$
2.5

0.08
%
Money Market

2,769.9

9.1

0.44

2,574.0

2.2

0.11

Time

3,985.2

36.3

1.22

4,027.9

23.6

0.78

Total Interest-Bearing Deposits

11,370.2

52.8

0.62

11,102.0

28.3

0.34

Short-Term Borrowings

15.3

0.2

1.81

2.1

—

0.68

Long-Term Borrowings

123.1

2.7

2.87

—

—

—

Total Interest-Bearing Liabilities

11,508.6

55.7

0.65

11,104.1

28.3

0.34

Net Interest Income

$
422.3

$
393.9

Interest Rate Spread

2.90
%

2.87
%
Net Interest Margin

3.14
%

2.99
%
Noninterest-Bearing Demand Deposits

5,916.0

5,848.5

Other Liabilities

417.6

378.2

Stockholders' Equity

2,464.6

2,527.4

Total Liabilities and Stockholders' Equity

$
20,306.8

$
19,858.2

(1)

⁽¹⁾

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

(2)

⁽²⁾

For the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the taxable-equivalent basis adjustments made to the table above were not material.

Table of Contents


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

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

Analysis of Change in Net Interest Income

Table 7

Nine Months Ended September 30, 2018

Compared to September 30, 2017
(dollars in millions)

Volume

Rate

Total(1)
Change in Interest Income:

Interest-Bearing Deposits in Other Banks

$
—

$
2.9

$
2.9
Available-for-Sale Investment Securities

(3.6)

9.5

5.9
Loans and Leases

Commercial and industrial

(4.0)

15.9

11.9
Real estate - commercial

8.0

7.2

15.2
Real estate - construction

3.0

2.5

5.5
Real estate - residential

9.3

1.2

10.5
Consumer

3.9

(0.2)

3.7
Lease financing

(0.2)

0.2

—
Total Loans and Leases

20.0

26.8

46.8
Other Earning Assets

—

0.2

0.2
Total Change in Interest Income

16.4

39.4

55.8

Change in Interest Expense:

Interest-Bearing Deposits

Savings

0.1

4.8

4.9
Money Market

0.2

6.7

6.9
Time

(0.3)

13.0

12.7
Total Interest-Bearing Deposits

—

24.5

24.5
Short-Term Borrowings

0.2

—

0.2
Long-Term Borrowings

2.7

—

2.7
Total Change in Interest Expense

2.9

24.5

27.4
Change in Net Interest Income

$
13.5

$
14.9

$
28.4

(1)

⁽¹⁾

The change in interest income and expense not solely due to changes in volume or rate has been allocated on a pro-rata basis to the volume and rate columns.

Net interest income, on a fully taxable-equivalent basis, was ~~$422.3~~$433.8 million for the nine months ended September 30, ~~2018,~~2019, an increase of ~~$28.4~~$11.5 million or 7%3% compared to the same period in ~~2017.~~2018. Our net interest margin was ~~3.14%~~3.22% for the nine months ended September 30, ~~2018,~~2019, an increase of 15eight basis points from the same period in ~~2017.~~2018. The increase in net interest income, on a fully taxable-equivalent basis, was primarily due to higher average balances and yields in most loan ~~categories and higher yields in our investment securities portfolio.~~categories. This was partially offset by lower average balances in our investment securities portfolio, ~~and~~ higher deposit funding ~~costs.~~costs and higher average balances in total borrowings. For the nine months ended September 30, ~~2018,~~2019, the average balance of our loans and leases was ~~$12.5~~$13.1 billion, an increase of ~~$613.8~~$622.4 million or 5% compared to the same period in ~~2017.~~2018. The higher average balance in loans and leases was primarily due to growth in our residential real estate and commercial real estate ~~and construction lending portfolios, partially offset by declines in our commercial and industrial portfolio.~~portfolios. Yields on our loans and leases were ~~4.17%~~4.44% for the nine months ended September 30, ~~2018,~~2019, an increase of 3127 basis points as compared to the same period in ~~2017.~~2018. We experienced an increase in our yield from total loans primarily due to increases in adjustable rate construction, commercial real estate and commercial and industrial loans, which are typically based on ~~the London Interbank Offered Rate (“LIBOR”).~~LIBOR. For the nine months ended September 30, ~~2018,~~2019, the average balance of our investment securities portfolio was ~~$5.0~~$4.4 billion, a decrease of ~~$238.3~~$567.8 million or 5%11% compared to the same period in ~~2017. Yields on our investment securities portfolio were 2.20% for the nine months ended September 30, 2018, an increase of 25 basis points from the same period in 2017.~~2018. Deposit funding costs were ~~$52.8~~$69.7 million for the nine months ended September 30, ~~2018,~~2019, an increase of ~~$24.5~~$16.9 million compared to the same period in ~~2017.~~2018. Rates paid on our interest-bearing deposits were 6285 basis points for the nine months ended September 30, ~~2018,~~2019, an increase of 2823 basis points compared to the same period in ~~2017.~~2018. While we experienced higher rates paid on all interest-bearing deposit categories in the nine months ended September 30, ~~2018,~~2019, particularly high rates were paid on our ~~time~~money market deposits with an increase of 4451 basis points compared to the same period in ~~2017.~~2018. For the nine months ended September 30, 2019, the average balance of our total borrowings was $621.9 million, an increase of $483.5 million from the same period in 2018. This was due to increases in FHLB fixed-rate advances during the nine months ended September 30, 2019 compared to the same period in 2018.

Table of Contents

Provision for Loan and Lease Losses

The Provision was nil for the three months ended September 30, 2019, which represented a decrease of $4.5 million compared to the same period in 2018. This decrease was partially due to the sale of $408.9 million commercial and industrial loans during the three months ended September 30, 2019. We recorded net charge-offs of loans and leases of $5.6 million and $3.8 million for the three months ended September 30, 2019 and 2018, respectively. This represented net charge-offs of 0.17% and 0.12% of average loans and leases, on an annualized basis, for the three months ended September 30, 2019 and 2018, respectively. The Provision was $9.6 million for the nine months ended September 30, 2019, which represented a decrease of $6.9 million compared to the same period in 2018. We recorded net charge-offs of loans and leases of $18.3 million and $12.4 million for the nine months ended September 30, 2019 and 2018, respectively. This represented net charge-offs of 0.19% and 0.13% of average loans and leases, on an annualized basis, for the nine months ended September 30, 2019 and 2018, respectively. The Allowance was $133.0 million as of September 30, 2019, a decrease of $8.8 million or 6% from December 31, 2018 and represented 1.04% of total outstanding loans and leases as of September 30, 2019, compared to 1.08% of total outstanding loans and leases as of December 31, 2018. The Provision is recorded to maintain the Allowance at levels deemed adequate by management based on the factors noted in the “Risk Governance and Quantitative and Qualitative Disclosures About Market Risk — Credit Risk” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).

Noninterest Income

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


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


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

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

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

Table of Contents

Service charges on deposit accounts were $8.6 million for the three months ended September 30, 2019, an increase of $0.6 million or 8% as compared to the same period in 2018. This increase was primarily due to a $0.3 million increase in overdraft and checking account fees and a $0.2 million increase in checking account service fees. Service charges on deposit accounts were $24.7 million for the nine months ended September 30, 2019, an increase of $1.1 million or 5% as compared to the same period in 2018. This increase was primarily due to a $0.8 million increase in overdraft and checking account fees and a $0.3 million increase in account analysis service charges.

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

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

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

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

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

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

Table of Contents

Noninterest Expense

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


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


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

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

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

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

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

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

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

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

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

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

Provision for Income Taxes

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

Analysis of Business Segments

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


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

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

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

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

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

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

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

Net loss for the Treasury and Other segment was $4.0 million for the three months ended September 30, 2019, a decrease in loss of $2.4 million or 37% as compared to the same period in 2018. The decrease in the net loss was primarily due to a $2.4 million increase in net interest income, a $1.7 million increase in noninterest income, partially offset by a $0.9 million decrease in the benefit for income taxes. The increase in net interest income was primarily due to higher earnings credits as a result of higher average balances in our loan portfolio, partially offset by lower average balances in our investment securities portfolio. The increase in noninterest income was primarily due to higher BOLI income. The decrease in the benefit for income taxes was primarily due to the decrease in net loss. Net loss for the Treasury and Other segment was $13.3 million for the nine months ended September 30, 2019, a decrease in loss of $3.5 million or 21% as compared to the same period in 2018. The decrease in the net loss was primarily due to a $5.0 million increase in net interest income, partially offset by a $1.3 million decrease in the benefit for income taxes and a $1.2 million increase in noninterest expense. The increase in net interest income was primarily due to higher earnings credits as a result of higher average balances in our loan portfolio, partially offset by lower average balances in our investment securities portfolio. The decrease in the benefit for income taxes was primarily due to the decrease in net loss. The increase in noninterest expense was primarily due to higher contracted services and professional fees, salaries and employee benefits expenses and advertising and marketing expenses, partially offset by lower overall expenses that were allocated to the Treasury and Other segment.

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Analysis of Financial Condition

Liquidity

Liquidity refers to our ability to maintain cash flow that is adequate to fund operations and meet present and future financial obligations through either the sale or maturity of existing assets or by obtaining additional funding through liability management. We consider the effective and prudent management of liquidity to be fundamental to our health and strength. Our objective is to manage our cash flow and liquidity reserves so that they are adequate to fund our obligations and other commitments on a timely basis and at a reasonable cost.

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

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

Our core deposits have historically provided us with a long term source of stable and relatively lower cost of funding. Our core deposits, defined as all deposits exclusive of time deposits exceeding $250,000, totaled $15.3 billion as of both September 30, 2019 and December 31, 2018, which represented 91% and 89%, respectively, of our total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company, however, deposit levels could decrease if interest rates increase significantly or if corporate customers increase investing activities and reduce deposit balances.

The Company’s routine funding requirements are expected to consist primarily of general corporate needs and dividends to be paid to our stockholders. We expect to meet these obligations primarily from dividends paid by the Bank to the Parent. Additional sources of liquidity available to us include selling residential real estate loans in the secondary market, short- and long-term borrowings and the issuance of long-term debt and equity securities.

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Investment Securities

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


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

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

Maturities and Weighted-Average Yield on Securities⁽¹⁾

Table 14

1 Year or Less

After 1 Year - 5 Years

After 5 Years - 10 Years

Over 10 Years

Total

Weighted

Average

Fair

(dollars in millions)

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Amount

Yield

Value

As of September 30, 2019

Available-for-Sale Securities

U.S. Treasury securities

29.7

2.40

—

29.7

2.40

29.7

Government agency debt securities⁽²⁾

—

9.1

2.71

15.3

2.70

—

24.4

2.70

24.5

Government-sponsored enterprises debt securities⁽³⁾

101.7

1.97

25.0

1.86

—

126.7

1.95

126.7

Mortgage-Backed Securities⁽²⁾:

Government agency

—

151.3

2.80

191.0

2.41

—

342.3

2.58

343.9

Government-sponsored enterprises

—

366.3

3.10

—

366.3

3.10

372.0

Collateralized mortgage obligations⁽²⁾:

Government agency

—

2,404.7

2.17

75.3

2.17

—

2,480.0

2.17

2,486.5

Government-sponsored enterprises

—

773.7

2.31

—

773.7

2.31

773.8

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

131.4

2.07

3,730.1

2.31

281.6

2.36

—

4,143.1

2.31

4,157.1

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

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

(3)	Maturities for government-sponsored enterprises debt securities purchased at a premium are categorized by their first call date.

The fair value of our available-for-sale investment securities portfolio was $4.2 billion as of September 30, 2019, a decrease of $341.3 million or 8% compared to December 31, 2018. Our available-for-sale investment securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss), unless a security is deemed to be OTTI.

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

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

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

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were $13.7 million and $142.2 million as of September 30, 2019 and December 31, 2018, respectively. Lower unrealized losses in our investment securities portfolio were primarily due to lower market interest rates as of September 30, 2019, relative to December 31, 2018, resulting in a higher valuation. The lower gross unrealized loss positions were primarily related to our collateralized mortgage obligations, the fair value of which is sensitive to changes in market interest rates.

We conduct a regular assessment of our investment securities portfolio to determine whether any securities are OTTI. When assessing unrealized losses for OTTI, we consider the nature of the investment, the financial condition of the issuer, the extent and duration of unrealized losses, expected cash flows of underlying assets and market conditions. As of September 30, 2019, we had no plans to sell investment securities with unrealized losses, and believe it is more likely than not that we would not be required to sell such securities before recovery of their amortized cost, which may be at maturity. As of December 31, 2018, we intended to sell 48 investment securities with an aggregate book value of $898.2 million, primarily comprised of U.S. Treasury securities and longer duration collateralized mortgage obligations. As a result, we recorded a non-credit related OTTI write-down of $24.1 million for the year ended December 31, 2018. In January 2019, the sale of these securities were executed and the proceeds were used to invest in securities to improve portfolio return, reposition interest rate risk, maintain liquidity and to diversify asset allocation.

We are required to hold non-marketable equity securities, comprised of FHLB stock, as a condition of our membership in the FHLB system. Our FHLB stock is accounted for at cost, which equals par or redemption value. As of both September 30, 2019 and December 31, 2018, we held $34.1 million in FHLB stock, which is recorded as a component of other assets in our unaudited interim consolidated balance sheets.

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

Loans and Leases

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


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

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

Commercial and industrial loans are made primarily to corporations, middle market and small businesses for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes. We also offer a variety of automobile dealer flooring lines to our customers in Hawaii and California to assist with the financing of their inventory. Commercial and industrial loans were $2.7 billion as of September 30, 2019, a decrease of $554.7 million or 17% from December 31, 2018. This decrease was primarily due to the sale of $408.9 million in loans during the nine months ended September 30, 2019, and greater than expected prepayments.

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were $3.3 billion as of September 30, 2019, an increase of $318.6 million or 11% from December 31, 2018. Strong demand for commercial real estate lending activities was reflective of the demand by both investors and owner occupants to refinance and/or to acquire new real estate assets.

Construction loans are for the purchase or construction of a property for which repayment will be generated by the property. Loans in this portfolio are primarily for the purchase of land, as well as for the development of commercial properties, single family homes and condominiums. We classify loans as construction until the completion of the construction phase. Following construction, if a loan is retained by the Bank, the loan is reclassified to the commercial real estate or residential real estate classes of loans. Construction loans were $487.0 million as of September 30, 2019, a decrease of $139.8 million or 22% from December 31, 2018.

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

Consumer loans consist primarily of open- and closed-end direct and indirect credit facilities for personal, automobile and household purchases, as well as credit card loans. We seek to maintain reasonable levels of risk in consumer lending by following prudent underwriting guidelines, which include an evaluation of personal credit history, cash flow and collateral values based on existing market conditions. Consumer loans were $1.6 billion as of September 30, 2019, a decrease of $25.0 million or 2% from December 31, 2018. The decrease in consumer loans was primarily due to lower automobile loans.

Lease financing consists of commercial single investor leases and leveraged leases. Underwriting of new lease transactions is based on our lending policy, including but not limited to an analysis of customer cash flows and secondary sources of repayment, including the value of leased equipment, the guarantors’ cash flows and/or other credit enhancements. No new leveraged leases are being added to the portfolio and all remaining leveraged leases are running off. Lease financing was $167.9 million as of September 30, 2019, an increase of $20.1 million or 14% from December 31, 2018.

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

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

Loans and Leases by Rate Type

Table 16

September 30, 2019

Adjustable Rate

Hybrid

Fixed

(dollars in thousands)

Prime

LIBOR

Treasury

Other

Total

Rate

Total

Commercial and industrial

246,066

1,986,831

—

2,874

2,235,771

11,858

406,448

2,654,077

Commercial real estate

44,288

1,908,746

—

1,016,317

2,969,351

75,282

264,756

3,309,389

Construction

43,199

316,210

—

30,224

389,633

1,047

96,297

486,977

Residential:

Residential mortgage

28,110

11,166

164

337,340

376,780

371,870

2,922,774

3,671,424

Home equity line

329,130

—

43,947

—

373,077

542,954

916,106

Total residential

357,240

11,166

44,111

337,340

749,857

914,824

2,922,849

4,587,530

Consumer

342,274

20,545

1,733

308

364,860

12,027

1,260,662

1,637,549

Lease financing

—

167,874

Total loans and leases

1,033,067

4,243,498

45,844

1,387,063

6,709,472

1,015,038

5,118,886

12,843,396

% by rate type at September 30, 2019

100

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

Geographic Distribution of Loan and Lease Portfolio

Table 17

September 30, 2019

U.S.

Guam &

Foreign &

(dollars in thousands)

Hawaii

Mainland⁽¹⁾

Saipan

Other

Total

Commercial and industrial

1,300,045

1,172,977

128,718

52,337

2,654,077

Commercial real estate

2,201,525

678,087

429,360

417

3,309,389

Construction

236,867

245,362

4,748

—

486,977

Residential:

Residential mortgage

3,543,586

2,746

125,092

—

3,671,424

Home equity line

884,352

1,463

30,291

—

916,106

Total residential

4,427,938

4,209

155,383

—

4,587,530

Consumer

1,218,725

22,726

393,923

2,175

1,637,549

Lease financing

46,684

114,719

6,471

—

167,874

Total Loans and Leases

9,431,784

2,238,080

1,118,603

54,929

12,843,396

Percentage of Total Loans and Leases

73%

17%

100%

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

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Geographic Distribution of Loan and Lease Portfolio										Table 18
	December 31, 2018
			U.S.		Guam &		Foreign &
(dollars in thousands)	Hawaii		Mainland⁽¹⁾		Saipan		Other		Total
Commercial and industrial	$	1,289,171	$	1,707,713	$	130,477	$	81,399	$	3,208,760
Commercial real estate		2,003,997		615,364		370,546		876		2,990,783
Construction		326,006		272,709		28,042		—		626,757
Residential:
Residential mortgage		3,405,867		2,890		118,344		—		3,527,101
Home equity line		882,805		—		29,712		—		912,517
Total residential		4,288,672		2,890		148,056		—		4,439,618
Consumer		1,239,563		23,038		397,783		2,120		1,662,504
Lease financing		46,409		93,954		7,406		—		147,769
Total Loans and Leases	$	9,193,818	$	2,715,668	$	1,082,310	$	84,395	$	13,076,191
Percentage of Total Loans and Leases		70%		21%		8%		1%		100%

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

Our lending activities are concentrated primarily in Hawaii. However, we also have lending activities on the U.S. mainland, Guam and Saipan. Our commercial lending activities on the U.S. mainland include automobile dealer flooring activities in California, limited participation in the Shared National Credits Program and selective commercial real estate projects based on existing customer relationships and participation in selective senior mortgage secured construction and term loans. Our lease financing portfolio includes leveraged lease financing activities on the U.S. mainland, but this portfolio continues to run off and no new leveraged leases are being added to the portfolio. Our consumer lending activities are concentrated primarily in Hawaii and, to a smaller extent, in Guam and Saipan.

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

Maturities for Selected Loan Categories⁽¹⁾

Table 19

September 30, 2019

Due in One

Due After One

Due After

(dollars in thousands)

Year or Less

to Five Years

Five Years

Total

Commercial and industrial

1,215,175

1,127,425

311,477

2,654,077

Construction

162,231

233,230

91,516

486,977

Total Loans and Leases

1,377,406

1,360,655

402,993

3,141,054

Total of loans with:

Adjustable interest rates

1,262,503

1,094,667

268,234

2,625,404

Hybrid interest rates

1,461

3,186

8,258

12,905

Fixed interest rates

113,442

262,802

126,501

502,745

Total Loans and Leases

1,377,406

1,360,655

402,993

3,141,054

(1)	Based on contractual maturities.

Credit Quality

We evaluate certain loans and leases, including commercial and industrial loans, commercial real estate loans and construction loans, individually for impairment and non-accrual status. A loan is considered to be impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. We generally place a loan on non-accrual status when management believes that collection of principal or interest has become doubtful or when a loan or lease becomes 90 days past due as to principal or interest, unless it is well secured and in the process of collection. Loans on non-accrual status are generally classified as impaired, but not all impaired loans are necessarily placed on non-accrual status. See “Note 4. Allowance for Loan and Lease Losses” contained in our unaudited interim consolidated financial statements for more information about our credit quality indicators.

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

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

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

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


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

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

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

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

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


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

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

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

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

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

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

NPAs continue to remain at relatively low levels due to steady general economic conditions in Hawaii, led by steady tourism and construction industries, low unemployment and a continued strong real estate market. We have also continued to remain diligent in our collection and recovery efforts and have continued to seek new lending opportunities while maintaining sound judgment and underwriting practices.

Loans and Leases Past Due 90 Days or More and Still Accruing Interest. Loans and leases in this category are 90 days or more past due, as to principal or interest, and are still accruing interest because they are well secured and in the process of collection.

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

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

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

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

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

Loans Modified in a Troubled Debt Restructuring

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


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

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

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

Allowance for Loan and Lease Losses

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

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

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


Allowance for Loan and Lease Losses											Table 23
	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in thousands)	2019			2018			2019			2018
Balance at Beginning of Period	$	138,535		$	140,601		$	141,718		$	137,253
Loans and Leases Charged-Off
Commercial Loans:
Commercial and industrial		(514)			(303)			(2,514)			(778)
Lease financing		—			—			(24)			—
Total Commercial Loans		(514)			(303)			(2,538)			(778)
Residential		(7)			(125)			(7)			(159)
Consumer		(8,015)			(5,700)			(24,118)			(18,615)
Total Loans and Leases Charged-Off		(8,536)			(6,128)			(26,663)			(19,552)
Recoveries on Loans and Leases Previously Charged-Off
Commercial Loans:
Commercial and industrial		241			51			303			154
Commercial real estate		30			21			93			175
Total Commercial Loans		271			72			396			329
Residential		425			442			860			684
Consumer		2,269			1,803			7,103			6,106
Total Recoveries on Loans and Leases Previously Charged-Off		2,965			2,317			8,359			7,119
Net Loans and Leases Charged-Off		(5,571)			(3,811)			(18,304)			(12,433)
Provision for Loan and Lease Losses	~~The Provision was $4.5 million~~	—			4,460			9,550			16,430
Balance at End of Period	$	132,964		$	141,250		$	132,964		$	141,250
Average Loans and Leases Outstanding	$	13,032,349		$	12,595,668		$	13,105,086		$	12,482,747
Ratio of Net Loans and Leases Charged-Off to Average Loans and Leases Outstanding⁽¹⁾		0.17	%		0.12	%		0.19	%		0.13	%
Ratio of Allowance for ~~the three months ended September 30, 2018, which represented a nominal decrease as compared~~Loan and Lease Losses to ~~the same period in 2017. We recorded net charge-offs of loans~~Loans and leases of $3.8 million and $4.1 million for the three months ended September 30, 2018 and 2017, respectively. This represented net charge-offs of 0.12% and 0.13% of average loans and leases, on an annualized basis, for the three months ended September 30, 2018 and 2017,Leases Outstanding		1.04	%		1.12	%		1.04	%		1.12	%

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

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


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

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

As of September 30, 2019, the Allowance was $133.0 million or 1.04% of total loans and leases outstanding, compared with an Allowance of $141.7 million or 1.08% of total loans and leases outstanding as of December 31, 2018. The level of the Allowance was commensurate with our stable credit risk profile, loan portfolio growth and composition and a steady Hawaii economy.

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

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

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

Goodwill

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

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Other Assets

Other assets were $562.5 million as of September 30, 2019, an increase of $116.1 million or 26% from December 31, 2018. This increase was primarily due to a $73.6 million increase in interest rate swap agreements, a $46.1 million increase stemming from our adoption of Accounting Standard Update No. 2016-02, Leases (Topic 842), which required us to record right-of-use assets related to our operating leases, and a $36.9 million increase in affordable housing and other tax credit investment partnership interests. This was partially offset by a $38.1 million decrease in current tax receivables and deferred tax assets.

Deposits

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

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


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

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respectively. The Provision was $16.4 million for the nine months ended September 30, 2018, which represented an increase of $3.0 million compared to the same period in 2017. We recorded net charge-offs of loans and leases of $12.4 million and $11.6 million for the nine months ended September 30, 2018 and 2017, respectively. This represented net charge-offs of 0.13% of average loans and leases, on an annualized basis, for both the nine months ended September 30, 2018 and 2017. The Allowance was $141.3 million
(1) Public deposits were $0.7 billion as of September 30, 2018, an increase of $4.0 million or 3% from December 31, 2017 and represented 1.12% of total outstanding loans and leases as of both September 30, 2018 and December 31, 2017. The Provision is recorded to maintain the Allowance at levels deemed adequate by management based on the factors noted in the “Risk Governance and Quantitative and Qualitative Disclosures About Market Risk — Credit Risk” section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
~~Noninterest Income~~
Table 8 presents the major components of noninterest income for the three months ended September 30, 2018 and 2017 and Table 9 presents the major components of noninterest income for the nine months ended September 30, 2018 and 2017:

Noninterest Income

Table 8

Three Months Ended

September 30,

Dollar

Percent

(dollars in thousands)

2018

2017

Change

Change

Service charges on deposit accounts(1)

$
7,933

$
8,929

$
(996)

(11)
%
Credit and debit card fees(1)

16,535

16,126

409

3

Other service charges and fees

9,578

8,510

1,068

13

Trust and investment services income

7,487

7,672

(185)

(2)

Bank-owned life insurance

3,692

3,119

573

18

Other

2,180

5,308

(3,128)

(59)

Total noninterest income

$
47,405

$
49,664

$
(2,259)

(5)
%
⁽¹⁾
Certain prior period noninterest income amounts have been revised from the amounts previously reported to correct classification errors identified by management. For further information, see “Note 1. Organization and Basis of Presentation”.

Noninterest Income

Table 9

Nine Months Ended

September 30,

Dollar

Percent

(dollars in thousands)

2018

2017

Change

Change

Service charges on deposit accounts(1)

$
23,609

$
27,548

$
(3,939)

(14)
%
Credit and debit card fees(1)

48,961

48,450

511

1

Other service charges and fees

28,553

25,717

2,836

11

Trust and investment services income

23,429

22,536

893

4

Bank-owned life insurance

8,131

10,624

(2,493)

(23)

Other

13,219

16,406

(3,187)

(19)

Total noninterest income

$
145,902

$
151,281

$
(5,379)

(4)
%
⁽¹⁾
Certain prior period noninterest income amounts have been revised from the amounts previously reported to correct classification errors identified by management. For further information, see “Note 1. Organization and Basis of Presentation”.
~~Total noninterest income was $47.4 million for the three months ended September 30, 2018,~~2019, a decrease of ~~$2.3~~$344.0 million or ~~5% as~~34% compared to ~~the same period in 2017. Total noninterest income was $145.9 million for the nine months ended September 30, 2018, a decrease of $5.4 million or 4%~~December 31, 2018.

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

Short-term and Long-term Borrowings

Short-term borrowings were $400.0 million as of September 30, 2019, an increase of $400.0 million from December 31, 2018. This increase was due to the reclassification of $400.0 million in FHLB fixed-rate advances from long-term borrowings to short-term borrowings as the maturity dates for these advances are less than one year. These short-term FHLB fixed-rate advances have a weighted average interest rate of 2.84% and maturity dates in 2020.

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


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

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

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

Pension and Postretirement Plan Obligations

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

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

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

Foreign Activities

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

Capital

In July 2013, the federal bank regulators approved final rules implementing the Basel Committee on Banking Supervision’s December 2010 final capital framework for strengthening international capital standards, known as Basel III and various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Capital Rules”). Subject to a phase-in period for various provisions, the Capital Rules became effective for us and for the Bank on January 1, 2015. The Capital Rules require bank holding companies and their bank subsidiaries to maintain substantially more capital than previously required, with a greater emphasis on common equity. The Capital Rules, among other things, (i) introduced a capital measure called CET1 capital, (ii) specified that Tier 1 capital consists of CET1 capital and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defined CET1 capital narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 capital and not to the other components of capital and (iv) expanded the scope of the deductions/adjustments to capital as compared to prior regulations.

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

●

4.5% CET1 capital to ~~the same period in 2017.~~

~~Service charges on deposit accounts were $7.9 million for the three months ended September 30, 2018, a decrease of $1.0 million or 11% as compared~~risk-weighted assets,

●

6.0% Tier 1 capital (that is, CET1 capital plus Additional Tier 1 capital) to the same period in 2017. Service charges on deposit accounts were $23.6 million for the nine months ended September 30, 2018, a decrease of $3.9 million or 14% as compared to the same period in 2017. These decreases were primarily due to decreases in service charges from account analysis services due to higher earning credit rates that offset fee income.

Credit and debit card fees were $16.5 million for the three months ended September 30, 2018, an increase of $0.4 million or 3% as compared to the same period in 2017. Credit and debit card fees were $49.0 million for the nine months

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ended September 30, 2018, an increase of $0.5 million or 1% as compared to the same period in 2017. The increase was due to a $1.5 million increase merchant service revenues and a $0.8 million increase in interchange settlement fees, partially offset by a $1.5 million increase in network association dues and a $0.2 million decrease in rental fees from credit card terminals.

Other service charges and fees were $9.6 million for the three months ended September 30, 2018, an increase of $1.1 million or 13% as compared to the same period in 2017. This increase was primarily due to a $0.9 million increase in fees from the sale of annuities and securities, a $0.1 million increase in residential mortgage loan servicing fees and a $0.1 million increase in fee income from our cash management services. Other service charges and fees were $28.6 million for the nine months ended September 30, 2018, an increase of $2.8 million or 11% as compared to the same period in 2017. This increase was primarily due to a $1.9 million increase in fees from the sale of annuities and securities, a $0.6 million increase in fee income from our cash management services and a $0.4 million increase in fees from standby letters of credit arrangements.

Trust and investment services income was $7.5 million for the three months ended September 30, 2018, a decrease of $0.2 million or 2% as compared to the same period in 2017. Trust and investment services income was $23.4 million for the nine months ended September 30, 2018, an increase of $0.9 million or 4% as compared to the same period in 2017. This increase was primarily due to a $0.4 million increase in investment management fees, a $0.4 million increase in business cash management fees and a $0.2 million increase in personal property agency account fees.

BOLI income was $3.7 million for the three months ended September 30, 2018, an increase of $0.6 million or 18% as compared to the same period in 2017. This increase was due to a $0.6 million increase in death benefit proceeds from a life insurance policy. BOLI income was $8.1 million for the nine months ended September 30, 2018, a decrease of $2.5 million or 23% as compared to the same period in 2017. This decrease was due to a $1.9 million decrease in BOLI earnings and a $0.6 million decrease in death benefit proceeds from several life insurance policies.

Other noninterest income was $2.2 million for the three months ended September 30, 2018, a decrease of $3.1 million or 59% as compared to the same period in 2017. This decrease was primarily due to a $2.7 million decrease related to a gain on the sale of bank properties in 2017 and a $0.9 million decrease in customer-related interest rate swap fees, partially offset by a $0.5 million increase in volume-based incentives. Other noninterest income was $13.2 million for the nine months ended September 30, 2018, a decrease of $3.2 million or 19% as compared to the same period in 2017. This decrease was primarily due to a $2.7 million decrease related to a gain on the sale of bank properties in 2017, a $0.8 million decrease related to insurance proceeds from a 2017 severe weather event that affected the Hawaiian Islands and a $0.6 million decrease in customer-related interest rate swap fees, partially offset by a $1.1 million gain on the sale of leased equipment.

~~Noninterest Expense~~

Table 10 presents the major components of noninterest expense for the three months ended September 30, 2018 and 2017 and Table 11 presents the major components of noninterest expense for the nine months ended September 30, 2018 and 2017:

Noninterest Expense

Table 10

Three Months Ended

September 30,

Dollar

Percentage

(dollars in thousands)

2018

2017


Change

Change

Salaries and employee benefits(1)

$
41,959

$
38,687

$
3,272

8
%
Contracted services and professional fees

11,478

10,834

644

6

Occupancy(2)

6,757

6,238

519

8

Equipment

4,181

4,174

7

—

Regulatory assessment and fees

3,966

3,668

298

8

Advertising and marketing

1,060

2,005

(945)

(47)

Card rewards program(2)

5,805

5,438

367

7

Other(1)

17,941

13,740

4,201

31

Total noninterest expense

$
93,147

$
84,784

$
8,363

10
%

⁽¹⁾

The Company adopted ASU No. 2017-07 and applied the guidance retrospectively. As such, $2.9 million previously reported in salaries and employee benefits were reclassified to other noninterest expense for the three months ended September 30, 2017.

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⁽²⁾

Certain prior period noninterest expense amounts have been revised from the amounts previously reported to correct classification errors identified by management. For further information, see “Note 1. Organization and Basis of Presentation”.

Noninterest Expense

Table 11

Nine Months Ended

September 30,

Dollar

Percentage

(dollars in thousands)

2018

2017

Change

Change

Salaries and employee benefits(1)

$
125,755

$
119,459

$
6,296

5
%
Contracted services and professional fees

36,770

33,530

3,240

10

Occupancy(2)

20,149

17,382

2,767

16

Equipment

13,104

12,898

206

2

Regulatory assessment and fees

12,164

11,192

972

9

Advertising and marketing

3,126

5,255

(2,129)

(41)

Card rewards program(2)

17,882

17,107

775

5

Other(1)

46,649

40,881

5,768

14

Total noninterest expense

$
275,599

$
257,704

$
17,895

7
%

⁽¹⁾

The Company adopted ASU No. 2017-07 and applied the guidance retrospectively. As such, $8.7 million previously reported in salaries and employee benefits were reclassified to other noninterest expense for the nine months ended September 30, 2017.

risk-weighted assets,

⁽²⁾

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●

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

~~Total noninterest expense was $93.1 million for the three months ended September 30, 2018, an increase of $8.4 million or 10% as compared~~
● 4.0% Tier 1 capital to average quarterly assets.

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

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


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

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

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

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

Off-Balance Sheet Arrangements and Guarantees

Off-Balance Sheet Arrangements

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

Guarantees

We sell residential mortgage loans in the secondary market primarily to Fannie Mae or Freddie Mac. The agreements under which we sell residential mortgage loans to Fannie Mae or Freddie Mac contain provisions that

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include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the specific representations and warranties vary among investors, insurance or guarantee agreements, they typically cover ownership of the loan, validity of the lien securing the loan, the absence of delinquent taxes or liens against the property securing the loan, compliance with loan criteria set forth in the applicable agreement, compliance with applicable federal, state and local laws and other matters. As of September 30, 2019 and December 31, 2018, the unpaid principal balance of our portfolio of residential mortgage loans sold was $2.4 billion and $2.7 billion, respectively. The agreements under which we sell residential mortgage loans require delivery of various documents to the investor or its document custodian. Although these loans are primarily sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred if a loan review reveals that underwriting and documentation standards were potentially not met in the origination of those loans. Upon receipt of a repurchase request, we work with investors to arrive at a mutually agreeable resolution. Repurchase demands are typically reviewed on an individual loan by loan basis to validate the claims made by the investor to determine if a contractually required repurchase event has occurred. We manage the risk associated with potential repurchases or other forms of settlement through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards. For the nine months ended September 30, 2019, there was one repurchase of a residential mortgage loan of $0.4 million and there were no pending repurchase requests.

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

Although to date repurchase requests related to representation and warranty provisions and servicing activities have been limited, it is possible that requests to repurchase mortgage loans may increase in frequency as investors more aggressively pursue all means of recovering losses on their purchased loans. However, as of September 30, 2019, management believes that this exposure is not material due to the historical level of repurchase requests and loss trends and thus has not established a liability for losses related to mortgage loan repurchases. As of September 30, 2019, 99% of our residential mortgage loans serviced for investors were current. We maintain ongoing communications with investors and continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in loans sold to investors.

Contractual Obligations

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

Future Application of Accounting Pronouncements

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

Risk Governance and Quantitative and Qualitative Disclosures About Market Risk

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and operational risk. See “Analysis of Financial Condition — Liquidity” and “—Capital” sections of this MD&A for further discussions of liquidity risk management and capital management, respectively.

Credit Risk

Credit risk is the risk that borrowers or counterparties will be unable or unwilling to repay their obligations in accordance with the underlying contractual terms. We manage and control credit risk in the loan and lease portfolio by adhering to well-defined underwriting criteria and account administration standards established by management. Written credit policies document underwriting standards, approval levels, exposure limits and other limits or standards deemed necessary and prudent. Portfolio diversification at the obligor, industry, product, and/or geographic location levels is actively managed to mitigate concentration risk. In addition, credit risk management includes an independent credit review process that assesses compliance with commercial, real estate and consumer credit policies, risk ratings and other critical credit information. In addition to implementing risk management practices that are based upon established and sound lending practices, we adhere to sound credit principles. We understand and evaluate our customers’ borrowing needs and capacity to repay, in conjunction with their character and history.

Management has identified three categories of loans that we use to develop our systematic methodology to determine the Allowance: commercial, residential real estate and consumer.

Commercial lending is further categorized into four distinct classes based on characteristics relating to the borrower, transaction and collateral. These classes are: commercial and industrial, commercial real estate, construction and lease financing. Commercial and industrial loans are primarily for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes by medium to larger Hawaii based corporations, as well as U.S. mainland and international companies. Commercial and industrial loans are typically secured by non-real estate assets whereby the collateral is trading assets, enterprise value or inventory. As with many of our customers, our commercial and industrial loan customers are heavily dependent on tourism, government expenditures and real estate values. Commercial real estate loans are secured by real estate, including but not limited to structures and facilities to support activities designated as retail, health care, general office space, warehouse and industrial space. Our Bank’s underwriting policy generally requires that net cash flows from the property be sufficient to service the debt while still maintaining an appropriate amount of reserves. Commercial real estate loans in Hawaii are characterized by having a limited supply of real estate at commercially attractive locations, long delivery time frames for development and high interest rate sensitivity. Our construction lending portfolio consists primarily of land loans, single family and condominium development loans. Financing of construction loans is subject to a high degree of credit risk given the long delivery time frames for such projects. Construction lending activities are underwritten on a project financing basis whereby the cash flows or lease rents from the underlying real estate collateral or the sale of the finished inventory is the primary source of repayment. Market feasibility analysis is typically performed by assessing market comparables, market conditions and demand in the specific lending area and general community. We require presales of finished inventory prior to loan funding. However, because this analysis is typically performed on a forward looking basis, real estate construction projects typically present a higher risk profile in our lending activities. Lease financing activities include commercial single investor leases and leveraged leases used to purchase items ranging from computer equipment to transportation equipment. Underwriting of new leasing arrangements typically includes analyzing customer cash flows, evaluating secondary sources of repayment, such as the value of the leased asset, the guarantors’ net cash flows as well as other credit enhancements provided by the lessee.

Residential real estate is further categorized into the following classes: residential mortgages (loans secured by 1-4 family residential properties and home equity loans) and home equity lines of credit. Our Bank’s underwriting standards typically require LTV ratios of not more than 80%, although higher levels are permitted with accompanying mortgage insurance. First mortgage loans secured by residential properties generally carry a moderate level of credit risk, with an average loan size of approximately $342,000. Residential mortgage loan production is added to our loan portfolio or is sold in the secondary market, based on management’s evaluation of our liquidity, capital and loan portfolio mix as well as market conditions. Changes in interest rates, the economic environment and other market factors have impacted, and will likely continue to impact, the marketability and value of collateral and the financial condition of our borrowers which impacts the level of credit risk inherent in this portfolio, although we remain a supply constrained housing environment in Hawaii. Geographic concentrations exist for this portfolio as nearly all residential mortgage loans and home equity lines of credit are for residences located in Hawaii, Guam or Saipan. These island locales are susceptible to a wide array of potential natural disasters including, but not limited to, hurricanes, floods, tsunamis and earthquakes. We offer home equity lines of credit with variable rates; fixed rate options may be available post-closing. All lines are

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underwritten at 2% over the fully indexed rate. Our procedures for underwriting home equity lines of credit include an assessment of an applicant’s overall financial capacity and repayment ability. Decisions are primarily based on repayment ability via debt-to-income ratios, LTV ratios and an evaluation of credit history.

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

In addition to geographic concentration risk, we also monitor our exposure to industry risk. While the Bank, our customers and our results of operations could be adversely impacted by events affecting the tourism industry, we also monitor our other industry exposures, including, but not limited to, our exposures in the oil, gas and energy industries. As of September 30, 2019 and December 31, 2018, we did not have material exposures to customers in the oil, gas and energy industries.

Market Risk

Market risk is the potential of loss arising from changes in interest rates, foreign exchange rates, equity prices and commodity prices, including the correlation among these factors and their volatility. When the value of an instrument is tied to such external factors, the holder faces market risk. We are exposed to market risk primarily from interest rate risk, which is defined as the risk of loss of net interest income or net interest margin because of changes in interest rates.

The potential cash flows, sales or replacement value of many of our assets and liabilities, especially those that earn or pay interest, are sensitive to changes in the general level of interest rates. In the banking industry, changes in interest rates can significantly impact earnings and the safety and soundness of an entity.

Interest rate risk arises primarily from our core business activities of extending loans and accepting deposits. This occurs when our interest earning loans and interest bearing deposits mature or reprice at different times, on a different basis or in unequal amounts. Interest rates may also affect loan demand, credit losses, mortgage origination volume, pre- payment speeds and other items affecting earnings.

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

Market Risk Measurement

We primarily use net interest income simulation analysis to measure and analyze interest rate risk. We run various hypothetical interest rate scenarios on a monthly basis and compare these results against a measured base case scenario. Our net interest income simulation analysis incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results. These assumptions include: (1) the timing of changes in interest rates, (2) shifts or rotations in the yield curve, (3) re-pricing characteristics for market rate sensitive instruments on and off balance sheet, (4) differing sensitivities of financial instruments due to differing underlying rate indices and (5) varying

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loan prepayment speeds for different interest rate scenarios. Because of limitations inherent in any approach used to measure interest rate risk, simulation results are not intended as a forecast of the actual effect of a change in market interest rates on our results but rather as a means to better plan and execute appropriate asset liability management strategies to manage our interest rate risk.

Table 29 presents, for the twelve months subsequent to September 30, 2019 and December 31, 2018, an estimate of the changes in net interest income that would result from ramps (gradual changes) and shocks (immediate changes) in market interest rates, moving in a parallel fashion over the entire yield curve, relative to the measured base case scenario. Ramp scenarios assume interest rates move gradually in parallel across the yield curve relative to the base case scenario. Shock scenarios assume an immediate and sustained parallel shift in interest rates across the entire yield curve, relative to the base case scenario. The base case scenario assumes that the balance sheet and interest rates are generally unchanged. We evaluate the sensitivity by using a static forecast, where the balance sheets as of September 30, 2019 and December 31, 2018 are held constant.


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

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

The table above shows the effects of a simulation which estimates the effect of a gradual and immediate sustained parallel shift in the yield curve of −100, −50, +50 and +100 basis points in market interest rates over a twelve month period on our net interest income.

Currently, our interest rate profile is such that we project net interest income will benefit from higher interest rates as our assets would reprice faster and to a greater degree than our liabilities, while in the case of lower interest rates, our assets would reprice downward and to a greater degree than our liabilities.

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

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

We also have longer term interest rate risk exposures which may not be appropriately measured by net interest income simulation analysis. We use market value of equity (“MVE”) sensitivity analysis to study the impact of long term cash flows on earnings and capital. MVE involves discounting present values of all cash flows of on-balance sheet and off-balance sheet items under different interest rate scenarios. The discounted present value of all cash flows represents our MVE. MVE analysis requires modifying the expected cash flows in each interest rate scenario, which will impact the discounted present value. The amount of base case measurement and its sensitivity to shifts in the yield curve allow management to measure longer term repricing option risk in the balance sheet.

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We also analyze the historical sensitivity of our interest bearing transaction accounts to determine the portion that it classifies as interest rate sensitive versus the portion classified over one year. This analysis divides interest bearing assets and liabilities into maturity categories and measures the “gap” between maturing assets and liabilities in each category.

Limitations of Market Risk Measures

The results of our simulation analyses are hypothetical, and a variety of factors might cause actual results to differ substantially from what is depicted. For example, if the timing and magnitude of interest rate changes differ from those projected, our net interest income might vary significantly. Non parallel yield curve shifts such as a flattening or steepening of the yield curve or changes in interest rate spreads would also cause our net interest income to be different from that depicted. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term liabilities re-price faster than expected or faster than our assets re-price. Actual results could differ from those projected if we grow assets and liabilities faster or slower than estimated, if we experience a net outflow of deposits or if our mix of assets and liabilities otherwise changes. For example, while we maintain relatively high levels of liquidity, a faster than expected withdrawal of deposits out of the bank may cause us to seek higher cost sources of funding. Actual results could also differ from those projected if we experience substantially different prepayment speeds in our loan portfolio than those assumed in the simulation analyses. Finally, these simulation results do not consider all the actions that we may undertake in response to potential or actual changes in interest rates, such as changes to our loan, investment, deposit, funding or hedging strategies.

Market Risk Governance

We seek to achieve consistent growth in net interest income and capital while managing volatility arising from changes in market interest rates. The objective of our interest rate risk management process is to increase net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.

To manage the impact on net interest income, we manage our exposure to changes in interest rates through our asset and liability management activities within guidelines established by our ALCO and approved by our board of directors. The ALCO has the responsibility for approving and ensuring compliance with the ALCO management policies, including interest rate risk exposures. The objective of our interest rate risk management process is to maximize net interest income while operating within acceptable limits established for interest rate risk and maintaining adequate levels of funding and liquidity.

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

Management uses the results of its various simulation analyses to formulate strategies to achieve a desired risk profile within the parameters of our capital and liquidity guidelines.

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Operational Risk

Operational risk is the risk of loss arising from inadequate or failed processes, people or systems, external events (such as natural disasters), or compliance, reputational or legal matters, including the risk of loss resulting from fraud, litigation and breaches in data security. Operational risk is inherent in all of our business ventures and the management of that risk is important to the achievement of our objectives. We have a framework in place that includes the reporting and assessment of any operational risk events, and the assessment of our mitigating strategies within our key business lines. This framework is implemented through our policies, processes and reporting requirements. We measure and report operational risk using the seven operational risk event types projected by the Basel Committee on Banking Supervision in Basel II: (1) external fraud; (2) internal fraud; (3) employment practices and workplace safety; (4) clients, products and business practices; (5) damage to physical assets; (6) business disruption and system failures; and (7) execution, delivery and process management. Our operational risk review process is also a core part of our assessment of material new products or activities.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2019. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2019.

Changes in Internal Control over Financial Reporting

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

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

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

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

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


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

(1)

Includes 9,046 shares acquired from employees to satisfy income tax withholding requirements in ~~2017. Total noninterest expense was $275.6 million for the nine months ended September 30, 2018, an increase of $17.9 million or 7% as compared to the same period in 2017.~~

Salaries and employee benefits expense was $42.0 million for the three months ended September 30, 2018, an increase of $3.3 million or 8% as compared to the same period in 2017. This increase was primarily due to a $2.3 million increase in base salaries and related payroll taxes, a $0.9 million increase in other compensation, primarily related to bonuses resulting from the initial public offering and related stock-based compensation and a $0.6 million increase in group health plan costs. This was partially offset by a $0.7 million decrease in incentive compensation. Salaries and employee benefits expense was $125.8 million for the nine months ended September 30, 2018, an increase of $6.3 million or 5% as compared to the same period in 2017. This increase was primarily due to a $6.4 million increase in base salaries and related payroll taxes and a $1.8 million increase in group health plan costs. This was partially offset by a $2.0 million decrease in incentive compensation.

Contracted services and professional fees were $11.5 million for the three months ended September 30, 2018, an increase of $0.6 million or 6% as compared to the same period in 2017. This increase was due to a $0.5 million increase in outside services, primarily attributable to marketing and new customer services and a $0.2 million increase in contracted data processing expenses, primarily due to new merchant billing services. Contracted services and professional fees were $36.8 million for the nine months ended September 30, 2018, an increase of $3.2 million or 10% as compared to the same period in 2017. This increase was due to a $1.8 million increase in outside services, primarily attributable to marketing and new customer services, a $0.9 million increase in contracted data processing expenses primarily due to new merchant billing services and a $0.4 million increase in audit, legal and consultant fees.

Occupancy expense was $6.8 million for the three months ended September 30, 2018, an increase of $0.5 million or 8% as compared to the same period in 2017. This increase was primarily due to a $0.8 million decrease in net sublease rental income, partially offset by a $0.3 million decrease in ATM rent expense. Occupancy expense was $20.1 million for the nine months ended September 30, 2018, an increase of $2.8 million or 16% as compared to the same period in 2017. This increase was primarily due to a $2.1 million decrease in net sublease rental income, mainly attributable to the sale of a bank property in December 2017, and a $1.3 million increase in building maintenance expense. This was partially offset by a $0.6 million decrease in ATM rent expense.

Regulatory assessment and fees were $4.0 million for the three months ended September 30, 2018, an increase of $0.3 million or 8% as compared to the same period in 2017. Regulatory assessment and fees were $12.2 million for the nine months ended September 30, 2018, an increase of $1.0 million or 9% as compared to the same period in 2017. These increases were primarily due to an increase in the Federal Deposit Insurance Corporation (“FDIC”) insurance assessment rate.

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Advertising and marketing expense was $1.1 million for the three months ended September 30, 2018, a decrease of $0.9 million or 47% as compared to the same period in 2017. This decrease was primarily due to a $0.7 million increase in vendor reimbursements as well as a $0.3 million decrease in advertising costs recordedconnection with vested restricted stock units during the three months ended September 30, ~~2018. Advertising and marketing expense was $3.1~~2019.

(2)

In March 2019, the Company announced a share repurchase program for up to $100 million ~~for~~of its outstanding common stock during 2019. In August 2019, the ~~nine months ended September 30, 2018,~~Company announced a ~~decrease of $2.1 million or 41% as compared to the same period in 2017. This decrease was primarily due to a $1.3~~$50 million increase in ~~vendor reimbursements as well as a $0.8~~its share repurchase program to up to $150 million ~~decrease in advertising costs recorded~~of its outstanding common stock during ~~the nine months ended September 30, 2018.~~

Card rewards program expense was $5.8 million for the three months ended September 30, 2018, an increase of $0.4 million or 7% as compared to the same period in 2017. Card rewards program expense was $17.9 million for the nine months ended September 30, 2018, an increase of $0.8 million or 5% as compared to the same period in 2017. This increase was primarily due to a $0.9 million increase in interchange fees paid to our credit card partners and a $0.4 million increase in credit card cash reward redemptions, partially offset by $0.5 million decrease in priority rewards card redemptions.

Other noninterest expense was $17.9 million for the three months ended September 30, 2018, an increase of $4.2 million or 31% as compared to the same period in 2017. This increase was primarily due to a $4.1 million charge recorded in connection with the anticipated settlement of a putative class action lawsuit against the Company. Other noninterest expense was $46.6 million for the nine months ended September 30, 2018, an increase of $5.8 million or 14% as compared to the same period in 2017. This increase was primarily due to a $4.1 million charge recorded in connection with the anticipated class action lawsuit settlement noted above, $1.2 million increase in operational losses (which includes losses as a result of bank error, fraud, items processing, or theft), a $0.7 million loss on our funding swap related to a decrease in the conversion rate of our Visa Class B restricted shares sold in 2016, a $0.6 million increase in charitable contributions, a $0.5 million increase in software amortization expense and a $0.4 million increase in the Company’s mortgage errors and omissions insurance policy expense. This was partially offset by a $1.7 million decrease in pension-related expenses. Additional information related to our funding swap is presented in “Note 13. Derivative Financial Instruments” contained in our unaudited interim consolidated financial statements.

~~Provision for Income Taxes~~

The provision for income taxes was $23.7 million (an effective tax rate of 25.99%) for the three months ended September 30, 2018, compared with the provision for income taxes of $35.3 million (an effective tax rate of 37.71%) for the same period in 2017. The provision for income taxes was $71.8 million (an effective tax rate of 26.00%) for the nine months ended September 30, 2018, compared with the provision for income taxes of $102.1 million (an effective tax rate of 37.25%) for the same period in 2017. The decreases in the effective tax rate for the three and nine months ended September 30, 2018 as compared to the same periods in 2017 were due to the impact of the Tax Act that was signed into law on December 22, 2017, which reduced the corporate tax rate from 35% to 21%. Additional information about the provision for income taxes is presented in “Note 12. Income Taxes” contained in our unaudited interim consolidated financial statements.

~~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, 2018 and 2017. Additional information about operating segment performance is presented in “Note 19. Reportable Operating Segments” contained in our unaudited interim consolidated financial statements.

Business Segment Net Income

Table 12

Three Months Ended

Nine Months Ended

September 30,

September 30,
(dollars in thousands)

2018

2017

2018

2017
Retail Banking

$
55,201

$
47,446

$
165,408

$
138,144
Commercial Banking

18,574

16,498

55,734

51,387
Treasury and Other

(6,387)

(5,581)

(16,743)

(17,533)
Total

$
67,388

$
58,363

$
204,399

$
171,998

~~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

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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 $55.2 million for the three months ended September 30, 2018, an increase of $7.8 million or 16% as compared to the same period in 2017. The increase in net income for the Retail Banking segment was primarily due to a $9.3 million decrease in the provision for income taxes and a $2.9 million increase in net interest income, partially offset by a $4.5 million increase in noninterest expense. The decrease in the provision for income taxes was primarily due to the Tax Act. The increase in net interest income was primarily due to higher earnings credits from our deposit portfolio. The increase in noninterest expense was primarily due to a $4.1 million charged recorded in connection with an anticipated settlement agreement to resolve a putative class action lawsuit against the Company. Net income for the Retail Banking segment was $165.4 million for the nine months ended September 30, 2018, an increase of $27.3 million or 20% as compared to the same period in 2017. The increase in net income for the Retail Banking segment was primarily due to a $23.7 million decrease in the provision for income taxes and an $11.2 million increase in net interest income. This was partially offset by a $5.1 million increase in noninterest expense, a $1.5 million increase in the provision for loan and lease losses and a $1.0 million decrease in noninterest income. The decrease in the provision for income taxes was primarily due to the Tax Act. The increase in net interest income was primarily due to higher earnings credits from our deposit portfolio. The increase in noninterest expense was primarily due to the charge recorded in connection with our class action lawsuit as noted above, and an increase in compensation and occupancy expenses, partially offset by lower expenses that were allocated to the Retail Banking segment. The decrease in noninterest income was primarily due to a decrease in service charges from account analysis services, partially offset by an increase in fees from the sale of annuities and securities.

~~Commercial Banking.~~ Our Commercial Banking segment includes our corporate banking, residential and commercial real estate loans, commercial lease financing, auto dealer financing, 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 $18.6 million for the three months ended September 30, 2018, an increase of $2.1 million or 13% as compared to the same period in 2017. The increase in net income for the Commercial Banking segment was primarily due to a $3.6 million decrease in the provision for income taxes and a $1.2 million increase in net interest income, partially offset by a $3.1 million increase in noninterest expense. The decrease in the provision for income taxes was primarily due to the Tax Act. The increase in net interest income was primarily due to higher interest income from our commercial lending portfolio, particularly our commercial real estate loans. The increase in noninterest expense was primarily due to higher overall expenses that were allocated to the Commercial Banking segment. Net income for the Commercial Banking segment was $55.7 million for the nine months ended September 30, 2018, an increase of $4.3 million or 8% as compared to the same period in 2017. The increase in net income for the Commercial Banking segment was primarily due to an $11.1 million decrease in the provision for income taxes, a $2.7 million increase in noninterest income and a $2.6 million increase in net interest income, partially offset by a $10.6 million increase in noninterest expense and a $1.5 million increase in the provision for loan and lease losses. The decrease in the provision for income taxes was primarily due to the Tax Act. The increase in noninterest income was primarily due to an increase in merchant service revenues, an airline excise tax settlement, a gain on the sale of leased equipment and an increase in interchange settlement fees, partially offset by an increase in network association dues. The increase in net interest income was primarily due to an increase in interest income from our commercial lending portfolio, particularly our commercial real estate loans. The increase in noninterest expense was primarily due to higher overall expenses that were allocated to the Commercial Banking segment and an increase in operational losses and contracted data processing expenses.

~~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. 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.

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~~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 $6.4 million for the three months ended September 30, 2018, an increase in loss of $0.8 million or 14% as compared to the same period in 2017. The increase in the net loss was primarily due to a $2.6 million decrease in noninterest income and a $1.2 million decrease in the benefit for income taxes, partially offset by a $3.8 million increase in net interest income. The decrease in noninterest income was primarily due to a decrease related to a gain on the sale of bank properties in 2017. The decrease in the benefit for income taxes was primarily due to the Tax Act. The increase in net interest income was primarily due to higher earnings credits as a result of higher average balances and yields in our loan portfolio. Net loss for the Treasury and Other segment was $16.7 million for the nine months ended September 30, 2018, a decrease in loss of $0.8 million or 5% as compared to the same period in 2017. The decrease in the net loss was primarily due to a $14.6 million increase in net interest income, partially offset by a $7.1 million decrease in noninterest income, a $4.5 million decrease in the benefit for income taxes and a $2.2 million increase in noninterest expense. The increase in net interest income was primarily due to higher earnings credits as a result of higher average balances and yields in our loan portfolio and higher yields in our investment securities portfolio. The decrease in noninterest income was primarily due to a decrease related to a gain on the sale of bank properties in 2017, a decrease in BOLI income and a decrease related to insurance proceeds from a 2017 severe weather event that affected the Hawaiian Islands. The decrease in the benefit for income taxes was primarily due to the Tax Act. The increase in noninterest expense was primarily due to an increase in base salaries, building maintenance and outside services expenses, as well as a decrease in sublease rental income. This was partially offset by a decrease in pension-related expenses and advertising costs as well as an increase in vendor reimbursements.

~~Analysis of Financial Condition~~

~~Liquidity~~

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”).~~2019. As of September 30, ~~2018~~2019, $51.2 million remained of the $150 million total repurchase amount authorized under the share repurchase program for 2019. The timing and December 31, 2017, cash and cash equivalents were $0.7 billion and $1.0 billion, respectively. Potential sources of liquidity also include investment securities in our available-for-sale portfolio. The carrying value of our available-for-sale investment securities was $4.6 billion and $5.2 billion as of September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018 and December 31, 2017, we maintained our excess liquidity primarily in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac. As of September 30, 2018 and December 31, 2017, our available-for-sale investment securities portfolio was comprised of securities with an average base duration of approximately 4.0 years and 3.8 years, respectively. Furthermore, as of September 30, 2018, we expect maturities and paydowns of approximately $723.2 million to occur over the next twelve months. 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 Federal Home Loan Bank of Des Moines (the “FHLB”) and the FRB. As of September 30, 2018, we have borrowing capacity of $1.7 billion from the FHLB and $713.0 million from the FRB based on the amount of ~~collateral pledged. During the three and nine months ended September 30, 2018, advances totaling $200.0 million and $400.0 million, respectively, were issued from the FHLB.~~

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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 $14.6 billion and $14.7 billion as of September 30, 2018 and December 31, 2017, which represented 88% and 83%, respectively, of our total deposits. These core deposits are normally less volatile, often with customer relationships tied to other products offered by the Company. While we consider core deposits to be less volatile, deposit levels could decrease if interest rates increase significantly or if corporate customers increase investing activities and reduce deposit balances.

~~Investment Securities~~

~~Table 13 presents the book value, which is also the estimated fair value, of our available-for-sale investment securities portfolio as of September 30, 2018 and December 31, 2017:~~

Investment Securities

Table 13

September 30,

December 31,
(dollars in thousands)

2018

2017
U.S. Treasury securities

$
383,890

$
392,255
Government-sponsored enterprises debt securities

237,217

242,601
Government agency mortgage-backed securities

419,293

351,390
Government-sponsored enterprises mortgage-backed securities

154,133

174,741
Collateralized mortgage obligations:

Government agency

2,753,966

3,290,474
Government-sponsored enterprises

627,239

762,718
Debt securities issued by state and political subdivisions

19,563

20,479
Total available-for-sale securities

$
4,595,301

$
5,234,658

~~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, 2018:~~

Maturities and Weighted-Average Yield on Securities(1)

Table 14

Weighted

After 1

Weighted

After 5

Weighted

Weighted

Weighted

1 Year

Average

Year -

Average

Years -

Average

Over 10

Average

Average

Fair
(dollars in millions)

or Less

Yield

5 Years

Yield

10 Years

Yield

Years

Yield

Total

Yield

Value
As of September 30, 2018

Available-for-Sale Securities

U.S. Treasury securities

$
—

—
%
$
403.4

1.32
%
$
—

—
%
$
—

—
%
$
403.4

1.32
%
$
383.9
Government-sponsored enterprises debt securities

—

—

100.0

1.86

149.7

2.22

—

—

249.7

2.08

237.2
Mortgage-Backed Securities(2):

Government agency

51.2

2.76

175.0

2.77

113.3

2.74

100.3

2.71

439.8

2.75

419.3
Government-sponsored enterprises

30.4

2.34

75.9

2.33

36.9

2.26

18.8

2.24

162.0

2.31

154.1
Collateralized mortgage obligations(2):

Government agency

523.9

2.01

1,478.0

2.04

700.1

2.09

205.0

2.12

2,907.0

2.05

2,754.0
Government-sponsored enterprises

117.7

1.95

366.3

1.97

164.2

2.02

9.6

1.70

657.8

1.97

627.2
Debt securities issued by state and political subdivisions

—

—

—

—

—

—

20.3

3.32

20.3

3.32

19.6
Total available-for-sale securities as of September 30, 2018

$
723.2

2.07
%
$
2,598.6

1.97
%
$
1,164.2

2.16
%
$
354.0

2.35
%
$
4,840.0

2.06
%
$
4,595.3

⁽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 $4.6 billion as of September 30, 2018, a decrease of $639.4 million or 12% compared to December 31, 2017. This decrease was primarily due to our use of paydowns and maturities to fund loan growth. Our available-for-sale investment securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss), unless a security is deemed to be other-than-temporarily impaired (“OTTI”).

As of September 30, 2018, we maintained all of our investment securities in the available-for-sale category recorded at fair value in the unaudited interim consolidated balance sheets, with $3.4 billion invested in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac. Our available-for-sale portfolio also included $573.4 million in mortgage backed securities issued by Ginnie Mae, Freddie Mac and Fannie Mae, $383.9 million in U.S. Treasury

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securities, $237.2 million in debt securities issued by government-sponsored enterprises (FHLB and Federal Farm Credit Banks Funding Corporation callable bonds) and $19.6 million in debt securities issued by state and political subdivisions.

Gross unrealized gains in our investment securities portfolio were $0.1 million and $0.2 million as of September 30, 2018 and December 31, 2017, respectively. Gross unrealized losses in our investment securities portfolio were $244.8 million and $122.9 million as of September 30, 2018 and December 31, 2017, respectively. Higher unrealized losses in our investment securities portfolio were primarily due to higher market interest rates as of September 30, 2018, relative to when the investment securities were purchased. The higher gross unrealized loss positions were primarily related to our collateralized mortgage obligations, the fair value of which is sensitive to changes in market interest rates.

We 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 September 30, 2018 and December 31, 2017, we held FHLB stock of $26.1 million and $10.1 million, respectively, which is recorded as a component of other assets in our unaudited interim consolidated balance sheets.

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

~~Loans and Leases~~

~~Table 15 presents the composition of our loan and lease portfolio by major categories as of September 30, 2018 and December 31, 2017:~~

Loans and Leases

Table 15

September 30,

December 31,
(dollars in thousands)

2018

2017
Commercial and industrial

$
2,969,237

$
3,135,266
Real estate:

Commercial

2,891,753

2,667,597
Construction

612,794

632,911
Residential

4,313,489

4,090,053
Total real estate

7,818,036

7,390,561
Consumer

1,651,877

1,586,476
Lease financing

161,314

165,066
Total loans and leases

$
12,600,464

$
12,277,369

Total loans and leases were $12.6 billion as of September 30, 2018, an increase of $323.1 million or 3% from December 31, 2017 with increases in all categories except commercial and industrial loans, construction loans and lease financing.

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 $3.0 billion as of September 30, 2018, a decrease of $166.0 million or 5% from December 31, 2017. This decrease was primarily due to greater than expected prepayments. Additionally, commercial and industrial loans also decreased due to lower dealer flooring balances as dealers more carefully managed their inventory levels as well as increased competition from captive finance companies.

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Commercial real estate loans are secured by first mortgages on commercial real estate at loan to value (“LTV”) ratios generally not exceeding 75% and a minimum debt service coverage ratio of 1.20 to 1. The commercial properties are predominantly apartments, neighborhood and grocery anchored retail, industrial, office, and to a lesser extent, specialized properties such as hotels. The primary source of repayment for investor property is cash flow from the property and for owner occupied property is the operating cash flow from the business. Commercial real estate loans were $2.9 billion as of September 30, 2018, an increase of $224.2 million or 8% from December 31, 2017. Strong demand for commercial real estate lending activities was reflective of a strong real estate market in Hawaii and the demand by both investors and owner occupants to refinance and/or to acquire new real estate assets.

Construction loans are for the purchase or construction of a property for which repayment will be generated by the property. Loans in this portfolio are primarily for the purchase of land, as well as for the development of commercial properties, single family homes and condominiums. We classify loans as construction until the completion of the construction phase. Following construction, if a loan is retained by the Bank, the loan is reclassified to the commercial real estate or residential real estate classes of loans. Construction loans were $612.8 million as of September 30, 2018, a decrease of $20.1 million or 3% from December 31, 2017, in part due to greater than expected prepayments.

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 $4.3 billion as of September 30, 2018, an increase of $223.4 million or 6% from December 31, 2017. Our portfolio of residential real estate loans continues to benefit from Hawaii’s strong real estate market and continued demand for new housing developments in the relatively low interest rate environment.

Consumer loans consist primarily of open- and closed-end direct and indirect credit facilities for personal, automobile and household purchases as well as credit card loans. We seek to maintain reasonable levels of risk in consumer lending by following prudent underwriting guidelines, which include an evaluation of personal credit history, cash flow and collateral values based on existing market conditions. Consumer loans were $1.7 billion as of September 30, 2018, an increase of $65.4 million or 4% from December 31, 2017. High levels of consumer outstanding balances were reflective of a strong Hawaii economy, higher statewide personal income and lower unemployment trends. These factors contributed to higher levels of consumer spending.

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 $161.3 million as of September 30, 2018, a decrease of $3.8 million or 2% from December 31, 2017.

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

~~Table of Contents~~

~~Tables 16 and 17 present the geographic distribution of our loan and lease portfolio as of September 30, 2018 and December 31, 2017:~~

Geographic Distribution of Loan and Lease Portfolio

Table 16

September 30, 2018

U.S.

Guam &

Foreign &

(dollars in thousands)

Hawaii

Mainland(1)

Saipan

Other

Total
Commercial and industrial

$
1,205,171

$
1,584,572

$
130,610

$
48,884

$
2,969,237
Real estate:

Commercial

1,922,667

594,055

374,132

899

2,891,753
Construction

343,384

241,619

27,791

—

612,794
Residential

4,165,150

2,893

145,446

—

4,313,489
Total real estate

6,431,201

838,567

547,369

899

7,818,036
Consumer

1,226,781

23,179

399,926

1,991

1,651,877
Lease financing

48,393

95,214

8,158

9,549

161,314
Total Loans and Leases

$
8,911,546

$
2,541,532

$
1,086,063

$
61,323

$
12,600,464
Percentage of Total Loans and Leases

71%

20%

9%

0%

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 17

December 31, 2017

U.S.

Guam &

Foreign &

(dollars in thousands)

Hawaii

Mainland(1)

Saipan

Other

Total
Commercial and industrial

$
1,253,250

$
1,645,357

$
159,305

$
77,354

$
3,135,266
Real estate:

Commercial

1,810,675

488,782

366,237

1,903

2,667,597
Construction

385,442

213,761

33,708

—

632,911
Residential

3,940,316

2,704

147,033

—

4,090,053
Total real estate

6,136,433

705,247

546,978

1,903

7,390,561
Consumer

1,153,043

25,681

405,517

2,235

1,586,476
Lease financing

49,379

95,337

10,220

10,130

165,066
Total Loans and Leases

$
8,592,105

$
2,471,622

$
1,122,020

$
91,622

$
12,277,369
Percentage of Total Loans and Leases

70%

20%

9%

1%

100%

⁽¹⁾

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

~~Table of Contents~~

~~Table 18 presents certain contractual loan maturity categories and sensitivities of those loans to changes in interest rates as of September 30, 2018:~~

Maturities for Selected Loan Categories(1)

Table 18

September 30, 2018

Due in One

Due After One

Due After

(dollars in thousands)

Year or Less

to Five Years

Five Years

Total
Commercial and industrial

$
1,200,680

$
1,445,711

$
322,846

$
2,969,237
Real estate - construction

137,429

249,321

226,044

612,794
Total Loans and Leases

$
1,338,109

$
1,695,032

$
548,890

$
3,582,031

Total of loans due after one year with:

Fixed interest rates

$
259,950

$
103,562

$
363,512
Variable interest rates

1,435,082

445,328

1,880,410
Total Loans and Leases

$
1,695,032

$
548,890

$
2,243,922

⁽¹⁾

~~Based on contractual maturities.~~

~~Credit Quality~~

~~Table of Contents~~

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

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

~~Table 19 presents information on our non-performing assets and accruing loans and leases past due 90 days or more as of September 30, 2018 and December 31, 2017:~~

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

Table 19

September 30,

December 31,

(dollars in thousands)

2018

2017

Non-Performing Assets

Non-Accrual Loans and Leases

Commercial Loans:

Commercial and industrial

$
481

$
2,932

Real estate - commercial

2,786

1,786

Real estate - construction

2,001

—

Total Commercial Loans

5,268

4,718

Residential

5,678

5,107

Total Non-Accrual Loans and Leases

10,946

9,825

Other Real Estate Owned

362

329

Total Non-Performing Assets

$
11,308

$
10,154

Accruing Loans and Leases Past Due 90 Days or More

Commercial Loans:

Commercial and industrial

$
141

$
220

Real estate - commercial

172

1,400

Total Commercial Loans

313

1,620

Residential

2,788

1,360

Consumer

2,813

1,394

Total Accruing Loans and Leases Past Due 90 Days or More

$
5,914

$
4,374

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

28,608

34,130

Total Loans and Leases

$
12,600,464

$
12,277,369

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

0.09
%

0.08
%
Ratio of Non-Performing Assets to Total Loans and Leases and Other Real Estate Owned

0.09
%

0.08
%
Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More to Total Loans and Leases and Other Real Estate Owned

0.14
%

0.12
%

~~Table 20 presents the activity in Non-Performing Assets (“NPAs”) for the nine months ended September 30, 2018:~~

Non-Performing Assets

Table 20

Nine Months Ended September 30,
(dollars in thousands)

2018
Balance at beginning of period

$
10,154
Additions

7,051
Reductions

Payments

(3,919)
Return to accrual status

(1,014)
Sales of other real estate owned

(329)
Charge-offs/write-downs

(635)
Total Reductions

(5,897)
Balance at End of Period

$
11,308

~~Table of Contents~~

Total NPAs were $11.3 million as of September 30, 2018, an increase of $1.2 million or 11% from December 31, 2017. The ratio of our NPAs to total loans and leases and other real estate owned was 0.09% as of September 30, 2018, an increase of one basis point from December 31, 2017. The increase in total NPAs was primarily due to a $2.0 million increase in construction loans and a $1.0 million increase in commercial real estate loans, partially offset by a $2.5 million decrease in commercial and industrial non-accrual loans.

The largest component of our NPAs continues to be residential real estate loans. The level of these NPAs can remain elevated due to a lengthy judicial foreclosure process in Hawaii. As of September 30, 2018, residential real estate non-accrual loans were $5.7 million, an increase of $0.6 million or 11% from December 31, 2017. As of September 30, 2018, our residential real estate non-accrual loans were comprised of 33 loans with a weighted average current loan-to-value (“LTV”) ratio of 72%.

Commercial and industrial non-accrual loans were $0.5 million as of September 30, 2018, a decrease of $2.5 million or 84% from December 31, 2017. All of our remaining commercial and industrial non-accrual loans were individually evaluated for impairment and we have already taken $0.1 million in charge-offs related to these loans.

Commercial real estate non-accrual loans were $2.8 million as of September 30, 2018, an increase of $1.0 million or 56% from December 31, 2017. This increase was attributable to the addition of a $1.1 million commercial real estate non-accrual loan for which the collateral value exceeds the outstanding balance. As result, no charge-offs have been taken on this loan.

Construction non-accrual loans were $2.0 million as of September 30, 2018, an increase of $2.0 million or 100% from December 31, 2017. This increase was primarily due to the addition of a $2.0 million construction non-accrual loan for which the collateral value exceeds the outstanding balance. As result, no charge-offs have been taken on this loan.

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. Other real estate owned was $0.4 million and $0.3 million as of September 30, 2018 and December 31, 2017, respectively, and was comprised of two residential real estate properties as of September 30, 2018 and one residential real estate property as of December 31, 2017.

As noted above, the increase in NPAs is primarily due to the addition of a construction loan and a commercial real estate loan to non-accrual status. However, NPAs continue to remain at relatively low levels due to strong general economic conditions in Hawaii, led by strong tourism and construction industries, low unemployment and a continued strong real estate market. We have also continued to remain diligent in our collection and recovery efforts and have continued to seek new lending opportunities while maintaining sound judgment and underwriting practices.

~~Loans and Leases Past Due 90 Days or More and Still Accruing Interest.~~ ~~Loans and leases in this category are 90 days or more past due, as to principal or interest, and are still accruing interest because they are well secured and in the process of collection.~~

Loans and leases past due 90 days or more and still accruing interest were $5.9 million as of September 30, 2018, an increase of $1.5 million or 35% as compared to December 31, 2017. Residential real estate loans and consumer loans that were past due 90 days or more and still accruing interest increased by $1.4 million each during the nine months ended September 30, 2018. The increase in loans that were past due 90 days or more and still accruing interest was primarily due to the timing of receipt of payments.

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

Impaired loans were $39.6 million and $45.3 million as of September 30, 2018 and December 31, 2017, respectively. These impaired loans had a related Allowance of $0.9 million and $0.5 million as of September 30, 2018 and December 31, 2017, respectively. The decrease in impaired loans during the nine months ended September 30, 2018 was primarily due to a net decrease of six commercial and industrial loans totaling $4.2 million and a net decrease of three

~~Table of Contents~~

commercial real estate loans totaling $2.3 million, partially offset by a net increase of one construction loan of $2.0 million. The impaired loan balance is further decreased by charge-offs and paydowns. As of September 30, 2018 and December 31, 2017, we recorded charge-offs of $0.8 million and $1.5 million, respectively, related to our total impaired loans. Our impaired loans are considered in management’s assessment of the overall adequacy of the Allowance.

If interest due on the balances of all non-accrual loans as of September 30, 2018 had been accrued under the original terms, approximately $0.2 million and $0.5 million in additional interest income would have been recorded during the three and nine months ended September 30, 2018, respectively, compared to nil and $0.2 million in additional interest income that would have been recorded for the same period in 2017, respectively. Actual interest income recorded on these loans was $0.5 million and $1.4 million, respectively, for the three and nine months ended September 30, 2018 compared to $0.5 million and $1.8 million, respectively, for the same period in 2017.

~~Loans Modified in a Troubled Debt Restructuring~~

~~Table 21 presents information on loans whose terms have been modified in a TDR as of September 30, 2018 and December 31, 2017:~~

Loans Modified in a Troubled Debt Restructuring

Table 21

September 30,

December 31,
(dollars in thousands)

2018

2017
Commercial and industrial

$
12,304

$
15,251
Real estate - commercial

4,864

8,850
Total commercial

17,168

24,101
Residential

12,714

12,394
Total

$
29,882

$
36,495

Loans modified in a TDR were $29.9 million as of September 30, 2018, a decrease of $6.6 million or 18% from December 31, 2017. This decrease was primarily due to the payoffs of six commercial and industrial loans of $3.2 million, one commercial real estate loan of $1.4 million and five residential real estate loans of $1.5 million along with decreases of other loans related to payments. As of September 30, 2018, $28.6 million or 96% of our loans modified in a TDR were performing in accordance with their modified contractual terms and were on accrual status.

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

~~Allowance for Loan and Lease Losses~~

~~Table of Contents~~

~~Table 22 presents an analysis of our Allowance for the periods indicated:~~

Allowance for Loan and Lease Losses

Table 22

Three Months Ended September 30,

Nine Months Ended September 30,

(dollars in thousands)

2018

2017

2018

2017

Balance at Beginning of Period

$
140,601

$
136,883

$
137,253

$
135,494

Loans and Leases Charged-Off

Commercial Loans:

Commercial and industrial

(303)

(408)

(778)

(1,338)

Lease financing

—

(1)

—

(147)

Total Commercial Loans

(303)

(409)

(778)

(1,485)

Residential

(125)

(293)

(159)

(315)

Consumer

(5,700)

(6,263)

(18,615)

(17,086)

Total Loans and Leases Charged-Off

(6,128)

(6,965)

(19,552)

(18,886)

Recoveries on Loans and Leases Previously Charged-Off

Commercial Loans:

Commercial and industrial

51

582

154

825

Real estate - commercial

21

336

175

468

Total Commercial Loans

72

918

329

1,293

Residential

442

139

684

610

Consumer

1,803

1,852

6,106

5,416

Total Recoveries on Loans and Leases Previously Charged-Off

2,317

2,909

7,119

7,319

Net Loans and Leases Charged-Off

(3,811)

(4,056)

(12,433)

(11,567)

Provision for Loan and Lease Losses

4,460

4,500

16,430

13,400

Balance at End of Period

$
141,250

$
137,327

$
141,250

$
137,327

Average Loans and Leases Outstanding

$
12,595,668

$
12,115,001

$
12,482,747

$
11,868,917

Ratio of Net Loans and Leases Charged-Off to Average Loans and Leases Outstanding (1)

0.12
%

0.13
%

0.13
%

0.13
%
Ratio of Allowance for Loan and Lease Losses to Loans and Leases Outstanding

1.12
%

1.13
%

1.12
%

1.13
%

~~(1)Annualized for the three and nine months ended September 30, 2018 and 2017.~~

Tables 23 and 24 present the allocation of the Allowance by loan and lease category, in both dollars and as a percentage of total loans and leases outstanding as of September 30, 2018 and December 31, 2017:

Allocation of the Allowance by Loan and Lease Category

Table 23

September 30,

December 31,
(dollars in thousands)

2018

2017
Commercial and industrial

$
33,436

$
34,006
Real estate - commercial

20,814

18,044
Real estate - construction

6,218

6,817
Lease financing

528

611
Total commercial

60,996

59,478
Residential

44,389

42,852
Consumer

33,993

31,249
Unallocated

1,872

3,674
Total Allowance for Loan and Lease Losses

$
141,250

$
137,253

Allocation of the Allowance by Loan and Lease Category (as a percentage of total loans and leases outstanding)
Table 24

September 30,

December 31,

2018

2017

Allocated

Loan category

Allocated

Loan category

Allowance as

as % of total

Allowance as

as % of total

% of loan or

loans and

% of loan or

loans and

lease category

leases

lease category

leases

Commercial and industrial

1.13
%
23.57
%
1.08
%
25.54
%
Real estate - commercial

0.72

22.95

0.68

21.73

Real estate - construction

1.01

4.86

1.08

5.16

Lease financing

0.33

1.28

0.37

1.34

Total commercial

0.92

52.66

0.90

53.77

Residential

1.03

34.23

1.05

33.31

Consumer

2.06

13.11

1.97

12.92

Total

1.12
%
100.00
%
1.12
%
100.00
%

~~Table of Contents~~

As of September 30, 2018, the Allowance was $141.3 million or 1.12% of total loans and leases outstanding, compared with an Allowance of $137.3 million or 1.12% of total loans and leases outstanding as of December 31, 2017. The level of the Allowance was commensurate with our stable credit risk profile, loan portfolio growth and composition and a strong Hawaii economy.

Net charge-offs of loans and leases were $3.8 million or 0.12% of total average loans and leases, on an annualized basis, for the three months ended September 30, 2018 compared to $4.0 million or 0.13% of total average loans and leases, on an annualized basis, for three months ended September 30, 2017. Net charge-offs in our commercial lending portfolio were $0.2 million for the three months ended September 30, 2018 compared to net recoveries of $0.5 million for the three months ended September 30, 2017. Net recoveries in our residential lending portfolio were $0.3 million for the three months ended September 30, 2018 compared to $0.2 million net charge-offs for the three months ended September 30, 2017. Net charge-offs in our consumer lending portfolio were $3.9 million and $4.4 million for the three months ended September 30, 2018 and 2017, 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.

Net charge-offs of loans and leases were $12.4 million or 0.13% of total average loans and leases, on an annualized basis, for the nine months ended September 30, 2018 compared to $11.6 million or 0.13% of total average loans and leases, on an annualized basis, for the nine months ended September 30, 2017. Net charge-offs in our commercial lending portfolio were $0.4 million for the nine months ended September 30, 2018 compared to net charge-offs of $0.2 million for the nine months ended September 30, 2017. Net recoveries in our residential lending portfolio were $0.5 million and $0.3 million for the nine months ended September 30, 2018 and 2017, respectively. Our net recovery position in this portfolio segment is largely attributable to rising real estate prices in Hawaii. Net charge-offs in our consumer lending portfolio were $12.5 million and $11.7 million for the nine months ended September 30, 2018 and 2017, respectively. Net charge-offs in our consumer portfolio segment include those related to credit card, automobile loans, installment loans and small business lines of credit and reflect the inherent risk associated with these loans.

As of September 30, 2018, the allocation of the Allowance to our commercial, residential and consumer loans was comparable to the respective allocations as of December 31, 2017. See “Note 4. Allowance for Loan and Lease Losses” contained in our unaudited interim consolidated financial statements for more information on the Allowance.

~~Goodwill~~

Goodwill was $995.5 million as of both September 30, 2018 and December 31, 2017. Our goodwill originated from the acquisition of BancWest by BNPP in December of 2001. Goodwill generated in that acquisition was recorded on the balance sheet of the Bank as a result of push down accounting treatment, and remains on our consolidated balance sheets. Goodwill is not amortized but is subject, at a minimum, to annual tests for impairment at a reporting unit level. Determining the amount of goodwill impairment, if any, includes assessing the current implied fair value of the reporting unit as if it were being acquired in a business combination and comparing it to the carrying amount of the reporting unit’s goodwill. There was no impairment in our goodwill for the three and nine months ended September 30, 2018. Future events that could cause a significant decline in our expected future cash flows or a significant adverse change in our business or the business climate may necessitate taking charges in future reporting periods related to the impairment of our goodwill.

~~Other Assets~~

Other assets were $436.3 million as of September 30, 2018, an increase of $81.0 million or 23% from December 31, 2017. This increase was primarily due to a $45.6 million increase in affordable housing and other tax credit investment partnership interests, a $26.2 million increase in prepaid expenses and a $16.0 million increase in FHLB Stock. This increase was partially offset by a $12.7 million decrease in our interest rate swap agreements.

~~Deposits~~

~~Table of Contents~~

~~Table 25 presents the composition of our deposits as of September 30, 2018 and December 31, 2017:~~

Deposits

Table 25

September 30,

December 31,
(dollars in thousands)

2018

2017
Demand

$
5,807,355

$
6,126,853
Savings

4,685,460

4,509,419
Money Market

2,905,959

2,801,968
Time(1)

3,290,499

4,173,882
Total Deposits

$
16,689,273

$
17,612,122

⁽¹⁾

~~Public time deposits were $1.2 billion as of September 30, 2018, a decrease of $788.3 million or 40% as compared to December 31, 2017.~~

Total deposits were $16.7 billion as of September 30, 2018, a decrease of $922.8 million or 5% from December 31, 2017. The decrease in deposit balances stemmed from an $883.4 million or 21% decrease in time deposit balances, primarily from a $788.3 million decrease in public time deposits, and a $319.5 million or 5% decrease in demand deposit balances, primarily due to a $324.7 million decrease in business analyzed deposit accounts due to higher earning credit rates. This was partially offset by a $176.0 million or 4% increase in savings deposit balances and a $104.0 million or 4% increase in money market deposit balances.

~~Short-term and Long-term Borrowings~~

Short-term borrowings were $30.0 million as of September 30, 2018, an increase of $30.0 million from December 31, 2017. This increase was due to federal funds purchased, totaling $30.0 million with a weighted-average interest rate of 2.25%.

~~Table 26 below provides selected information for short-term borrowings for the nine months ended September 30, 2018 and 2017:~~

Short-term borrowings

Table 26

Nine Months Ended September 30,
(dollars in thousands)

2018

2017

Federal funds purchased:

Weighted-average interest rate at September 30,

2.25
%

—
%
Highest month-end balance

$
30,000

$
6,000

Average outstanding balance

$
6,073

$
927

Weighted-average interest rate paid

1.26
%

0.64
%

Long-term borrowings were $400.0 million as of September 30, 2018, an increase of $400.0 million from December 31, 2017. This increase was due to issuances of FHLB fixed-rate advances totaling $400.0 million with a weighted average interest rate of 2.84% and maturity dates in 2020. As of September 30, 2018, the available remaining borrowing capacity with the FHLB was $1.7 billion. The FHLB fixed rate advances and remaining borrowing capacity were secured by residential real estate loan collateral as of September 30, 2018.

~~Pension and Postretirement Plan Obligations~~

We have a noncontributory qualified defined benefit pension plan, an unfunded supplemental executive retirement plan, a directors’ retirement plan (a non-qualified pension plan for eligible directors) and a postretirement benefit plan providing life insurance and healthcare benefits that we offer to our directors and employees, as applicable. The noncontributory qualified defined benefit pension plan, the unfunded supplemental executive retirement plan and the directors’ retirement plan are all frozen plans. 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 $122.2 million as of September 30, 2018, an increase of $2.0 million or 2% from December 31, 2017. This increase was primarily due to net periodic benefit costs for the nine months ended September 30, 2018 of $8.0 million, partially offset by payments of $6.1 million.

~~Table of Contents~~

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

~~Foreign Activities~~

Cross-border outstandings are defined as loans (including accrued interest), acceptances, interest-bearing deposits with other banks, other interest-bearing investments and any other monetary assets which are denominated in dollars or other non-local currency. As of September 30, 2018, aggregate cross-border outstandings in countries which amounted to 0.75% to 1% of our total consolidated assets were approximately $184.3 million to Japan. As of December 31, 2017, aggregate cross-border outstandings in countries which amounted to 0.75% to 1% of our total consolidated assets were approximately $177.3 million to Japan. There were no cross-border outstandings in excess of 1% of our total consolidated assets as of both September 30, 2018 and December 31, 2017.

~~Capital~~

In July 2013, the federal bank regulators approved final rules implementing the Basel Committee on Banking Supervision’s final capital framework for strengthening international capital standards (“Basel III”) and various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Capital Rules”). The Capital Rules became effective on January 1, 2015 (subject to a phase-in period for certain provisions). The Capital Rules, among other things, (i) introduced a capital measure called ‘‘Common Equity Tier 1’’ (‘‘CET1’’) capital, (ii) specified that Tier 1 capital consists of CET1 capital and ‘‘Additional Tier 1 capital’’ instruments meeting specified requirements, (iii) defined CET1 capital narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 capital and not to the other components of capital and (iv) expanded the scope of the deductions/adjustments to capital as compared to prior regulations.

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

~~4.5% CET1 capital to risk-weighted assets,~~

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

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

~~4.0% Tier 1 capital to average quarterly assets.~~

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

~~Table of Contents~~

As of September 30, 2018, our capital levels remained characterized as “well capitalized” under the Capital Rules. Our regulatory capital ratios, calculated in accordance with the Capital Rules, are presented in Table 27 below. There have been no conditions or events since September 30, 2018 that management believes have changed either the Company’s or the Bank’s capital classifications.

Regulatory Capital

Table 27

September 30,

December 31,

(dollars in thousands)

2018

2017

Stockholders' Equity

$
2,423,462

$
2,532,551

Less:

Goodwill

995,492

995,492

Accumulated other comprehensive loss, net

(204,699)

(96,383)

Common Equity Tier 1 Capital and Tier 1 Capital

$
1,632,669

$
1,633,442

Add:

Allowable Reserve for Loan and Lease Losses and Unfunded Commitments

141,850

137,853

Total Capital

$
1,774,519

$
1,771,295

Risk-Weighted Assets

$
13,506,595

$
13,120,542

Key Regulatory Capital Ratios

Common Equity Tier 1 Capital Ratio

12.09
%

12.45
%
Tier 1 Capital Ratio

12.09
%

12.45
%
Total Capital Ratio

13.14
%

13.50
%
Tier 1 Leverage Ratio

8.42
%

8.52
%

Total stockholders’ equity was $2.4 billion as of September 30, 2018, a decrease of $109.1 million or 4% from December 31, 2017. The decrease in stockholders’ equity was primarily due to an increase of $131.8 million in treasury stock related to our share repurchases ~~from BWC concurrent with a secondary offering, dividends declared~~are influenced by various internal and paid to the Company’s stockholders of $98.7 million for the nine months ended September 30, 2018 and an increase of $88.2 million in accumulated other comprehensive loss, net of tax, primarily due to higher unrealized losses on our investment securities due to rising interest rates. This was partially offset by earnings for the period of $204.4 million.

In October 2018, the Company’s Board of Directors declared a quarterly cash dividend of $0.24 per share on our outstanding shares. The dividend will be paid on December 7, 2018 to shareholders of record at the close of business on November 26, 2018.

As previously noted, we reclassified a credit balance of $20.1 million from accumulated other comprehensive loss to retained earnings on January 1, 2018 based on our prospective adoption of ASU No. 2018-02, ~~Income Statement – Reporting Comprehensive Income (Topic 220), Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.~~ If ASU No. 2018-02 had been adopted retrospectively, the CET1 Capital Ratio and Tier 1 Capital Ratio would have both been 12.60%, the Total Capital Ratio would have been 13.65% and the Tier 1 Leverage Ratio would have been 8.62% as of December 31, 2017.

~~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. A VIE is a legal entity that lacks the ability to financially support its activities or whose equity investors lack the ability to control its activities or absorb profits and losses proportionately with their investment in the entity. The primary beneficiary consolidates the VIE. Based on our analysis, we have determined that the Company is not the primary beneficiary of these entities. As a result, we do not consolidate these VIEs.

~~Guarantees~~

Table of Contents

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

~~Table of Contents~~

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, 2018 and December 31, 2017, the unpaid principal balance of our portfolio of residential mortgage loans sold was $2.7 billion and $2.3 billion, respectively. The agreements under which we sell residential mortgage loans require delivery of various documents to the investor or its document custodian. Although these loans are primarily sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred if a loan review reveals that underwriting and documentation standards were potentially not met in the origination of those loans. Upon receipt of a repurchase request, we work with investors to arrive at a mutually agreeable resolution. Repurchase demands are typically reviewed on an individual loan by loan basis to validate the claims made by the investor to determine if a contractually required repurchase event has occurred. We manage the risk associated with potential repurchases or other forms of settlement through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards. For the nine months ended September 30, 2018, there was one repurchase of a residential mortgage loan of $0.7 million and there were no pending repurchase requests.Exhibit Number

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, 2018, we had no repurchase requests related to loan servicing activities, nor were there any pending repurchase requests as of September 30, 2018.

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, 2018, 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, 2018, 99% of our residential mortgage loans serviced for investors were current. We maintain ongoing communications with investors and continue to evaluate this exposure by monitoring the level and number of repurchase requests as well as the delinquency rates in loans sold to investors.31.1

~~Contractual Obligations~~

Our contractual obligations have not changed materially since previously reported as of December 31, 2017. However, as noted above, in connection with our transition to a stand-alone public company and our continued separation from BNPP, we expect to incur higher costs, resulting in higher purchase obligations, in future periods from higher pricing of services by third-party vendors whose future contracts with us do not reflect BOW’s volumes or the benefits of BNPP bargaining power. Currently, we are not able to reasonably estimate the future amount and timing of these higher purchase obligations.

~~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, 2018, see “Note 1. Organization and Basis of Presentation — Recent Accounting Pronouncements” to the unaudited interim consolidated financial statements for more information.

~~Table~~Certification of ~~Contents~~

~~Risk Governance and Quantitative and Qualitative Disclosures About Market Risk~~

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

~~Credit Risk~~

Credit risk is the risk that borrowers or counterparties will be unable or unwilling to repay their obligations in accordance with the underlying contractual terms. We manage and control credit risk in the loan and lease portfolio by adhering to well-defined underwriting criteria and account administration standards established by management. Written credit policies document underwriting standards, approval levels, exposure limits and other limits or standards deemed necessary and prudent. Portfolio diversification at the obligor, industry, product, and/or geographic location levels is actively managed to mitigate concentration risk. In addition, credit risk management also includes an independent credit review process that assesses compliance with commercial, real estate and consumer credit policies, risk ratings and other critical credit information. In addition to implementing risk management practices that are based upon established and sound lending practices, we adhere to sound credit principles. We understand and evaluate our customers’ borrowing needs and capacity to repay, in conjunction with their character and history.

~~Management has identified three categories of loans that we use to develop our systematic methodology to determine the Allowance: commercial, residential real estate and consumer.~~

Commercial lending consists of four distinct classes based on characteristics relating to the borrower, transaction and collateral. These classes are: commercial and industrial, commercial real estate, construction and lease financing. Commercial and industrial loans are primarily for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes by medium to larger Hawaii based corporations, as well as U.S. mainland and international companies. Commercial and industrial loans are typically secured by non-real estate assets whereby the collateral is trading assets, enterprise value or inventory. As with many of our customers, our commercial and industrial loan customers are heavily dependent on tourism, government expenditures and real estate values. Commercial real estate loans are secured by real estate, including but not limited to structures and facilities to support activities designated as retail, health care, general office space, warehouse and industrial space. Our bank’s underwriting policy generally requires that net cash flows from the property be sufficient to service the debt while still maintaining an appropriate amount of reserves. Commercial real estate loans in Hawaii are characterized by having a limited supply of real estate at commercially attractive locations, long delivery time frames for development and high interest rate sensitivity. Our construction lending portfolio consists primarily of land loans, single family and condominium development loans. Financing of construction loans is subject to a high degree of credit risk given the long delivery time frames for such projects. Construction lending activities are underwritten on a project financing basis whereby the cash flows or lease rents from the underlying real estate collateral or the sale of the finished inventory is the primary source of repayment. Market feasibility analysis is typically performed by assessing market comparables, market conditions and demand in the specific lending area and general community. We require presales of finished inventory prior to loan funding. However, because this analysis is typically performed on a forward looking basis, real estate construction projects typically present a higher risk profile in our lending activities. Lease financing activities include commercial single investor leases and leveraged leases used to purchase items ranging from computer equipment to transportation equipment. Underwriting of new leasing arrangements typically includes analyzing customer cash flows, evaluating secondary sources of repayment such as the value of the leased asset, the guarantors’ net cash flows as well as other credit enhancements provided by the lessee.

Residential real estate is not further categorized into classes, but consists of loans secured by 1-4 family residential properties and home equity lines of credit and loans. 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. Residential mortgage loan production is added to our loan portfolio or is sold in the secondary market, based on management’s evaluation of our liquidity, capital and loan portfolio mix as well as market conditions. Changes in interest rates, the economic environment and other market factors have impacted, and will likely continue to impact, the marketability and value of collateral and the financial condition of our borrowers which impacts the level of credit risk inherent in this portfolio, although we remain a supply constrained housing environment in Hawaii. Geographic concentrations exist for this portfolio as nearly all residential mortgage loans and home equity lines of credit and loans outstanding are for residences located in Hawaii, Guam or Saipan.

~~Table of Contents~~

These island locales are susceptible to a wide array of potential natural disasters including, but not limited to, hurricanes, floods, volcanic eruptions, tsunamis and earthquakes. We offer fixed and variable rate home equity loans, with variable rate loans underwritten at fully-indexed interest rates. Our procedures for underwriting home equity loans 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 credit scores.

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, 2018 and December 31, 2017, we did not have material exposures to customers in the oil, gas and energy industries.

~~Market Risk~~

~~Market Risk Measurement~~

We primarily use net interest income simulation analysis to measure and analyze interest rate risk. We run various hypothetical interest rate scenarios on a quarterly basis and compare these results against a measured base case scenario. Our net interest income simulation analysis incorporates various assumptions, which we believe are reasonable but which may have a significant impact on results. These assumptions include: (1) the timing of changes in interest rates, (2) shifts

~~Table of Contents~~

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, (5) varying loan prepayment speeds for different interest rate scenarios and (6) overall increase or decrease in the size of the balance sheet and product mix of assets and liabilities. 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 28 presents, for the twelve months subsequent to September 30, 2018 and December 31, 2017, an estimate of the change in net interest income that would result from an immediate change in market interest rates, moving in a parallel fashion over 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: 1) a dynamic forecast, incorporating expected changes in the balance sheet, and 2) a static forecast, where the balance sheet as of September 30, 2018 and December 31, 2017 is held constant.

Net Interest Income Sensitivity Profile - Estimated Percentage Change Over 12 Months

Table 28

Dynamic Forecast

Static Forecast

Dynamic Forecast

Static Forecast

As of September 30, 2018

As of December 31, 2017

Immediate Change in Interest Rates (basis points)

+200

7.1
%
9.9
%

6.3
%
10.9
%
+100

4.2

5.0

3.8

5.5

(100)

(5.3)

(5.3)

(4.8)

(4.8)

The table above shows the effects of a simulation which estimates the effect of an immediate and sustained parallel shift in the yield curve of −100, +100 and +200 basis points in market interest rates over a twelve month period on our net interest income. One declining interest rate scenario and two rising interest rate scenarios were selected as shown in the table and net interest income was calculated and compared to the base case scenario, as described above.

Under the dynamic balance sheet forecasts, the change in net interest income from the base case scenario as of September 30, 2018 was slightly more sensitive as compared to similar projections made as of December 31, 2017. Under the static balance sheet forecasts, larger sensitivities are generally experienced in these scenarios as expected changes in the deposit mix are not reflected in the forecast over the next twelve months.

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 allows 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. Nonparallel yield curve shifts such as a flattening or steepening of the yield curve or changes in interest rate spreads would also cause our net interest income to be different from that depicted. An increasing interest rate environment could reduce projected net interest income if deposits and other short-term liabilities re-price faster than expected or faster than our assets re-price. Actual results could differ from those projected if we grow assets and liabilities faster or slower than estimated, if we experience a net outflow of deposits or if our mix of assets and liabilities otherwise changes. For example, while we maintain relatively large cash balances with the FRB, 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

~~Table of Contents~~

~~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~~

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 13. 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.~~

~~Operational Risk~~

~~Table of Contents~~

~~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~~Pursuant to Rule 13a-14(a) 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~~Amended, Adopted Pursuant to Section 302 of ~~September 30, 2018. 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~~Sarbanes-Oxley 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 andof 2002

31.2

Certification of 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, 2018.~~

~~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, 2018 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

~~PART II – OTHER INFORMATION~~

~~ITEM 1. LEGAL PROCEEDINGS~~

The Company operates in a highly regulated environment. From time to time, the Company is party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows, or capital levels. For additional information, see the discussion related to contingencies in “Note 14. Commitments and Contingent Liabilities” in our unaudited interim consolidated financial statements under “Part I, Item 1. Financial Statements.”

~~ITEM 1A. 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, 2017.~~

~~Table of Contents~~

~~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, 2018:~~

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

Purchased(1)

per Share

Programs

Plans or Programs
July 1, 2018 through July 31, 2018

-

$
-

-

$
-
August 1, 2018 through August 31, 2018

1,801,801

27.75

-

-
September 1, 2018 through September 30, 2018

-

-

-

-
Total

1,801,801

$
27.75

-

⁽¹⁾

On July 26, 2018, we entered into a Share Repurchase Agreement (the “Share Repurchase Agreement”) with BNPP and BWC, pursuant to which we acquired from BWC 1,801,801 shares of our common stock, par value $0.01 per share (the “Direct Share Repurchase”). Pursuant to the Share Repurchase Agreement, the per share purchase price paid by the Company was equal to $27.75, the same per share purchase price paid by the underwriter to BWC in connection with a registered public offering of shares of the common stock of the Company by BWC completed on August 1, 2018. The Direct Share Repurchase was completed on August 1, 2018 for an aggregate purchase price of approximately $50.0 million.

~~ITEM 5. OTHER INFORMATION~~

~~Information Required~~ Pursuant to ~~Section 13(r) of the Securities Exchange Act~~

~~Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012 amended Section 13~~Rule 13a-14(a) of the Securities Exchange Act of 1934, ~~(the “Exchange Act”)~~as Amended, Adopted Pursuant to add new subsection (r), which requires disclosure if, during the reporting period, the issuer or any of its affiliates has knowingly engaged in certain specified activities involving Iran or other persons targeted by the United States sanctions programs related to terrorism (Executive Order 13224) or the proliferation of weapons of mass destruction (Executive Order 13382). Disclosure is generally required even if the activities were conducted outside the United States by non-U.S. entities in compliance with applicable law. First Hawaiian, Inc. and the Bank (the “Company”) have not engaged in any activities that would require reporting under Section ~~13(r)~~302 of the ~~Exchange Act. However, the Company is controlled by BNP Paribas and under common control with BNP Paribas’ affiliates (collectively “BNPP”). To help the Company comply with~~Sarbanes-Oxley Act of 2002

32.1

Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section ~~13(r)~~1350, as Adopted Pursuant to Section 906 of the ~~Exchange~~Sarbanes-Oxley Act ~~BNPP has requested relevant information from its affiliates globally, and it has provided~~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 ~~following information to~~Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document – the ~~Company:~~

BNPP is committed to economic sanctions compliance, the prevention of money laundering and the fight against corruption and terrorist financing. As part of these efforts, BNPP has adopted and maintains a risk-based compliance program reasonably designed to ensure conformity with applicable anti-money laundering, anti-corruption, counter-terrorist financing, and sanctions laws and regulationsinstance document does not appear in the ~~territories in which BNPP operates.~~

~~Legacy agreements:~~ InInteractive Data File because its XBRL tags are embedded within the past, BNPP has issued and participates in legacy guarantees and other financing arrangements that supported various projects, including the construction of petrochemical plants in Iran. Some of these financing arrangements had counterparties that were entities or instrumentalities of the Government of Iran, involved Iranian banks that were subsequently sanctioned pursuant to Executive Orders 13224 or 13382, or involved a Syrian entity that was subsequently sanctioned pursuant to Executive Order 13382. BNPP continues to have obligations under these arrangements and has made efforts to close the positions which remain outstanding in accordance with applicable law. BNPP received gross revenues of approximately EUR 0.5 million and EUR 1.0 million during the three and nine months ended September 30, 2018, respectively, in connection with these projects, with a net profit of less than that amount, which were mainly comprised of repayments and fees on those legacy guarantees and other financing arrangements.Inline XBRL document

~~Other relationships with Iranian banks:~~ Until August 1, 2017, BNPP maintained a safe deposit box in Italy for the Rome branch of an Iranian government-owned bank. There was no gross revenue to BNPP during the reporting period for this activity.

101.SCH

~~Clearing systems:~~ As part of its operations and in conformance with applicable law, BNPP participates in various local clearing and settlement exchange systems. Iranian government-owned banks also participate in some of these clearing systems and may act as counterparty banks. BNPP intends to continue to participate in the local clearing and settlementInline XBRL Taxonomy Extension Schema Document

101.CAL

~~Table of Contents~~Inline XBRL Taxonomy Extension Calculation Linkbase Document

~~exchange systems in various countries. There was no measurable gross revenue or net profit generated by this activity for BNPP during the reporting period.~~

~~Restricted accounts and transactions:~~ BNPP maintains various accounts that are blocked or restricted for sanctions-related reasons, for which no activity took place during the reporting period, except for the crediting of interest or the deduction of standard account charges, in accordance with applicable law. During the fourth quarter of 2016, BNPP froze payments where required under relevant sanctions programs. BNPP will continue to hold these assets in a blocked or restricted status, as applicable laws may require or permit.101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

88101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

~~Table of Contents~~

~~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~~

~~10.1~~	~~Offer Letter, dated as of July 25, 2018, from Robert S. Harrison on behalf of First Hawaiian Bank to Ravi Mallela~~

~~10.2~~	Share Repurchase Agreement, dated as of July 26, 2018, among BNP Paribas, BancWest Corporation and the Company (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by First Hawaiian, Inc. on August 1, 2018 (File No. 001-14585))

~~10.3~~	Amendment No. 1 to the Stockholder Agreement, dated as of August 1, 2018, between BNP Paribas and the Company (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by First Hawaiian, Inc. on August 1, 2018 (File No. 001-14585))

~~10.4~~	~~Form of First Hawaiian, Inc. 2016 Omnibus Incentive Compensation Plan Restricted Share Unit Award Agreement~~

~~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~~

~~101.SCH~~	~~XBRL Taxonomy Extension Schema Document~~

~~101.CAL~~	~~XBRL Taxonomy Extension Calculation Linkbase Document~~

~~101.LAB~~	~~XBRL Taxonomy Extension Label Linkbase Document~~

~~101.PRE~~	~~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)

~~Table of Contents~~

~~Signatures~~

Table of Contents

Signatures

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

Date: October 24, 2019

First Hawaiian, Inc.

By:

/s/ Robert S. Harrison

Robert S. Harrison

Chairman of the ~~Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.~~


~~Date: October 25, 2018~~		~~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)



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


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, ~~2018~~2019 and ~~2017~~2018			2
		Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018			3
		Consolidated Balance Sheets as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018			4
		Consolidated Statements of Stockholders' Equity for the three and nine months ended September 30, ~~2018~~2019 and ~~2017~~2018			5
		Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2018~~2019 and ~~2017~~2018			6 7
		Notes to Consolidated Financial Statements (unaudited)			7 8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			47 49
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk			86 90
	Item 4.	Controls and Procedures			86 90
Part II Other Information					86 90
	Item 1.	Legal Proceedings			86 90
	Item 1A.	Risk Factors			86 90
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			87 91
	Item 5.6.	~~Other Information~~Exhibits			87 92
	~~Item 6.~~Exhibit Index				92
	~~Exhibits~~Signatures			89
	~~Exhibit Index~~	93	89
	~~Signatures~~			90


	September 30, 2018

											September 30, 2019
(dollars in thousands)	Residential		Consumer		Consumer - Auto		Credit Cards		Total		Residential Mortgage		Home Equity Line		Consumer		Consumer - Auto		Credit Cards		Total
Performing	$	4,297,918	$	235,072	$	1,049,219	$	325,317	$	5,907,526	$	3,663,274	$	910,032	$	230,849	$	1,029,124	$	343,814	$	6,177,093
Non-performing and delinquent		15,571		5,505		33,082		3,682		57,840		8,150		6,074		6,032		22,242		5,488		47,986
Total	$	4,313,489	$	240,577	$	1,082,301	$	328,999	$	5,965,366	$	3,671,424	$	916,106	$	236,881	$	1,051,366	$	349,302	$	6,225,079


	December 31, 2017

											December 31, 2018
(dollars in thousands)	Residential		Consumer		Consumer - Auto		Credit Cards		Total		Residential Mortgage		Home Equity Line		Consumer		Consumer - Auto		Credit Cards		Total
Performing	$	4,073,834	$	231,023	$	1,001,085	$	324,781	$	5,630,723	$	3,519,172	$	903,284	$	234,458	$	1,044,393	$	339,162	$	6,040,469
Non-performing and delinquent		16,219		3,335		22,612		3,640		45,806		7,929		9,233		5,448		33,739		5,304		61,653
Total	$	4,090,053	$	234,358	$	1,023,697	$	328,421	$	5,676,529	$	3,527,101	$	912,517	$	239,906	$	1,078,132	$	344,466	$	6,102,122


	September 30, 2018							December 31, 2017
						Weighted							Weighted
	Range					Average		Range					Average

															September 30, 2019							December 31, 2018
																				Weighted							Weighted
															Range					Average		Range					Average
Conditional prepayment rate	8.09	%	-	19.94	%	8.59	%	8.53	%	-	19.63	%	9.04	%	12.41	%	-	21.77	%	12.61	%	7.86	%	-	19.26	%	8.31	%
Life in years (of the MSR)	3.35		-	7.61		7.12		3.29		-	7.15		6.76		2.13		-	5.79		5.51		3.43		-	7.68		7.19
Weighted-average coupon rate	3.97	%	-	6.73	%	4.02	%	3.97	%	-	6.79	%	4.04	%	3.97	%	-	7.31	%	4.02	%	3.97	%	-	6.70	%	4.02	%
Discount rate	10.00	%	-	10.02	%	10.00	%	10.50	%	-	10.52	%	10.50	%	10.00	%	-	10.01	%	10.00	%	10.00	%	-	10.02	%	10.00	%


								Accumulated
				Additional				Other
	Common Stock			Paid-In		Retained		Comprehensive		Treasury
(dollars in thousands, except share amounts)	Shares	Amount		Capital		Earnings		Loss		Stock		Total
Balance as of December 31, 2016	139,530,654	$	1,395	$	2,484,251	$	78,850	$	(88,011)	$	—	$	2,476,485
Net income	—		—		—		171,998		—		—		171,998
Cash dividends declared ($0.66 per share)	—		—		—		(92,101)		—		—		(92,101)
Common stock issued under Employee Stock Purchase Plan	15,961		—		528		—		—		—		528
Equity-based awards	39,667		1		4,494		(444)		—		—		4,051
Other comprehensive income, net of tax	—		—		—		—		20,897		—		20,897
Balance as of September 30, 2017	139,586,282	$	1,396	$	2,489,273	$	158,303	$	(67,114)	$	—	$	2,581,858

Balance as of December 31, 2017	139,588,782	$	1,396	$	2,488,643	$	139,177	$	(96,383)	$	(282)	$	2,532,551
Net income	—		—		—		204,399		—		—		204,399
Cash dividends declared ($0.72 per share)	—		—		—		(98,666)		—		—		(98,666)
Common stock issued under Employee Stock Purchase Plan	12,341		—		342		—		—		—		342
Equity-based awards	42,475		1		5,451		(515)		—		(53)		4,884
Common stock repurchased	(4,769,870)		—		—		—		—		(131,800)		(131,800)
Adoption of Accounting Standards Update No. 2018-02	—		—		—		20,068		(20,068)		—		—
Other comprehensive loss, net of tax	—		—		—		—		(88,248)		—		(88,248)
Balance as of September 30, 2018	134,873,728	$	1,397	$	2,494,436	$	264,463	$	(204,699)	$	(132,135)	$	2,423,462


					First Hawaiian				Minimum		Well-
	First Hawaiian, Inc.				Bank				Capital		Capitalized
(dollars in thousands)	Amount		Ratio		Amount		Ratio		Ratio(1)		Ratio(1)
September 30, 2018:
Common equity tier 1 capital to risk-weighted assets	$	1,632,669	12.09	%	$	1,629,109	12.06	%	4.50	%	6.50	%
Tier 1 capital to risk-weighted assets		1,632,669	12.09	%		1,629,109	12.06	%	6.00	%	8.00	%
Total capital to risk-weighted assets		1,774,519	13.14	%		1,770,959	13.11	%	8.00	%	10.00	%
Tier 1 capital to average assets (leverage ratio)		1,632,669	8.42	%		1,629,109	8.41	%	4.00	%	5.00	%

December 31, 2017:
Common equity tier 1 capital to risk-weighted assets	$	1,633,442	12.45	%	$	1,623,455	12.37	%	4.50	%	6.50	%
Tier 1 capital to risk-weighted assets		1,633,442	12.45	%		1,623,455	12.37	%	6.00	%	8.00	%
Total capital to risk-weighted assets		1,771,295	13.50	%		1,761,308	13.42	%	8.00	%	10.00	%
Tier 1 capital to average assets (leverage ratio)		1,633,442	8.52	%		1,623,455	8.47	%	4.00	%	5.00	%


	September 30,			December 31,
Capital Ratios:	2018			2017
Common Equity Tier 1 Capital Ratio		12.09	%		12.45	%
Tier 1 Capital Ratio		12.09	%		12.45	%
Total Capital Ratio		13.14	%		13.50	%
Tier 1 Leverage Ratio		8.42	%		8.52	%
Total stockholders' equity to total assets		12.13	%		12.32	%
Tangible stockholders' equity to tangible assets (non-GAAP)(12)		7.52	%		7.86	%


	As of			As of
	September 30,			December 31,
	2018			2017
Balance Sheet Data:
Total stockholders' equity	$	2,423,462		$	2,532,551
Less: goodwill		995,492			995,492
Tangible stockholders' equity	$	1,427,970		$	1,537,059

Total assets	$	19,983,838		$	20,549,461
Less: goodwill		995,492			995,492
Tangible assets	$	18,988,346		$	19,553,969

Shares outstanding		134,873,728			139,588,782

Total stockholders' equity to total assets		12.13	%		12.32	%
Tangible stockholders' equity to tangible assets (non-GAAP)		7.52	%		7.86	%

Book value per share	$	17.97		$	18.14
Tangible book value per share (non-GAAP)	$	10.59		$	11.01


Average Balances and Interest Rates											Table 4
	Three Months Ended						Three Months Ended
	September 30, 2018						September 30, 2017
	Average		Income/		Yield/		Average		Income/			Yield/
(dollars in millions)	Balance		Expense		Rate		Balance		Expense			Rate
Earning Assets
Interest-Bearing Deposits in Other Banks	$	656.7	$	3.3	1.99	%	$	597.5	$	2.0		1.30	%
Available-for-Sale Investment Securities		4,737.3		25.2	2.11			5,124.9		24.2		1.88
Loans Held for Sale		1.8		—	3.83			0.1		—		3.62
Loans and Leases (1)
Commercial and industrial		3,019.9		31.0	4.08			3,276.4		27.3		3.31
Real estate - commercial		2,975.3		31.0	4.13			2,696.4		25.1		3.69
Real estate - construction		629.5		6.7	4.20			570.6		5.1		3.54
Real estate - residential		4,159.0		43.1	4.11			3,846.8		39.2		4.04
Consumer		1,649.7		22.4	5.39			1,546.9		21.0		5.39
Lease financing		162.3		1.2	3.00			177.9		1.3		2.91
Total Loans and Leases		12,595.7		135.4	4.26			12,115.0		119.0		3.90
Other Earning Assets		50.0		0.2	1.29			29.5		0.1		1.22
Total Earning Assets (2)		18,041.5		164.1	3.61			17,867.0		145.3		3.23
Cash and Due from Banks		336.5						324.0
Other Assets		2,013.5						1,918.1
Total Assets	$	20,391.5					$	20,109.1

Interest-Bearing Liabilities
Interest-Bearing Deposits
Savings	$	4,727.2	$	3.3	0.28	%	$	4,505.1	$	1.1		0.10	%
Money Market		2,871.0		4.6	0.63			2,607.7		0.9		0.13
Time		3,705.7		12.3	1.32			4,208.0		10.0		0.94
Total Interest-Bearing Deposits		11,303.9		20.2	0.71			11,320.8		12.0		0.42
Short-Term Borrowings		3.3		—	1.30			0.8		—		0.91
Long-Term Borrowings		358.7		2.6	2.85			—		—		—
Total Interest-Bearing Liabilities		11,665.9		22.8	0.78			11,321.6		12.0		0.42
Net Interest Income			$	141.3					$	133.3
Interest Rate Spread					2.83	%						2.81	%
Net Interest Margin					3.11	%						2.96	%
Noninterest-Bearing Demand Deposits		5,854.9						5,844.6
Other Liabilities		442.8						378.3
Stockholders' Equity		2,427.9						2,564.6
Total Liabilities and Stockholders' Equity	$	20,391.5					$	20,109.1


Analysis of Change in Net Interest Income						Table 5
	Three Months Ended September 30, 2018
	Compared to September 30, 2017
(dollars in millions)	Volume		Rate		Total (1)
Change in Interest Income:
Interest-Bearing Deposits in Other Banks	$	0.2	$	1.1	$	1.3
Available-for-Sale Investment Securities		(1.9)		2.9		1.0
Loans and Leases
Commercial and industrial		(2.3)		6.0		3.7
Real estate - commercial		2.7		3.2		5.9
Real estate - construction		0.6		1.0		1.6
Real estate - residential		3.3		0.6		3.9
Consumer		1.4		—		1.4
Lease financing		(0.1)		—		(0.1)
Total Loans and Leases		5.6		10.8		16.4
Other Earning Assets		0.1		—		0.1
Total Change in Interest Income		4.0		14.8		18.8

Change in Interest Expense:
Interest-Bearing Deposits
Savings		0.1		2.1		2.2
Money Market		0.1		3.6		3.7
Time		(1.3)		3.6		2.3
Total Interest-Bearing Deposits		(1.1)		9.3		8.2
Long-term Borrowings		2.6		—		2.6
Total Change in Interest Expense		1.5		9.3		10.8
Change in Net Interest Income	$	2.5	$	5.5	$	8.0


Average Balances and Interest Rates												Table 6
	Nine Months Ended							Nine Months Ended
	September 30, 2018							September 30, 2017
	Average		Income/		Yield/			Average		Income/			Yield/
(dollars in millions)	Balance		Expense		Rate			Balance		Expense			Rate
Earning Assets
Interest-Bearing Deposits in Other Banks	$	518.4	$	6.9		1.77	%	$	516.8	$	4.0		1.02	%
Available-for-Sale Investment Securities		4,951.4		81.6		2.20			5,189.7		75.7		1.95
Loans Held for Sale		1.3		—		3.60			—		—		—
Loans and Leases(1)
Commercial and industrial		3,100.1		89.2		3.85			3,263.3		77.3		3.17
Real estate - commercial		2,886.7		86.3		4.00			2,606.1		71.1		3.65
Real estate - construction		623.9		18.6		4.00			514.1		13.1		3.41
Real estate - residential		4,085.7		126.0		4.12			3,784.5		115.5		4.08
Consumer		1,625.0		65.5		5.38			1,528.8		61.8		5.41
Lease financing		161.3		3.6		2.98			172.1		3.6		2.84
Total Loans and Leases		12,482.7		389.2		4.17			11,868.9		342.4		3.86
Other Earning Assets		28.6		0.3		1.58			30.0		0.1		0.62
Total Earning Assets(2)		17,982.4		478.0		3.55			17,605.4		422.2		3.21
Cash and Due from Banks		324.4							322.7
Other Assets		2,000.0							1,930.1
Total Assets	$	20,306.8						$	19,858.2

Interest-Bearing Liabilities
Interest-Bearing Deposits
Savings	$	4,615.1	$	7.4		0.21	%	$	4,500.1	$	2.5		0.08	%
Money Market		2,769.9		9.1		0.44			2,574.0		2.2		0.11
Time		3,985.2		36.3		1.22			4,027.9		23.6		0.78
Total Interest-Bearing Deposits		11,370.2		52.8		0.62			11,102.0		28.3		0.34
Short-Term Borrowings		15.3		0.2		1.81			2.1		—		0.68
Long-Term Borrowings		123.1		2.7		2.87			—		—		—
Total Interest-Bearing Liabilities		11,508.6		55.7		0.65			11,104.1		28.3		0.34
Net Interest Income			$	422.3						$	393.9
Interest Rate Spread						2.90	%						2.87	%
Net Interest Margin						3.14	%						2.99	%
Noninterest-Bearing Demand Deposits		5,916.0							5,848.5
Other Liabilities		417.6							378.2
Stockholders' Equity		2,464.6							2,527.4
Total Liabilities and Stockholders' Equity	$	20,306.8						$	19,858.2


Analysis of Change in Net Interest Income						Table 7
	Nine Months Ended September 30, 2018
	Compared to September 30, 2017
(dollars in millions)	Volume		Rate		Total(1)
Change in Interest Income:
Interest-Bearing Deposits in Other Banks	$	—	$	2.9	$	2.9
Available-for-Sale Investment Securities		(3.6)		9.5		5.9
Loans and Leases
Commercial and industrial		(4.0)		15.9		11.9
Real estate - commercial		8.0		7.2		15.2
Real estate - construction		3.0		2.5		5.5
Real estate - residential		9.3		1.2		10.5
Consumer		3.9		(0.2)		3.7
Lease financing		(0.2)		0.2		—
Total Loans and Leases		20.0		26.8		46.8
Other Earning Assets		—		0.2		0.2
Total Change in Interest Income		16.4		39.4		55.8

Change in Interest Expense:
Interest-Bearing Deposits
Savings		0.1		4.8		4.9
Money Market		0.2		6.7		6.9
Time		(0.3)		13.0		12.7
Total Interest-Bearing Deposits		—		24.5		24.5
Short-Term Borrowings		0.2		—		0.2
Long-Term Borrowings		2.7		—		2.7
Total Change in Interest Expense		2.9		24.5		27.4
Change in Net Interest Income	$	13.5	$	14.9	$	28.4