FIRST HAWAIIAN, INC. (FHB)

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

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Cautionary Note Regarding Forward-Looking Statements

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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. Statements that are not historical or current facts, are forward-looking statements, 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.

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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 market and economic conditions generally or in Hawaii, Guam and Saipan in particular, including inflationary pressures and interest rate environment; our dependence on the real estate markets in which we operate; concentrated exposures to certain asset classes and individual obligors; the effect of 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 future value of the investment securities that we own; the possibility of a deterioration in credit quality in our portfolio; the possibility we might underestimate the credit losses inherent in our loan and lease portfolio; our ability to attract and retain customer deposits; our inability to receive dividends from our bank, pay dividends to our common stockholders and satisfy obligations as they become due; our access to sources of liquidity and capital to address our liquidity needs; our ability to attract and retain skilled employees or changes in our management personnel; our ability to maintain our Bank's reputation; the failure to properly use and protect our customer and employee information and data; the possibility of employee misconduct or mistakes; the actual or perceived soundness of other financial institutions; the effectiveness of our risk management and internal disclosure controls and procedures; our ability to keep pace with technological changes; any failure or interruption of our information and communications systems; our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business; our ability to identify and address cybersecurity risks; the occurrence of fraudulent activity or effect of a material breach of, or disruption to, the security of any of our or our vendors’ systems; the development and use of AI; our ability to successfully develop and commercialize new or enhanced products and services; changes in the demand for our products and services; risks associated with the sale of loans and with our use of appraisals in valuing and monitoring loans; the possibility that actual results may differ from estimates and forecasts; fluctuations in the fair value of our assets and liabilities and off-balance sheet exposures; the effects of the failure of any component of our business infrastructure provided by a third party; the potential for environmental liability; the risk of being subject to litigation and the outcome thereof; the impact of, and changes in, applicable laws, regulations and accounting standards and policies; possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations, including trade and other geopolitical tensions resulting from conflicts in the Middle East, the imposition of tariffs and tightening of export control regulations; the effects of severe weather, geopolitical instability, including war, terrorist attacks, pandemics or other severe health emergencies and natural disasters and other external events; the potential impact of climate change; our ability to maintain consistent growth, earnings and profitability; our likelihood of success in, and the impact of, litigation or regulatory actions; our ability to continue to pay dividends on our common stock;  contingent liabilities and unexpected tax liabilities that may be applicable to us as a result of the Reorganization Transactions; and damage to our reputation from any of the factors described above.

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The foregoing factors should not be considered an exhaustive list and should be read together with the risk factors and other cautionary statements included in our Annual Report on Form 10-K for the year ended December 31, 2025. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law.

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Company Overview

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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 two operating segments: Retail Banking and Commercial Banking. All other activities, including Treasury, are reported in Corporate/Other.

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

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Basis of Presentation

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

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

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The accompanying unaudited interim consolidated financial statements of the Company should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2025 and filed with the U.S. Securities and Exchange Commission (the “SEC”).

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Hawaii Economy

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Hawaii’s economy continues to remain resilient in an environment facing challenges, including from: high consumer prices and housing affordability, both of which are expected to continue with the gradual pass-through of tariffs and the ongoing conflict with Iran; a steady out-migration of its population; adverse weather events, such as the Kona Low storms, alongside rising insurance costs; and slower economic growth with a 1.7% forecasted increase in the real gross domestic product for Hawaii in 2026 as compared to a 2.2% forecasted increase for the United States overall in 2026. Recent geopolitical developments, including the conflicts in the Middle East, elevate uncertainty.

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Despite these challenges, according to the State of Hawaii Department of Business, Economic Development and Tourism, the statewide seasonally adjusted unemployment rate was 2.3% at February 28, 2026, which is lower than the national seasonally adjusted unemployment rate of 4.4%.

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Tourism also remains stable, with the average daily domestic passenger counts for the three months ended March 31, 2026 six percent higher than the average daily domestic passenger counts during the three months ended March 31, 2025, according to the Hawaii Tourism Authority. Hawaii’s economy depends significantly on conditions of the U.S. economy and key international economies, particularly Japan, and the broader demand for travel of these key markets. International visitor arrivals have not yet recovered to pre-pandemic arrival levels and demand for tourism could be negatively impacted by increasing fuel prices.

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The local Oahu housing market, particularly condominiums, continues to experience some softening as compared to previous years primarily due to continued high interest rates and prices. According to the Honolulu Board of Realtors, the volume of single-family home sales increased by 10.9%, while condominium sales decreased by 3.6%, in each case when comparing the three months ended March 31, 2026 with the same period in 2025. The median price of a single-family home sold on Oahu during the first three months of 2026 was $1,180,000, an increase of 2.6% compared to the same period in  2025. The median price of a condominium sold on Oahu during the first three months of 2026 was $510,000, equivalent to the median price during the same period in 2025. As of March 31, 2026, months of inventory of single-family homes and condominiums on Oahu were approximately 2.8 and 6.3 months, respectively, as compared to 3.3 and 6.2 months, respectively, as of March 31, 2025.

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Selected Financial Data

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

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ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Cautionary Note Regarding Forward-Looking Statements

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

A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including the following: the geographic concentration of our business; current and future market and economic conditions generally or in Hawaii, Guam and Saipan in particular, including inflationary pressures and interest rate environment; our dependence on the real estate markets in which we operate; concentrated exposures to certain asset classes and individual obligors; the effect of 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 future value of the investment securities that we own; the possibility of a deterioration in credit quality in our portfolio; the possibility we might underestimate the credit losses inherent in our loan and lease portfolio; our ability to attract and retain customer deposits; our inability to receive dividends from our Bank, pay dividends to our common stockholders and satisfy obligations as they become due; our access to sources of liquidity and capital to address our liquidity needs; our ability to attract and retain skilled employees or changes in our management personnel; our ability to maintain our Bank's reputation; the failure to properly use and protect our customer and employee information and data; the possibility of employee misconduct or mistakes; the actual or perceived soundness of other financial institutions; the effectiveness of our risk management and internal disclosure controls and procedures; our ability to keep pace with technological changes; any failure or interruption of our information and communications systems; our ability to effectively compete with other financial services companies and the effects of competition in the financial services industry on our business; our ability to identify and address cybersecurity risks; the occurrence of fraudulent activity or effect of a material breach of, or disruption to, the security of any of our or our vendors’ systems; the development and use of AI; our ability to successfully develop and commercialize new or enhanced products and services; changes in the demand for our products and services; risks associated with the sale of loans and with our use of appraisals in valuing and monitoring loans; the possibility that actual results may differ from estimates and forecasts; fluctuations in the fair value of our assets and liabilities and off-balance sheet exposures; the effects of the failure of any component of our business infrastructure provided by a third-party; the potential for environmental liability; the risk of being subject to litigation and the outcome thereof; the impact of, and changes in, applicable laws, regulations and accounting standards and policies; possible changes in trade, monetary and fiscal policies of, and other activities undertaken by, governments, agencies, central banks and similar organizations; the effects of severe weather, geopolitical instability, including war, terrorist attacks, pandemics or other severe health emergencies and natural disasters and other external events; the potential impact of climate change; our ability to maintain consistent growth, earnings and profitability; our likelihood of success in, and the impact of, litigation or regulatory actions; our ability to continue to pay dividends on our common stock; contingent liabilities and unexpected tax liabilities that may be applicable to us as a result of the Reorganization Transactions; and damage to our reputation from any of the factors described above.

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The foregoing factors should not be considered an exhaustive list and should be read together with the other cautionary statements set forth under “Item 1A. Risk Factors” in this Annual Report on Form 10-K. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by applicable law.

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Company Overview

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FHI, a bank holding company, owns 100% of the outstanding common stock of FHB. FHB was founded in 1858 under the name Bishop & Company and was the first successful banking partnership in the Kingdom of Hawaii and the second oldest bank formed west of the Mississippi River.

As of December 31, 2025, we were the largest full-service bank headquartered in Hawaii as measured by loans and leases and net income. As of December 31, 2025, we had $14.3 billion of gross loans and leases. We also generated $276.3 million of net income or diluted earnings per share of $2.20 for the year ended December 31, 2025. We operate our business through two operating segments: Retail Banking and Commercial Banking. All other activities, including Treasury, are reported in Corporate/Other. See “Note 22. Reportable Operating Segments” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information.

Hawaii Economy

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Hawaii’s economy as a whole experienced mixed economic conditions during the year ended December 31, 2025. Although the economy remains resilient and maintains a lower unemployment rate than the country as a whole, the State continues to endure high consumer prices and housing affordability challenges, which are expected to continue with the gradual pass-through of tariffs, as well as a steady out-migration of its population. According to the State of Hawaii Department of Business, Economic Development and Tourism, the statewide seasonally adjusted unemployment rate was 2.2% at December 31, 2025, lower than the national seasonally adjusted unemployment rate of 4.4%.

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Domestic visitor arrivals for the state remain stable, with the average daily domestic passenger counts for the year ended December 31, 2025 being relatively similar to the average daily domestic passenger counts during the year ended December 31, 2024, according to the Hawaii Tourism Authority. More generally, Hawaii’s economy depends significantly on conditions of the U.S. economy and key international economies, particularly Japan. International visitor arrivals have not yet recovered to pre-pandemic arrival levels.

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The local Oahu housing market continues to experience some softening as compared to previous years primarily due to increased interest rates. According to the Honolulu Board of Realtors, the volume of single-family home sales increased by 3.5%, while condominium sales decreased by 1.1%, in each case when comparing the year ended December 31, 2025 with the same period in 2024. The median price of a single-family home sold on Oahu in 2025 was $1,139,000, an increase of 3.5% compared to 2024. The median price of a condominium sold on Oahu in 2025 was $507,000, a decrease of 1.5% compared to 2024. As of December 31, 2025, months of inventory of single-family homes and condominiums on Oahu were approximately 2.6 and 5.9 months, respectively, as compared to 2.9 and 5.2 months, respectively, as of December 31, 2024.

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Selected Financial Data:

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

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

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Financial Highlights

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Net income was $276.3 million for the year ended December 31, 2025, an increase of $46.1 million or 20% as compared to 2024. Basic earnings per share was $2.21 for the year ended December 31, 2025, an increase of $0.41 or 23% as compared to 2024. Diluted earnings per share was $2.20 for the year ended December 31, 2025, an increase of $0.41 or 23% as compared to 2024. The increase in net income was primarily due to a $41.0 million increase in net interest income, a $31.2 million increase in noninterest income and a $1.8 million decrease in noninterest expense. This was partially offset by a $15.5 million increase in the provision for income taxes and a $12.5 million increase in the provision for credit losses (the “Provision”).

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Net income was $230.1 million for the year ended December 31, 2024, a decrease of $4.9 million or 2% as compared to 2023. Basic earnings per share was $1.80 for the year ended December 31, 2024, a decrease of $0.04 or 2% as compared to 2023. Diluted earnings per share was $1.79 for the year ended December 31, 2024, a decrease of $0.05 or 3% as compared to 2023.The decrease in net income was primarily due to a $15.0 million decrease in noninterest income and a $13.4 million decrease in net interest income. This was partially offset by an $11.9 million decrease in the Provision and an $11.7 million decrease in the provision for income taxes.

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Our return on average total assets was 1.16% for the year ended December 31, 2025, an increase of 20 basis points as compared to 2024, and our return on average total stockholders’ equity was 10.26% for the year ended December 31, 2025, an increase of 126 basis points as compared to 2024. Our return on average tangible assets was 1.21% for the year ended December 31, 2025, an increase of 21 basis points as compared to 2024, and our return on average tangible stockholders’ equity was 16.27% for the year ended December 31, 2025, an increase of 153 basis points as compared to 2024, due to higher net income, offset by an increase in average tangible stockholders’ equity. Our efficiency ratio was 56.43% for the year ended December 31, 2025 as compared to 61.57% in 2024. Return on average tangible assets and return on average tangible stockholders’ equity are non-GAAP financial measures. For a reconciliation to the most directly comparable GAAP financial measures for return on average tangible assets and return on average tangible stockholders’ equity, see Table 2, GAAP to Non-GAAP Reconciliation.

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Our return on average total assets was 0.96% for the year ended December 31, 2024, an increase of one basis point as compared to 2023, and our return on average total stockholders’ equity was 9.00% for the year ended December 31, 2024, a decrease of 101 basis points as compared to 2023. Our return on average tangible assets was 1.00% for the year ended December 31, 2024, an increase of one basis point as compared to 2023, and our return on average tangible stockholders’ equity was 14.74% for the year ended December 31, 2024, a decrease of 265 basis points as compared to 2023, due to an increase in average tangible stockholders’ equity, which resulted in part from a decrease in net unrealized losses in our investment securities portfolio, and lower net income. Our efficiency ratio was 61.57% for the year ended December 31, 2024 as compared to 59.48% in 2023. Return on average tangible assets and return on average tangible stockholders’ equity are non-GAAP financial measures. For a reconciliation to the most directly comparable GAAP financial measures for return on average tangible assets and return on average tangible stockholders’ equity, see Table 2, GAAP to Non-GAAP Reconciliation.

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Our results for the December 31, 2025 were highlighted by the following:

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Our results for the December 31, 2024 were highlighted by the following:

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Balance sheet highlights consisted of the following:

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Analysis of Results of Operations

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Net Interest Income

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For the years ended December 31, 2025, 2024, and 2023, average balances, related income and expenses, on a fully taxable-equivalent basis, and resulting yields and rates are presented in Table 3. An analysis of the change in net interest income, on a fully taxable-equivalent basis, is presented in Table 4.

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Net interest income, on a fully taxable-equivalent basis, was $667.8 million for the year ended December 31, 2025, an increase of $39.6 million or 6% as compared to 2024. Our net interest margin was 3.15% for the year ended December 31, 2025, an increase of 20 basis points as compared to 2024. The increase in net interest income, on a fully taxable-equivalent basis, was primarily due to lower deposit funding costs, higher average balances on our interest-bearing deposits in other banks and lower borrowing costs. This was partially offset by lower rates on our earning assets driven by lower yields in our loan and lease portfolio and lower average balances in our investment securities portfolio. Deposit funding costs were $279.3 million for the year ended December 31, 2025, a decrease of $56.4 million or 17% compared to 2024, primarily due to a decrease in interest rates. Rates paid on our interest-bearing deposits were 206 basis points for the year ended December 31, 2025, a decrease of 45 basis points compared to 2024, primarily due to rate decreases. For the year ended December 31, 2025, the average balance of our interest-bearing deposits in other banks was $1.3 billion, an increase of $412.8 million or 46% compared to the same period in 2024. Total borrowing costs were $7.4 million for the year ended December 31, 2025, a decrease of $12.6 million or 63% compared to 2024. $250.0 million of FHLB advances matured during the third quarter of 2025. Yields on our loans and leases were 5.45% for the year ended December 31, 2025, a decrease of 20 basis points as compared to 2024, primarily due to decreases in yields from our adjustable-rate commercial real estate and commercial and industrial loans, which are typically based on the SOFR. For the year ended December 31, 2025, average balances on our investment securities portfolio was $5.6 billion, a decrease of $420.7 million or 7% compared to 2024, primarily due to payments and maturities of securities during the period.

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Net interest income, on a fully taxable-equivalent basis, was $628.2 million for the year ended December 31, 2024, a decrease of $13.5 million or 2% as compared to 2023. Our net interest margin was 2.95% for the year ended December 31, 2024, an increase of three basis points as compared to 2023. The decrease in net interest income, on a fully taxable-equivalent basis, was primarily due to higher deposit funding costs and lower average balances in our investment securities portfolio. This was partially offset by higher rates on our earning assets driven by higher yields in our loan and lease portfolio, higher average balances on our interest-bearing deposits in other banks and lower borrowing costs. Deposit funding costs were $335.7 million for the year ended December 31, 2024, an increase of $77.5 million or 30% compared to 2023, primarily due to an increase in interest rates. Rates paid on our interest-bearing deposits were 251 basis points for the year ended December 31, 2024, an increase of 53 basis points compared to 2023, primarily due to rate increases. For the year ended December 31, 2024, average balances on our investment securities portfolio was $6.0 billion, a decrease of $1.1 billion or 15% compared to 2023, primarily due to payments, maturities and restructuring of securities during the period. Yields on our loans and leases were 5.65% for the year ended December 31, 2024, an increase of 39 basis points as compared to 2023, driven by higher average yields on our adjustable-rate loans, runoff of lower fixed-rate loans and higher rates on new loan originations during the period. For the year ended December 31, 2024, the average balance of our interest-bearing deposits in other banks was $900.8 million, an increase of $388.5 million or 76% compared to the same period in 2023. Total borrowing costs were $20.0 million for the year ended December 31, 2024, a decrease of $6.3 million or 24% compared to 2023. During the third quarter of 2024, $500.0 million of FHLB advances matured and a new $250.0 million short-term FHLB advance was taken.

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The Federal Reserve influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. Our loan portfolio is affected by changes in the prime interest rate. The prime rate began in 2023 at 7.50% and increased a total of 100 basis points (25 basis points each in February, March, May and July) to end the year at 8.50%. During 2024, the prime rate decreased a total of 100 basis points (50 basis points in September, and 25 basis points in both November and December) to end the year at 7.50%. In 2025, the prime rate decreased 75 basis points (25 basis points each in September, October and December) to end the year at 6.75%. Our loan portfolio is also impacted by changes in the SOFR. At December 31, 2025, the one-month and three-month CME Term SOFR interest rates were 3.70% and 3.66%, respectively. At December 31, 2024, the one-month and three-month CME Term SOFR interest rates were 4.33% and 4.31%, respectively. At December 31, 2023, the one-month and three-month CME Term SOFR interest rates were 5.35% and 5.33%, respectively. The target range for the federal funds rate, which is the cost of immediately available overnight funds, began in 2023 at 4.25% to 4.50%, and increased a total of 100 basis points to end the year at 5.25% to 5.50%. During 2024, the federal funds rate decreased a total of 100 basis points to end the year at 4.25% to 4.50%. In 2025, the federal funds rate decreased 75 basis points to end the year at 3.50% to 3.75%.

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Provision for Credit Losses

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The Provision was $27.2 million for the year ended December 31, 2025, compared to a Provision of $14.8 million in 2024. For the year ended December 31, 2025, the Provision included $24.4 million in provision for credit losses for loans and leases, compared to $17.5 million in provision for credit losses for loans and leases in 2024, and $2.9 million in provision for credit losses for the reserve for unfunded commitments, compared to a negative $2.8 million in provision for credit losses for the reserve for unfunded commitments in 2024. The increase in the Provision was primarily due to increases in the provision for home equity lines, commercial and industrial loans, construction loans, commercial real estate loans and lease financing and the provision for unfunded construction, home equity line, commercial real estate and commercial and industrial commitments. This was partially offset by decreases in the provision for residential mortgage loans and consumer loans. We recorded net charge-offs of $16.3 million and $13.6 million for the years ended December 31, 2025 and 2024, respectively. This represented net charge-offs of 0.11% and 0.10% of total average loans and leases for the years ended December 31, 2025 and 2024, respectively. The ACL was $168.5 million and $160.4 million as of December 31, 2025 and 2024, respectively, and represented 1.18% of total outstanding loans and leases as of December 31, 2025, compared to 1.11% of total outstanding loans and leases as of December 31, 2024. The reserve for unfunded commitments was $35.7 million as of December 31, 2025, compared to $32.8 million as of December 31, 2024. The Provision is recorded to maintain the ACL and the reserve for unfunded commitments at levels deemed adequate by management based on the factors noted in the “Risk Governance and Quantitative and Qualitative Disclosures About Market Risk — Credit Risk” section of this MD&A.

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Noninterest Income

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Table 5 presents the major components of noninterest income for the years ended December 31, 2025, 2024 and 2023:

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n/m – Denotes a variance that is not a meaningful metric to inform the change in noninterest income from the year ended December 31, 2025 to the same period in 2024 and from the year ended December 31, 2024 to the same period in 2023.

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Total noninterest income was $217.0 million for the year ended December 31, 2025, an increase of $31.2 million or 17% as compared to 2024. Total noninterest income was $185.8 million for the year ended December 31, 2024, a decrease of $15.0 million or 7% as compared to 2023.

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Service charges on deposit accounts were $31.6 million for the year ended December 31, 2025, an increase of 0.5 million or 2% as compared to 2024. This increase was primarily due to a $1.1 million increase in account analysis service charges, partially offset by a $0.3 million decrease in overdraft and checking account fees and a $0.2 million decrease in ATM interchange fees from customers. Service charges on deposit accounts were $31.1 million for the year ended December 31, 2024, an increase of $1.4 million or 5% as compared to 2023. This increase was primarily due to a $2.6 million increase in account analysis service charges, partially offset by a $1.2 million decrease in overdraft and checking account fees.

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Credit and debit card fees were $61.8 million for the year ended December 31, 2025, a decrease of $2.6 million or 4% as compared to 2024. This decrease was primarily due to a $3.1 million decrease in interchange settlement fees and a $0.8 million decrease in ATM interchange and surcharge fees, partially offset by a $1.3 million increase in merchant service revenues. Credit and debit card fees were $64.4 million for the year ended December 31, 2024, an increase of $0.5 million or 1% as compared to 2023. This increase was primarily due to a $2.6 million increase in debit card interchange fees, a $1.9 million decrease in network association dues and a $1.4 million increase in interchange settlement fees, partially offset by a $3.2 million decrease in ATM interchange and surcharge fees, a $1.3 million decrease in merchant service revenues and a $0.6 million decrease in rental fees from credit card terminals.

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Other service charges and fees were $53.2 million for the year ended December 31, 2025, an increase of $7.3 million or 16% as compared to 2024. This increase was primarily due to a $7.3 million increase in fees from annuities and securities and a $0.8 million increase in fees from standby letters of credit arrangements, partially offset by a $0.3 million decrease in service fees related to participation loans, a $0.2 million decrease in online banking fees and a $0.2 million decrease in insurance income. Other service charges and fees were $45.9 million for the year ended December 31, 2024, an increase of $8.6 million or 23% as compared to 2023. This increase was primarily due to a $6.9 million increase in fees from annuities and securities, a $0.3 million increase in safe deposit box rental fees, a $0.3 million increase in miscellaneous service fees, a $0.3 million increase in cash management service fees, a $0.3 million increase in insurance income and a $0.3 million increase in fees from standby letters of credit arrangements.

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Trust and investment services income was $36.9 million for the year ended December 31, 2025, a decrease of $1.4 million or 4% as compared to 2024. This decrease was primarily due to a $2.4 million decrease in investment management fees and a $0.5 million decrease in irrevocable trust fees, partially offset by a $0.6 million increase in business cash management fees, a $0.4 million increase in pension plan fees and a $0.3 million increase in money market fund management fees. Trust and investment services income was $38.3 million for the year ended December 31, 2024, a decrease of $0.1 million as compared to 2023.

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BOLI income was $20.6 million for the year ended December 31, 2025, an increase of $2.8 million or 15% as compared to 2024. This increase was due to a $4.7 million increase in BOLI earnings, partially offset by a $2.0 million decrease in death benefit proceeds from life insurance policies. BOLI income was $17.9 million for the year ended December 31, 2024, an increase of $2.5 million or 17% as compared to 2023. This increase was due to a $3.0 million increase in BOLI earnings, partially offset by a $0.4 million decrease in death benefit proceeds from life insurance policies.

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Net gains on the sale of investment securities were nil for the year ended December 31, 2025. Net losses on the sale of investment securities were $26.2 million for the year ended December 31, 2024, an increase in net losses of $27.0 million as compared to the same period in 2023. The net losses were primarily due to the investment portfolio restructuring and sale of investment securities resulting in a realized loss of $26.2 million for the year ended December 31, 2024.

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Other noninterest income was $12.9 million for the year ended December 31, 2025, a decrease of $1.6 million or 11% as compared to 2024. This decrease was primarily due to a $3.7 million decrease in insurance proceeds received during 2025 as compared to 2024 and a $1.6 million excise tax refund received during the year ended December 31, 2024. This was partially offset by a $1.6 million increase in customer-related interest rate swap fees, a $1.1 million decrease in net losses recognized in income related to derivative contracts and a $1.0 million increase in volume-based incentives. Other noninterest income was $14.5 million for the year ended December 31, 2024, a decrease of $1.0 million or 6% as compared to 2023. This decrease was primarily due to a $7.9 million gain on the sale of a bank property in 2023 and a $1.2 million decrease in volume-based incentives. This was partially offset by $4.1 million in insurance proceeds received during the year ended December 31, 2024, a $1.6 million excise tax refund received during the year ended December 31, 2024, a $1.5 million decrease in net losses recognized in income related to derivative contracts and a $0.5 million decrease in interest paid on collateral payments related to derivative instruments.

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Noninterest Expense

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Table 6 presents the major components of noninterest expense for the years ended December 31, 2025, 2024 and 2023:

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Total noninterest expense was $499.3 million for the year ended December 31, 2025, a decrease of $1.8 million as compared to 2024. Total noninterest expense was $501.2 million for the year ended December 31, 2024, an increase of $0.1 million as compared to 2023.

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Salaries and employee benefits expense was $245.9 million for the year ended December 31, 2025, an increase of $10.3 million or 4% as compared to 2024. This increase was primarily due to a $10.7 million increase in incentive compensation, a $2.4 million increase in base salaries and related payroll taxes and a $0.5 million increase in group health plan costs. This was partially offset by a $2.0 million increase in payroll and benefit costs being deferred as loan origination costs, a $0.6 million decrease in state unemployment tax expense, a $0.3 million decrease in nonrecurring separation agreements and severance costs and a $0.3 million decrease in adjustments made to the deferred compensation plan as a result of market conditions. Salaries and employee benefits expense was $235.6 million for the year ended December 31, 2024, an increase of $9.8 million or 4% as compared to 2023. This increase was primarily due to a $9.7 million increase in incentive compensation, a $1.8 million increase in retirement plan expenses, a $1.2 million decrease in payroll and benefit costs being deferred as loan origination costs and a $1.0 million increase in group health plan costs. This was partially offset by a $1.1 million decrease in other compensation, primarily related to a decrease in nonrecurring separation agreements and severance costs, partially offset by adjustments made to the deferred compensation plan as a result of market conditions, a $0.9 million decrease in employee overtime pay expense, a $0.9 million decrease in state unemployment tax expense and a $0.6 million decrease in temporary help expenses.

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Contracted services and professional fees were $60.3 million for the year ended December 31, 2025, a decrease of $0.6 million or 1% as compared to 2024. This decrease was primarily due to a $1.1 million decrease in outside services, primarily attributable to technology-related projects, marketing and new customer services, and a $0.7 million decrease in audit, legal and consultant fees, partially offset by a $1.2 million increase in contracted data processing expenses. Contracted services and professional fees were $60.9 million for the year ended December 31, 2024, a decrease of $5.5 million or 8% as compared to 2023. This decrease was primarily due to a $4.3 million decrease in outside services, primarily attributable to technology-related projects, marketing and new customer services, a $0.6 million decrease in contracted data processing expenses and a $0.6 million decrease in audit, legal and consultant fees.

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Occupancy expense was $30.2 million for the year ended December 31, 2025, an increase of $1.3 million or 4% as compared to 2024. This increase was primarily due to a $1.6 million increase in building depreciation, partially offset by a $0.4 million decrease in utilities expense. Occupancy expense was $29.0 million for the year ended December 31, 2024, a decrease of $0.6 million or 2% as compared to 2023. This decrease was primarily due to a $0.5 million increase in net sublease rental income and a $0.3 million decrease in building depreciation, partially offset by a $0.4 million increase in lease-related insurance expense.

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Equipment expense was $56.3 million for the year ended December 31, 2025, an increase of $2.4 million or 4% as compared to 2024. This increase was primarily due to a $2.0 million increase in technology-related amortization and licensing and maintenance fees and a $0.6 million increase in furniture and equipment depreciation, partially offset by a $0.3 million decrease in other furniture and equipment expense. Equipment expense was $53.9 million for the year ended December 31, 2024, an increase of $8.8 million or 19% as compared to 2023. This increase was primarily due to an $8.0 million increase in technology-related amortization and licensing and maintenance fees, a $0.5 million increase in furniture and equipment depreciation and a $0.3 million increase in other furniture and equipment expense.

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Regulatory assessment and fees were $12.1 million for the year ended December 31, 2025, a decrease of $7.0 million or 37% as compared to 2024. Regulatory assessment and fees were $19.1 million for the year ended December 31, 2024, a decrease of $13.0 million or 40% as compared to 2023. In October 2022, the FDIC adopted a final rule to increase the initial base deposit insurance assessment rate schedules by 2 basis points beginning with the first quarterly assessment period of 2023. In May 2023, the FDIC issued a notice of proposed rulemaking for a special assessment to replenish the deposit insurance fund following the 2023 bank failures. In November 2023, the FDIC approved a final rule to implement the special assessment and we recorded a $16.3 million expense in December 2023. During the first quarter of 2024, the FDIC issued a notice that the original loss estimate related to the 2023 bank failures was subsequently increased and that this increase would result in an additional assessment expense to affected institutions. As a result, we recorded a net expense related to the additional special assessment of $3.5 million for the year ended December 31, 2024. In December 2025, the FDIC reduced the rate at which the assessment is collected for the eighth quarter of the collection period, with an invoice payment date of March 30, 2026, from 3.36 basis points to 2.97 basis points. We recorded a reduction in the expense related to the additional special assessment of $2.6 million in 2025 to bring the net loss to $0.9 million as of December 31, 2025.

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Advertising and marketing expense was $8.6 million for the year ended December 31, 2025, an increase of $0.9 million or 11% as compared to 2024. This increase was primarily due to a $0.9 million increase in advertising costs. Advertising and marketing expense was $7.7 million for the year ended December 31, 2024, an increase of $0.1 million or 1% as compared to 2023.

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Card rewards program expense was $33.4 million for the year ended December 31, 2025, a decrease of $0.5 million or 1% as compared to 2024. This decrease was primarily due to a $0.4 million decrease in priority rewards card redemptions. Card rewards program expense was $33.8 million for the year ended December 31, 2024, an increase of $2.2 million or 7% as compared to 2023. This increase was primarily due to a $1.6 million increase in credit card cash reward redemptions and a $1.6 million increase in interchange fees paid to our credit card partners, partially offset by a $0.7 million decrease in priority rewards card redemptions and a $0.3 million decrease in international transaction fees.

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Other noninterest expense was $52.6 million for the year ended December 31, 2025, a decrease of $8.6 million or 14% as compared to 2024. This decrease was primarily due to a $4.6 million decrease in operational losses and other charge-offs, a $3.8 million decrease in expense due to adjustments to certain liabilities assumed as a result of the Reorganization Transactions, a $1.1 million decrease in costs associated with a fund acquired by the Company and a $0.6 million decrease in pension-related expenses. This was partially offset by a $1.0 million increase in charitable contributions and donations and a $0.7 million increase in brokers fees. Other noninterest expense was $61.2 million for the year ended December 31, 2024, a decrease of $1.7 million or 3% as compared to 2023. This decrease was primarily due to a $3.3 million decrease in operational losses and other charge-offs, a $2.1 million decrease in charitable contributions, a $1.0 million decrease in pension-related expenses, a $0.8 million decrease in losses incurred due to natural disasters and a $0.6 million decrease in business privilege tax expense. This was partially offset by a $3.8 million increase in expense due to adjustments to certain liabilities assumed as a result of the Reorganization Transactions, a $1.0 million increase in brokers fees, a $0.6 million increase in costs associated with a fund acquired by the Company and a $0.6 million increase in other tax expense.

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Provision for Income Taxes

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The provision for income taxes was $78.0 million (reflecting an effective tax rate of 22.01%) for the year ended December 31, 2025, compared with a provision for income taxes of $62.5 million (reflecting an effective tax rate of 21.35%) in 2024. On July 4, 2025, President Trump signed and enacted the One Big Beautiful Bill Act (“OBBBA”) into law. Its enactment did not have a material impact to our income tax expense or effective tax rate. This legislation made significant changes to the energy credit provisions which may impact the Company’s ability to originate solar leases in the future. Additional information about the provision for income taxes is presented in “Note 15. Income Taxes” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data.

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Analysis of Business Segments

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Our business segments are Retail Banking and Commercial Banking, with all other activities, including Treasury, reported in Corporate/Other. Table 7 summarizes net income (loss) from our business segments and Corporate/Other for the years ended December 31, 2025, 2024 and 2023. Additional information about operating segment performance and Corporate/Other is presented in “Note 22. Reportable Operating Segments” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data.

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During the quarter ended December 31, 2025, we realigned our internal organizational and management reporting structure. As a result of this change, we reduced our reportable operating segments from three to two. Our reportable segments are now Retail Banking and Commercial Banking. Activities previously reported within the Treasury and Other segment are now included in Corporate/Other, as Treasury exists to support our operating segments. The change in reportable segments reflects how our chief operating decision maker currently evaluates performance and allocates resources. In addition, during the third quarter of 2025, we made changes to the internal measurement of segment operating profits for the purpose of evaluating segment performance and resource allocation. The primary reason for the change was to align loan and deposit balances within the business segment that directly manages them. Specifically, certain loan and deposit balances previously included as part of the Retail Banking and Commercial Banking segments were reclassified among the segments and what is now Corporate/Other. The reallocation of select loan and deposit balances affected net interest income, net interest income after provision for credit losses, provision for income taxes, net income and segment earning assets. We have reported our selected financial information using the new loan and deposit balance alignments and using two reportable operating segments for the year ended December 31, 2025. Prior-period segment information has been recast to conform to the current presentation.

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Retail Banking.  Our Retail Banking segment includes the financial products and services we provide to consumers and small businesses. Loan and lease products offered include residential and commercial mortgage loans, home equity lines of credit and loans, automobile loans and leases, secured and unsecured lines of credit, installment loans, and small business loans and leases. Deposit products offered include checking, savings and time deposit accounts. Our Retail Banking segment also includes our wealth management services. Products and services from Retail Banking are delivered to customers through 49 banking locations throughout the State of Hawaii, Guam and Saipan.

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Net income for the Retail Banking segment was $250.5 million for the year ended December 31, 2025, an increase of $22.7 million or 10% as compared to 2024. The increase in net income for the Retail Banking segment was primarily due to a $24.8 million increase in net interest income, a $5.6 million increase in noninterest income and a $4.3 million decrease in noninterest expense, partially offset by a $9.0 million increase in the provision for income taxes and a $3.1 million increase in the Provision. The increase in net interest income was primarily due to higher deposit spreads and loan spreads. The increase in noninterest income was primarily due to an increase in other service charges and fees, partially offset by a decrease in trust and investment services income. The decrease in noninterest expense was primarily due decreases in regulatory assessments and fees and operational losses and other charge-offs. The increase in the provision for income taxes was primarily due to the increase in pretax income, partially offset by the allocation of the remeasurement of the California deferred tax assets. The increase in the Provision allocated to the Retail Banking segment was primarily due to increases in the provision for home equity lines, commercial and industrial loans, construction loans, commercial real estate loans and lease financing. The increase in total earning assets for the Retail Banking segment was primarily due to increases in our commercial loan and consumer loan portfolios, partially offset by a decrease in our residential real estate loan portfolio.

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Net income for the Retail Banking segment was $227.9 million for the year ended December 31, 2024, an increase of $54.3 million or 31% as compared to 2023. The increase in net income for the Retail Banking segment was primarily due to a $47.2 million increase in net interest income, a $9.2 million decrease in noninterest expense, a $8.4 million increase in noninterest income and a $1.6 million decrease in the Provision, partially offset by a $12.1 million increase in the provision for income taxes. The increase in net interest income was primarily due to higher deposit and loan spreads.  The decrease in noninterest expense was primarily due to lower overall expenses that were allocated to the Retail Banking segment and a decrease in regulatory assessments and fees, partially offset by increases in salaries and employee benefits expense and brokers fees. The increase in noninterest income was primarily due to increases in other service charges and fees and service charges on deposit accounts. The decrease in the Provision was primarily due to a decrease in our provision for credit losses for loans and leases allocated to the Retail Banking segment. The increase in the provision for income taxes was primarily due to the increase in pretax income. The decrease in total earning assets for the Retail Banking segment was primarily due to a decrease in our residential real estate loan portfolio.

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Commercial Banking.  Our Commercial Banking segment includes our corporate banking related products, commercial real estate loans, commercial lease financing, secured and unsecured lines of credit, 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.

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Net income for the Commercial Banking segment was $130.0 million for the year ended December 31, 2025, a decrease of $13.0 million or 9% as compared to 2024. The decrease in net income for the Commercial Banking segment was primarily due to a $23.0 million decrease in net interest income, a $3.8 million increase in the Provision and a $1.1 million decrease in noninterest income, partially offset by a $10.6 million decrease in noninterest expense and a $4.4 million decrease in the provision for income taxes. The decrease in net interest income was primarily due to lower loan and lease spreads and deposits spreads, partially offset by higher average deposit balances. The increase in the Provision allocated to the Commercial Banking segment was primarily due to increases in the provision for home equity lines, commercial and industrial loans, construction loans, commercial real estate loans and lease financing.  The decrease in noninterest income was primarily due to a decrease in credit and debit card fees and an excise tax refund and insurance proceeds received in 2024, partially offset by increases in customer-related interest rate swap fees, volume-based incentives and service charges on deposit accounts. The decrease in noninterest expense was primarily due to higher overall credits that were allocated to the Commercial Banking segment and a decrease in regulatory assessment and fees. The decrease in the provision for income taxes was primarily due to the decrease in pretax income, in addition to the allocation of the remeasurement of the California deferred tax assets. The decrease in total earning assets for the Commercial Banking segment was primarily due to a decrease in our commercial loan portfolio.

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Net income for the Commercial Banking segment was $143.0 million for the year ended December 31, 2024, an increase of $38.3 million or 37% as compared to 2023. The increase in net income for the Commercial Banking segment was primarily due to a $22.3 million decrease in noninterest expense, an $11.5 million increase in net interest income, a $5.8 million decrease in the Provision and a $4.1 million increase in noninterest income, partially offset by a $5.4 million increase in the provision for income taxes. The decrease in noninterest expense was primarily due to lower overall expenses that were allocated to the Commercial Banking segment, a one-time settlement expense in connection to a lawsuit against the Company incurred in 2023 and a decrease in regulatory assessment and fees, partially offset by an increase in card reward expenses. The increase in net interest income was primarily due to higher deposit spreads and average balances, partially offset by lower loan and lease spreads. The decrease in the Provision was primarily due to a decrease in our provision for credit losses for loans and leases allocated to the Commercial Banking segment. The increase in noninterest income was primarily due to an excise tax refund received in 2024, in addition to increases in credit and debit card fees, other service charges and fees and service charges on deposit accounts, partially offset by a decrease in volume-based incentives. The increase in the provision for income taxes was primarily due to the increase in pretax income. The increase in total earning assets for the Commercial Banking segment was primarily due to increases in our commercial loan and lease financing portfolios, partially offset by a decrease in our consumer loan portfolio.

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Analysis of Financial Condition

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Liquidity and Capital Resources

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

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

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Immediate liquid resources are available in cash which is primarily on deposit with the Federal Reserve Bank of San Francisco (the “FRB”). As of December 31, 2025 and 2024, cash and cash equivalents were $1.5 billion and $1.2 billion, respectively. Potential sources of liquidity also include investment securities in our available-for-sale portfolio and held-to-maturity portfolio. The carrying values of our available-for-sale investment securities and held-to-maturity investment securities were $2.1 billion and $3.5 billion as of December 31, 2025, respectively. The carrying values of our available-for-sale investment securities and held-to-maturity investment securities were $1.9 billion and $3.8 billion as of December 31, 2024, respectively. As of December 31, 2025 and 2024, we maintained our excess liquidity primarily in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac and mortgage-backed securities issued by Ginnie Mae, Freddie Mac, Fannie Mae, Municipal Housing Authorities and non-agency entities. As of December 31, 2025, our available-for-sale investment securities portfolio was comprised of securities with a weighted average life of approximately 4.7 years and our held-to-maturity investment securities portfolio was comprised of securities with a weighted average life of approximately 7.3 years. These funds offer substantial resources to meet either new loan demand or to help offset reductions in our deposit funding base as they provide quick sources of liquidity by pledging to obtain secured borrowings and repurchase agreements or sales of our available-for-sale securities portfolio. Liquidity is further enhanced by our ability to pledge loans to access secured borrowings from the FHLB and the FRB. As of December 31, 2025, we have borrowing capacity of $3.3 billion from the FHLB and $3.3 billion from the FRB based on the amount of collateral pledged.

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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 $19.1 billion and $19.0 billion as of December 31, 2025 and 2024, respectively, which represented 93% of our total deposits as of both December 31, 2025 and 2024. 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, including alternative investment options, that reduce deposit balances.

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Our material cash requirements from our current and long-term contractual obligations as of December 31, 2025 are summarized in the following table:

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Commitments to extend credit, standby letters of credit and commercial letters of credit do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon; therefore, these items, which totaled $6.9 billion and $6.0 billion as of December 31, 2025 and 2024, respectively, are not included in the table above. See the discussion of these credit and contractual commitments in “Note 17. Commitments and Contingent Liabilities” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data.

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Other postretirement benefit contributions in the table above represent the minimum expected contribution to the postretirement benefit plan. Actual contributions may differ from these estimates. Excluded from the table above is our pension benefit obligations. We comply with the minimum funding requirements, and we anticipate making future benefit contributions of $0.2 million related to the pension benefit plans during the year ending December 31, 2026. Additional information on these benefit plans can be found in “Note 14. Benefit Plans” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data.

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Our liability for unrecognized tax benefits (“UTBs”) as of December 31, 2025 and 2024 was $211.2 million and $206.4 million, respectively. The increase in UTBs was primarily due to additions related to previously identified tax positions. We are unable to reasonably estimate the period of cash settlement with the respective taxing authority. As a result, our liability for UTBs is not disclosed in the table above.

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In addition to the commitments specifically noted in the table above, we enter into a number of purchase obligations that arise from agreements to purchase goods or services in the ordinary course of business. These primarily consist of service agreements for various systems and applications supporting bank operations, including the systems and applications in the Bank’s core system. Some of these contracts are renewable or cancellable annually or in shorter time intervals. To secure favorable pricing concessions, we may also commit to contracts that may extend several years.

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Other material cash requirements may also include general corporate operating activities, stock repurchases, and capital to be returned to our shareholders.

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We expect to meet these obligations from dividends paid by the Bank to the Parent. Additional sources of liquidity available to us include selling residential real estate loans in the secondary market, taking out short- and long-term borrowings and issuing long-term debt and equity securities. We believe that our existing cash, cash equivalents, investments, and cash expected to be generated from operations, are still sufficient to meet our cash requirements within the next 12 months and beyond.

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Potential Demands on Liquidity from Off-Balance Sheet Arrangements

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We have off-balance sheet arrangements, such as variable interest entities, guarantees, and certain financial instruments with off-balance sheet risk, that may affect the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

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Variable Interest Entities

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We hold interests in several unconsolidated variable interest entities (“VIEs”). These unconsolidated VIEs are primarily low-income housing tax credit investments in partnerships and limited liability companies. Variable interests are defined as contractual ownership or other interests in an entity that change with fluctuations in an entity’s net asset value. The primary beneficiary consolidates the VIE. Based on our analysis, we have determined that the Company is not the primary beneficiary of these entities. As a result, we do not consolidate these VIEs. Unfunded commitments to fund these low-income housing tax credit investments were $153.3 million and $98.7 million as of December 31, 2025 and 2024, respectively.

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Guarantees

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We sell residential mortgage loans in the secondary market primarily to Fannie Mae or Freddie Mac. The agreements under which we sell residential mortgage loans to Fannie Mae or Freddie Mac contain provisions that include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the specific representations and warranties vary among investors, insurance or guarantee agreements, they typically cover: ownership of the loan; validity of the lien securing the loan; the absence of delinquent taxes or liens against the property securing the loan; compliance with loan criteria set forth in the applicable agreement; compliance with applicable federal, state, and local laws; and other matters. As of December 31, 2025 and 2024, the unpaid principal balance of our portfolio of residential mortgage loans sold was $1.1 billion and $1.3 billion, respectively. The agreements under which we sell residential mortgage loans require delivery of various documents to the investor or its document custodian. Although these loans are primarily sold on a non-recourse basis, we may be obligated to repurchase residential mortgage loans or reimburse investors for losses incurred if a loan review reveals that underwriting and documentation standards were potentially not met in the origination of those loans. Upon receipt of a repurchase request, we work with investors to arrive at a mutually agreeable resolution. Repurchase demands are typically reviewed on an individual loan by loan basis to validate the claims made by the investor to determine if a contractually required repurchase event has occurred. We manage the risk associated with potential repurchases or other forms of settlement through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor and secondary market standards. For the year ended December 31, 2025, there were no residential mortgage loan repurchases and there were no pending repurchase requests.

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In addition to servicing loans in our portfolio, substantially all of the loans we sell to investors are sold with servicing rights retained. We also service loans originated by other mortgage loan originators. As servicer, our primary duties are to: (1) collect payments due from borrowers; (2) advance certain delinquent payments of principal and interest; (3) maintain and administer any hazard, title, or primary mortgage insurance policies relating to the mortgage loans; (4) maintain any required escrow accounts for payment of taxes and insurance and administer escrow payments; and (5) foreclose on defaulted mortgage loans, or loan modifications or short sales. Each agreement under which we act as servicer generally specifies a standard of responsibility for actions taken by the Company in such capacity and provides protection against expenses and liabilities incurred by the Company when acting in compliance with the respective servicing agreements. However, if we commit a material breach of obligations as servicer, we may be subject to termination if the breach is not cured within a specified period following notice. The standards governing servicing and the possible remedies for violations of such standards vary by investor. These standards and remedies are determined by servicing guides issued by the investors as well as the contract provisions established between the investors and the Company. Remedies could include repurchase of an affected loan. For the year ended December 31, 2025, we had no repurchase requests related to loan servicing activities, nor were there any pending repurchase requests as of December 31, 2025.

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Although to date repurchase requests related to representation and warranty provisions and servicing activities have been limited, it is possible that requests to repurchase mortgage loans may increase in frequency as investors more aggressively pursue all means of recovering losses on their purchased loans. However, as of December 31, 2025, management believes that this exposure is not material due to the historical level of repurchase requests and loss trends and thus has not established a liability for losses related to mortgage loan repurchases. As of December 31, 2025, 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.

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Financial Instruments with Off-Balance Sheet Risk

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

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See “Note 17. Commitments and Contingent Liabilities” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information on our financial instruments with off-balance sheet risk.

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Investment Securities

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Table 9 presents the estimated fair value of our available-for-sale investment securities portfolio and amortized cost of our held-to-maturity investment securities portfolio as of December 31, 2025 and 2024:

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Table 10 presents the maturity distribution at amortized cost and weighted-average yield to maturity of our investment securities portfolio as of December 31, 2025:

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The carrying value of our investment securities portfolio was $5.6 billion as of December 31, 2025, a decrease of $107.9 million or 2% compared to December 31, 2024. The lower balances in investment securities were driven by payments and maturities during December 31, 2025, which were placed into cash. Our available-for-sale investment securities are carried at fair value with changes in fair value reflected in other comprehensive income (loss) or through the Provision. Our held-to-maturity investment securities are carried at amortized cost.

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As of December 31, 2025, we maintained all of our investment securities in either the available-for-sale category (recorded at fair value) or the held-to-maturity category (recorded at amortized cost) in the consolidated balance sheets, with $2.9 billion invested in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac. Our investment securities portfolio also included $2.5 billion in mortgage-backed securities issued by Ginnie Mae, Fannie Mae, Freddie Mac and Municipal Housing Authorities and non-agency entities, $76.6 million in collateralized loan obligations, $55.0 million in debt securities issued by states and political subdivisions and $46.2 million in debt securities issued by government agencies (U.S. International Development Finance Corporation bonds).

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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.

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Gross unrealized gains in our investment securities portfolio were $7.1 million and $0.6 million as of December 31, 2025 and 2024, respectively. Gross unrealized losses in our investment securities portfolio were $521.9 million and $792.7 million as of December 31, 2025 and 2024. The lower overall unrealized loss position was primarily due to paydowns in our investment securities portfolio and changes in market value of the securities.

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For our available-for-sale investment securities, we conduct a regular assessment of our investment securities portfolio to determine whether any securities are impaired. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security is compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through the allowance for credit losses is recognized in other comprehensive income. For the years ended December 31, 2025 and 2024, we did not record any credit losses related to our available-for-sale investment securities portfolio.

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For our held-to-maturity investment securities, we utilize the Current Expected Credit Loss (“CECL”) approach to estimate lifetime expected credit losses. Substantially all of our held-to-maturity securities are issued by the U.S. government, its agencies and government-sponsored enterprises. These securities have a long history of no credit losses and carry the explicit or implicit guarantee of the U.S. government. Therefore, as of December 31, 2025 and 2024, we did not record an allowance for credit losses related to our held-to-maturity investment securities portfolio.

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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 December 31, 2025 and 2024, we held $10.1 million and $21.4 million in FHLB stock, respectively, which is recorded as a component of other assets in our consolidated balance sheets.

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See “Note 3. Investment Securities” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information on our investment securities portfolio.

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Loans and Leases

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Table 11 presents the composition of our loan and lease portfolio by major categories as of December 31, 2025 and 2024:

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Total loans and leases were $14.3 billion as of December 31, 2025, a decrease of $95.7 million or 1% from December 31, 2024, with decreases in construction loans, commercial and industrial loans and residential real estate loans, partially offset by increases in commercial real estate loans, lease financing and consumer loans.

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Commercial and industrial loans are made primarily to corporations, middle market and small businesses for the purpose of financing equipment acquisition, expansion, working capital and other general business purposes. We also offer a variety of automobile dealer flooring lines to our customers in Hawaii and California to assist with the financing of their inventory. Commercial and industrial loans were $2.2 billion as of December 31, 2025, a decrease of $76.1 million or 3% from December 31, 2024.

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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 and owner occupied property is cash flow from the property and the operating cash flow from the business, respectively. Commercial real estate loans were $4.6 billion as of December 31, 2025, an increase of $126.3 million or 3% from December 31, 2024.

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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 $808.3 million as of December 31, 2025, a decrease of $110.1 million or 12% from December 31, 2024. This decrease was primarily due to construction loans reclassified to commercial real estate loans during the year ended December 31, 2025.

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Residential real estate loans are generally secured by 1-4 unit residential properties and are underwritten using traditional underwriting systems to assess the credit risks and financial capacity and repayment ability of the consumer. Decisions are primarily based on LTV ratios, debt-to-income (“DTI”) ratios, liquidity and credit scores. LTV ratios generally do not exceed 80%, although higher levels are permitted with mortgage insurance. We offer fixed rate mortgage products and variable rate mortgage products including HELOC. We offer these variable rate mortgage products based on SOFR with interest rates that are subject to change every six months after the third, fifth, seventh or tenth year, depending on the product. Variable rate residential mortgage loans are underwritten at fully-indexed interest rates. We generally do not offer interest-only, payment-option facilities, or any product with negative amortization. Residential real estate loans were $5.3 billion as of December 31, 2025, a decrease of $45.1 million or 1% from December 31, 2024.

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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 $1.0 billion as of December 31, 2025, an increase of $1.9 million or less than 1% from December 31, 2024.

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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 $441.9 million as of December 31, 2025, an increase of $7.3 million or 2% from December 31, 2024.

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See “Note 4. Loans and Leases” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data and the discussion in “Analysis of Financial Condition — Allowance for Credit 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 CME Term SOFR, Prime and SOFR, 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 or the remaining life of the loan. Table 12 presents the recorded investment in our loan and lease portfolio as of December 31, 2025:

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Tables 13 and 14 present the geographic distribution of our loan and lease portfolio as of December 31, 2025 and 2024:

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