# FIRST HAWAIIAN, INC. (FHB) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from FIRST HAWAIIAN, INC.'s 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/36377/000155837024001995/fhb-20231231x10k.htm
Accession: 0001558370-24-001995
Filing date: 2024-02-28
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/FHB/
All MD&A years: /company/FHB/mda/
Previous year: /company/FHB/mda/fy2022/ (FY 2022)
Next year: /company/FHB/mda/fy2024/ (FY 2024)

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 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; 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 man-made natural disasters; our ability to maintain consistent growth, earnings and profitability; the impact of any pandemic, epidemic or health-related crisis; 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 or review 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, 2023, we were the largest full-service bank headquartered in Hawaii as measured by assets, loans and leases, deposits and net income. As of December 31, 2023, we had $24.9 billion of assets, $14.4 billion of gross loans and leases and $21.3 billion of deposits. We also generated $235.0 million of net income or diluted earnings per share of $1.84 per share for the year ended December 31, 2023. We operate our business through three operating segments: Retail Banking, Commercial Banking and Treasury and 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 reflects some decline during the year ended December 31, 2023 but remains relatively resilient in the wake of the wildfires that affected the island of Maui in early August and high consumer prices. According to the State of Hawaii Department of Labor and Industrial Relations, the statewide seasonally adjusted unemployment rate decreased to 2.9% at December 31, 2023, compared to 3.2% at December 31, 2022. Nationally, the seasonally adjusted unemployment rate was 3.7% at December 31, 2023 compared to 3.5% at December 31, 2022.

Visitor arrivals to Maui are slowly increasing as West Maui (with the exception of Lahaina Town) reopened to tourism, with visitors in December 2023 at a 75% increase as compared to August 2023. Domestic visitor arrivals for the entire state continue to remain strong. The average daily domestic passenger counts for the twelve months of 2023 were approximately 4.4% higher than the average daily passenger counts during the twelve months of 2022, according to the Hawaii Tourism Authority.

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The housing market has slowed compared to the prior year but is still trending upwards overall. Both volume of real estate sales and housing prices decreased when comparing the twelve months of 2023 with the twelve months of 2022. According to the Honolulu Board of Realtors, the volume of single-family home sales decreased by 26.3%, while condominium sales decreased by 28%, as compared to the same period in 2022. The median price of a single-family home sold on Oahu in the twelve months of 2023 was $1,050,000, a decrease of 5.0% from the same period in 2022, but an increase of 6.1% from the same period in 2021. The median price of a condominium sold on Oahu in the twelve months of 2023 was $508,500, a decrease of 0.3% from the same period in 2022, but an increase of 7.1% from the same period in 2021. As of December 31, 2023, months of inventory of single-family homes and condominiums on Oahu remained low at approximately 2.8 and 3.2 months, respectively.

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State general excise and use tax revenues increased by 4.9% for the year ended December 31, 2023 as compared to the same period in 2022, according to the Hawaii Department of Business, Economic Development & Tourism.

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Effect of Recent Natural Disasters

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In early August of 2023, wildfires swept across several areas of Maui, impacting residents in upcountry Maui and devastating the historic town of Lahaina. Relief efforts from across the State of Hawaii commenced and continue to this day to aid those who have lost their homes, businesses, and loved ones. We have contributed $250,000 to the Hawaii Community Foundation’s Maui Strong Fund, granted loan payment deferrals for our borrowers affected by the wildfires, waived all ATM fees on Maui, and assisted affected employees with financial aid for temporary housing. Our operations on Maui also recovered quickly. Although the Lahaina branch and ATM were fully burned down, our vault withstood the fire and we were able to account for safe deposit box contents and return them to our customers. The remaining branches in Maui have remained fully operational and we are in process of re-opening a temporary location for the Lahaina branch.

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The outstanding balance of real estate-secured loans in the Maui fire zones totaled approximately $112 million as of December 31, 2023. We require our borrowers to maintain adequate levels of insurance, including fire insurance on residential mortgages. We do not currently know how long it will be before rebuilding can start, the amounts of available insurance coverage, the availability of government assistance for our borrowers in the long run or whether our borrowers’ longer-term ability to repay their loans has been diminished. There was no exposure to the electric utility as of December 31, 2023.

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We expect that the aftermath of the wildfires will continue to impact commercial activity throughout the island of Maui, but there remains much uncertainty as to how long it will take Maui to rebuild, return tourism to historic levels, and recover economically. Since there is significant uncertainty with respect to the full extent of the negative impacts due to the nature of the wildfires, the Company’s estimates concerning the impact of the wildfires, including those with respect to the loan portfolio potentially impacted, are based on judgment as of the date of this report and subject to change as conditions evolve. We will continue to closely monitor the impact that the wildfires has on our customers and will adjust the means by which we assist our customers during this period of financial and emotional hardship.

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Effect of Inflation, Interest Rates and Changing Prices

The consolidated financial statements and related financial data presented in this Form 10-K have been prepared according to generally accepted accounting principles in the United States, which require the measurement of financial positions and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation.

Although inflation is no longer rising as quickly as it did in previous periods, prices remain high due to, among other factors, continued global supply chain disruptions, changes in the labor market and geopolitical tensions.

The closures and adverse developments affecting certain banks in the first half of 2023 resulted in heightened levels of market activity and volatility, as well as the potential for increased regulation and more stringent capital requirements going forward. In response to the deterioration in the operating environment and funding conditions for U.S. banks, in April 2023, Moody’s lowered the macro profile of the U.S. banking system and downgraded the credit ratings of the Bank, among other regional banks.

In November 2023, the FDIC approved the final rule on a special assessment to replenish the deposit insurance fund following the recent bank failures. The Company fully recognized the special assessment in the fourth quarter of 2023. In light of the ongoing volatility in the capital markets and economic disruptions, we continue to carefully monitor our capital and liquidity positions.

As of December 31, 2023, the Company was “well-capitalized” and met all applicable regulatory capital requirements, including a Common Equity Tier 1 capital ratio of 12.39%, compared to the minimum requirement of 4.50%. For additional discussions regarding our capital and liquidity positions and related risks, refer to the sections titled “Liquidity and Capital Resources” and “Capital” in this MD&A.

Other key factors could impact our profitability in future reporting periods. See Item 1A. Risk Factors, beginning in the section captioned “Summary of Risk Factors.”

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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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[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31,"],["(dollars in thousands, except per share data)","","2023","\u200b","2022","\u200b"],["Balance Sheet Data:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Cash and cash equivalents","\u200b","$","1,739,897","\u200b","$","526,624","\u200b"],["Investment securities available-for-sale","\u200b","\u200b","2,255,336","\u200b","\u200b","3,151,133","\u200b"],["Investment securities held-to-maturity","\u200b","\u200b","4,041,449","\u200b","\u200b","4,320,639","\u200b"],["Loans and leases","\u200b","\u200b","14,353,497","\u200b","\u200b","14,092,012","\u200b"],["Allowance for credit losses for loans and leases","\u200b","\u200b","156,533","\u200b","\u200b","143,900","\u200b"],["Goodwill","\u200b","\u200b","995,492","\u200b","\u200b","995,492","\u200b"],["Total assets","\u200b","\u200b","24,926,474","\u200b","\u200b","24,577,223","\u200b"],["Total deposits","\u200b","\u200b","21,332,657","\u200b","\u200b","21,689,029","\u200b"],["Short-term borrowings","\u200b","\u200b","500,000","\u200b","\u200b","75,000","\u200b"],["Total liabilities","\u200b","\u200b","22,440,408","\u200b","\u200b","22,308,218","\u200b"],["Total stockholders' equity","\u200b","\u200b","2,486,066","\u200b","\u200b","2,269,005","\u200b"],["Book value per share","\u200b","$","19.48","\u200b","$","17.82","\u200b"],["Tangible book value per share (non-GAAP)(1)","\u200b","$","11.68","\u200b","$","10.00","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Asset Quality Ratios:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Non-accrual loans and leases / total loans and leases","\u200b","\u200b","0.13","%","\u200b","0.08","%"],["Allowance for credit losses for loans and leases / total loans and leases","\u200b","\u200b","1.09","%","\u200b","1.02","%"],["Net charge-offs / average total loans and leases","\u200b","\u200b","0.09","%","\u200b","0.08","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","December 31,","\u200b","December 31,","\u200b"],["Capital Ratios:","","2023","\u200b","2022","\u200b"],["Common Equity Tier 1 Capital Ratio","\u200b","","12.39","%","","11.82","%"],["Tier 1 Capital Ratio","\u200b","\u200b","12.39","%","\u200b","11.82","%"],["Total Capital Ratio","\u200b","\u200b","13.57","%","\u200b","12.92","%"],["Tier 1 Leverage Ratio","\u200b","\u200b","8.64","%","\u200b","8.11","%"],["Total stockholders' equity to total assets","\u200b","\u200b","9.97","%","\u200b","9.23","%"],["Tangible stockholders' equity to tangible assets (non-GAAP)(1)","\u200b","\u200b","6.23","%","\u200b","5.40","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Return on average tangible assets, return on average tangible stockholders\u2019 equity, tangible book value per share and tangible stockholders\u2019 equity to tangible assets are non-GAAP financial measures. We compute our return on average tangible assets as the ratio of net income to average tangible assets. We compute our return on average tangible stockholders\u2019 equity as the ratio of net income to average tangible stockholders\u2019 equity. We compute our tangible book value per share as the ratio of tangible stockholders\u2019 equity to outstanding shares. We compute our tangible stockholders\u2019 equity to tangible assets as the ratio of tangible stockholders\u2019 equity to tangible assets. We believe that these financial measures are useful for investors, regulators, management and others to evaluate financial performance and capital adequacy relative to other financial institutions. Although these non-GAAP financial measures are frequently used by shareholders in the evaluation of a company, they have limitations as analytical tools and should not be considered in isolation or as a substitute for analyses of results as reported under GAAP."]]
[[/GREPCENT_TABLE]]

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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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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["GAAP to Non-GAAP Reconciliation","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Table 2"],["\u200b","\u200b","\u200b","For the Years Ended"],["\u200b","\u200b","\u200b","December 31,"],["(dollars in thousands)","","2023","","2022","","2021"],["Income Statement Data:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Noninterest expense","\u200b","$","501,138","\u200b","$","440,471","\u200b","$","405,479","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net income","\u200b","$","234,983","\u200b","$","265,685","\u200b","$","265,735","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Average total stockholders' equity","\u200b","$","2,346,713","\u200b","$","2,321,606","\u200b","$","2,708,370","\u200b"],["Less: average goodwill","\u200b","\u200b","995,492","\u200b","\u200b","995,492","\u200b","\u200b","995,492","\u200b"],["Average tangible stockholders' equity","\u200b","$","1,351,221","\u200b","$","1,326,114","\u200b","$","1,712,878","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Average total assets","\u200b","$","24,625,445","\u200b","$","24,964,422","\u200b","$","24,426,258","\u200b"],["Less: average goodwill","\u200b","\u200b","995,492","\u200b","\u200b","995,492","\u200b","\u200b","995,492","\u200b"],["Average tangible assets","\u200b","$","23,629,953","\u200b","$","23,968,930","\u200b","$","23,430,766","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Return on average total stockholders' equity","\u200b","\u200b","10.01","%","\u200b","11.44","%","\u200b","9.81","%"],["Return on average tangible stockholders' equity (non-GAAP)","\u200b","\u200b","17.39","%","\u200b","20.03","%","\u200b","15.51","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Return on average total assets","\u200b","\u200b","0.95","%","\u200b","1.06","%","\u200b","1.09","%"],["Return on average tangible assets (non-GAAP)","\u200b","\u200b","0.99","%","\u200b","1.11","%","\u200b","1.13","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Noninterest expense to average assets","\u200b","\u200b","2.04","%","\u200b","1.76","%","\u200b","1.66","%"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","December 31,"],["(dollars in thousands, except per share data)","2023","\u200b","2022","\u200b"],["Balance Sheet Data:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total stockholders' equity","$","2,486,066","\u200b","$","2,269,005","\u200b"],["Less: goodwill","\u200b","995,492","\u200b","\u200b","995,492","\u200b"],["Tangible stockholders' equity","$","1,490,574","\u200b","$","1,273,513","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total assets","$","24,926,474","\u200b","$","24,577,223","\u200b"],["Less: goodwill","\u200b","995,492","\u200b","\u200b","995,492","\u200b"],["Tangible assets","$","23,930,982","\u200b","$","23,581,731","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Shares outstanding","\u200b","127,618,761","\u200b","\u200b","127,363,327","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total stockholders' equity to total assets","\u200b","9.97","%","\u200b","9.23","%"],["Tangible stockholders' equity to tangible assets (non-GAAP)","\u200b","6.23","%","\u200b","5.40","%"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Book value per share","$","19.48","\u200b","$","17.82","\u200b"],["Tangible book value per share (non-GAAP)","$","11.68","\u200b","$","10.00","\u200b"]]
[[/GREPCENT_TABLE]]

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Financial Highlights

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Net income was $235.0 million for the year ended December 31, 2023, a decrease of $30.7 million or 12% as compared to 2022. Basic and diluted earnings per share were both $1.84 per share for the year ended December 31, 2023, a decrease of $0.24 per share or 12% as compared to 2022. The decrease in net income was primarily due to a $60.7 million increase in noninterest expense and a $25.2 million increase in the provision for credit losses (the “Provision”). This was partially offset by a $22.6 million increase in net interest income, a $21.3 million increase in noninterest income and an $11.3 million decrease in the provision for income taxes.

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Net income was $265.7 million for the year ended December 31, 2022, a decrease of $0.1 million as compared to 2021. Basic earnings per share was $2.08 per share for the year ended December 31, 2022, an increase of $0.02 per share or 1% as compared to 2021. Diluted earnings per share was $2.08 for the year ended December 31, 2022, an increase of $0.03 or 1% as compared to 2021. Net income includes a $83.0 million increase in net interest income driven by the rising interest rate environment. The decrease in net income was primarily due to a $35.0 million increase in noninterest expense, a $5.4 million decrease in noninterest income, a $2.3 million increase in the provision for income taxes and a Provision of $1.4 million for the year ended December 31, 2022, compared to a negative Provision of $39.0 million for the year ended December 31, 2021.

​

Our return on average total assets was 0.95% for the year ended December 31, 2023, a decrease of 11 basis points as compared to 2022, and our return on average total stockholders’ equity was 10.01% for the year ended December 31, 2023, a decrease of 143 basis points as compared to 2022. Our return on average tangible assets was 0.99% for the year ended December 31, 2023, a decrease of 12 basis points as compared to 2022, and our return on average tangible stockholders’ equity was 17.39% for the year ended December 31, 2023, a decrease of 264 basis points as compared to 2022. Our efficiency ratio was 59.48% for the year ended December 31, 2023 as compared to 55.20% in 2022. 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.

​

Our return on average total assets was 1.06% for the year ended December 31, 2022, a decrease of three basis points as compared to 2021, and our return on average total stockholders’ equity was 11.44% for the year ended December 31, 2022, an increase of 163 basis points as compared to 2021. Our return on average tangible assets was 1.11% for the year ended December 31, 2022, a decrease of two basis points as compared to 2021, and our return on average tangible stockholders’ equity was 20.03% for the year ended December 31, 2022, an increase of 452 basis points as compared to 2021. Our efficiency ratio was 55.20% for the year ended December 31, 2022 as compared to 56.45% in 2021. 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.

​

Our results for the December 31, 2023 were highlighted by the following:

​

[[GREPCENT_TABLE]]
[["","\u25cf","Net interest income was $636.1 million for the year ended December 31, 2023, an increase of $22.6 million or 4% as compared to 2022. Our net interest margin was 2.92% for the year ended December 31, 2023, an increase of 14 basis points as compared to 2022. The increase in net interest income was primarily due to higher yields and average balances in our loan and lease portfolio and higher yields on interest-bearing deposits in other banks, primarily attributable to the rising interest rate environment in the period. This was partially offset by higher deposit funding costs and higher borrowing costs."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","The Provision was $26.6 million for the year ended December 31, 2023, an increase of $25.2 million as compared to 2022. The Provision of $26.6 million for the year ended December 31, 2023, was primarily due to increases in the provision for consumer loans, construction loans, commercial and industrial loans, residential mortgage loans and commercial real estate loans and the provision for unfunded commercial and industrial and construction commitments. This was partially offset by a decrease in the provision for unfunded home equity line commitments. The Provision is recorded to maintain the ACL and the reserve for unfunded commitments at levels deemed adequate to absorb lifetime expected credit losses in our loan and lease portfolio and unfunded loan and lease commitments as of the balance sheet date."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","Noninterest income was $200.8 million for the year ended December 31, 2023, an increase of $21.3 million or 12% as compared to 2022. The increase was primarily due to a $14.1 million increase in bank-owned life insurance (\u201cBOLI\u201d) income, a $5.5 million increase in other noninterest income, a $2.0 million increase in trust and investment services income, a $0.8 million increase in service charges on deposits accounts and a $0.8 million increase in net gains on the sale of investment securities, partially offset by a $2.1 million decrease in credit and debit card fees."]]
[[/GREPCENT_TABLE]]

​

54

Table of Contents

[[GREPCENT_TABLE]]
[["","\u25cf","Noninterest expense was $501.1 million for the year ended December 31, 2023, an increase of $60.7 million or 14% as compared to 2022. The increase in noninterest expense was primarily due to a $26.6 million increase in salaries and employee benefits, a $22.5 million increase in regulatory assessment and fees, a $10.6 million increase in equipment expense and a $5.7 million increase in other noninterest expense. This was partially offset by a $3.6 million decrease in contracted services and professional fees and a $1.4 million decrease in occupancy expense."]]
[[/GREPCENT_TABLE]]

​

Our results for the year ended December 31, 2022 were highlighted by the following:

​

[[GREPCENT_TABLE]]
[["","\u25cf","Net interest income was $613.5 million for the year ended December 31, 2022, an increase of $83.0 million or 16% as compared to 2021. Our net interest margin was 2.78% for the year ended December 31, 2022, an increase of 35 basis points as compared to 2021. The increase in net interest income was primarily due to higher yields in most loan categories, higher yields and average balances in our investment securities portfolio and higher yields on interest-bearing deposits in other banks, primarily attributable to the rising interest rate environment in the period. This was partially offset by higher deposit funding costs."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","The Provision was $1.4 million for the year ended December 31, 2022, compared to a negative Provision of $39.0 million for the year ended December 31, 2021. The negative Provision in 2021 was primarily due to lower expected credit losses as a result of the economic recovery and easing of restrictions related to the COVID-19 pandemic and the impact of the pandemic on Hawaii\u2019s economy, key industries, businesses and our customers. The Provision is recorded to maintain the ACL and the reserve for unfunded commitments at levels deemed adequate to absorb lifetime expected credit losses in our loan and lease portfolio and unfunded loan and lease commitments as of the balance sheet date."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","Noninterest income was $179.5 million for the year ended December 31, 2022, a decrease of $5.4 million or 3% as compared to 2021. The decrease was primarily due to an $11.9 million decrease in bank-owned life insurance (\u201cBOLI\u201d) income and a $1.5 million decrease in other service charges and fees. This was partially offset by a $2.7 million increase in other noninterest income, a $2.4 million increase in credit and debit card fees, a $1.7 million increase in trust and investment services income and a $1.3 million increase in service charges on deposit accounts."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","Noninterest expense was $440.5 million for the year ended December 31, 2022, an increase of $35.0 million or 9% as compared to 2021. The increase in noninterest expense was primarily due to a $16.7 million increase in salaries and employee benefits, a $9.8 million increase in equipment expense, a $6.7 million increase in contracted services and professional fees, a $5.7 million increase in card rewards program expenses, a $1.9 million increase in advertising and marketing expense, a $1.7 million increase in occupancy expense and a $1.4 million increase in regulatory assessment and fees. This was partially offset by an $8.9 million decrease in other noninterest expense."]]
[[/GREPCENT_TABLE]]

​

Balance sheet highlights consisted of the following:

​

[[GREPCENT_TABLE]]
[["","\u25cf","Total loans and leases were $14.4 billion as of December 31, 2023, an increase of $261.5 million or 2% as compared to December 31, 2022. This increase was primarily due to increases in commercial real estate loans, residential real estate loans, lease financing and construction loans, partially offset by decreases in consumer loans and commercial and industrial loans."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","The ACL was $156.5 million as of December 31, 2023, an increase of $12.6 million or 9% from December 31, 2022. The ratio of our ACL to total loans and leases outstanding was 1.09% as of December 31, 2023, an increase of seven basis points compared to December 31, 2022. The overall level of the ACL was commensurate with our stable credit risk profile, loan portfolio growth and composition and a stable Hawaii economy."]]
[[/GREPCENT_TABLE]]

55

Table of Contents

[[GREPCENT_TABLE]]
[["","\u25cf","Our investment portfolio is comprised of high-grade investment securities, primarily collateralized mortgage obligations issued by the Government National Mortgage Association (\u201cGinnie Mae\u201d), the Federal National Mortgage Association (\u201cFannie Mae\u201d) and the Federal Home Loan Mortgage Corporation (\u201cFreddie Mac\u201d) and mortgage-backed securities issued by Ginnie Mae, Freddie Mac, Fannie Mae, Municipal Housing Authorities and non-agency entities. The total carrying value of our investment securities portfolio was $6.3 billion as of December 31, 2023, a decrease of $1.2 billion or 16% from December 31, 2022. The decrease in investment securities was driven by sales, maturities and payments during the year ended December 31, 2023, which was used to fund loan growth and offset a decline in deposits."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","Total deposits were $21.3 billion as of December 31, 2023, a decrease of $356.4 million or 2% from December 31, 2022. This decrease was primarily due to a $1.3 billion decrease in demand deposits and a $117.6 million decrease in money market deposit balances, partially offset by a $980.1 million increase in time deposit balances and a $62.2 million increase in savings deposit balances."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","Total borrowings consisted of $500.0 million of short-term borrowings as of December 31, 2023, compared to $75.0 million of short-term borrowings as of December 31, 2022. For information with respect to the financial terms of such advances, see \u201c \u2013 Analysis of Financial Condition \u2013 Short-term Borrowings.\u201d"]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","Total stockholders\u2019 equity was $2.5 billion as of December 31, 2023, an increase of $217.1 million or 10% from December 31, 2022. This increase was primarily due to earnings for the year ended December 31, 2023 of $235.0 million and a $109.0 million increase in accumulated other comprehensive income, net of tax, partially offset by dividends declared and paid to the Company\u2019s stockholders of $132.6 million."]]
[[/GREPCENT_TABLE]]

​

Analysis of Results of Operations

​

Net Interest Income

​

For the years ended December 31, 2023, 2022, and 2021, 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.

56

Table of Contents

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Average Balances and Interest Rates","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Table 3"],["\u200b","\u200b","Year Ended","\u200b","Year Ended","\u200b","Year Ended","\u200b"],["\u200b","\u200b","December 31, 2023","\u200b","December 31, 2022","\u200b","December 31, 2021","\u200b"],["\u200b","\u200b","Average","\u200b","Income/","\u200b","Yield/","\u200b","Average","\u200b","Income/","\u200b","Yield/","\u200b","Average","\u200b","Income/","\u200b","Yield/","\u200b"],["(dollars in millions)","","Balance","","Expense","","Rate","","Balance","","Expense","","Rate","","Balance","","Expense","","Rate"],["Earning Assets","","\u200b","\u200b","","\u200b","\u200b","","\u200b","\u200b","","\u200b","\u200b","","\u200b","\u200b","","\u200b","","\u200b","\u200b","","\u200b","\u200b","","\u200b"],["Interest-Bearing Deposits in Other Banks","\u200b","$","512.3","\u200b","$","26.5","\u200b","\u200b","5.18","%","$","867.6","\u200b","$","10.3","\u200b","1.19","%","$","1,723.0","\u200b","$","2.3","\u200b","0.14","%"],["Available-for-Sale Investment Securities","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Taxable","\u200b","\u200b","2,871.8","\u200b","\u200b","73.8","\u200b","\u200b","2.57","\u200b","\u200b","4,650.1","\u200b","\u200b","83.2","\u200b","1.79","\u200b","\u200b","6,608.9","\u200b","\u200b","93.3","\u200b","1.41","\u200b"],["Non-Taxable","\u200b","\u200b","10.2","\u200b","\u200b","0.6","\u200b","\u200b","5.55","\u200b","\u200b","180.0","\u200b","\u200b","4.9","\u200b","2.74","\u200b","\u200b","481.9","\u200b","\u200b","10.2","\u200b","2.12","\u200b"],["Held-to-Maturity Investment Securities","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Taxable","\u200b","\u200b","3,579.0","\u200b","\u200b","60.7","\u200b","\u200b","1.70","\u200b","\u200b","2,728.2","\u200b","\u200b","45.5","\u200b","1.67","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b"],["Non-Taxable","\u200b","\u200b","607.7","\u200b","\u200b","15.9","\u200b","\u200b","2.61","\u200b","\u200b","460.6","\u200b","\u200b","12.5","\u200b","2.71","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b"],["Total Investment Securities","\u200b","\u200b","7,068.7","\u200b","\u200b","151.0","\u200b","\u200b","2.14","\u200b","\u200b","8,018.9","\u200b","\u200b","146.1","\u200b","1.82","\u200b","\u200b","7,090.8","\u200b","\u200b","103.5","\u200b","1.46","\u200b"],["Loans Held for Sale","\u200b","\u200b","0.4","\u200b","\u200b","\u2014","\u200b","\u200b","6.63","\u200b","\u200b","0.6","\u200b","\u200b","\u2014","\u200b","3.14","\u200b","\u200b","3.6","\u200b","\u200b","0.1","\u200b","2.24","\u200b"],["Loans and Leases(1)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial and industrial","\u200b","\u200b","2,182.3","\u200b","\u200b","141.0","\u200b","\u200b","6.46","\u200b","\u200b","2,019.5","\u200b","\u200b","78.4","\u200b","3.88","\u200b","\u200b","2,586.8","\u200b","\u200b","82.2","\u200b","3.18","\u200b"],["Commercial real estate","\u200b","\u200b","4,257.9","\u200b","\u200b","266.0","\u200b","\u200b","6.25","\u200b","\u200b","3,895.3","\u200b","\u200b","153.2","\u200b","3.93","\u200b","\u200b","3,456.7","\u200b","\u200b","101.6","\u200b","2.94","\u200b"],["Construction","\u200b","\u200b","877.7","\u200b","\u200b","62.1","\u200b","\u200b","7.08","\u200b","\u200b","755.0","\u200b","\u200b","32.5","\u200b","4.30","\u200b","\u200b","804.5","\u200b","\u200b","25.4","\u200b","3.16","\u200b"],["Residential:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Residential mortgage","\u200b","\u200b","4,308.0","\u200b","\u200b","156.4","\u200b","\u200b","3.63","\u200b","\u200b","4,200.2","\u200b","\u200b","145.5","\u200b","3.46","\u200b","\u200b","3,836.6","\u200b","\u200b","138.3","\u200b","3.60","\u200b"],["Home equity line","\u200b","\u200b","1,131.1","\u200b","\u200b","39.3","\u200b","\u200b","3.47","\u200b","\u200b","965.0","\u200b","\u200b","26.5","\u200b","2.75","\u200b","\u200b","834.3","\u200b","\u200b","22.2","\u200b","2.66","\u200b"],["Consumer","\u200b","\u200b","1,178.6","\u200b","\u200b","71.5","\u200b","\u200b","6.07","\u200b","\u200b","1,218.9","\u200b","\u200b","65.3","\u200b","5.35","\u200b","\u200b","1,275.5","\u200b","\u200b","67.8","\u200b","5.31","\u200b"],["Lease financing","\u200b","\u200b","330.7","\u200b","\u200b","14.1","\u200b","\u200b","4.26","\u200b","\u200b","260.9","\u200b","\u200b","9.7","\u200b","3.69","\u200b","\u200b","239.9","\u200b","\u200b","7.6","\u200b","3.14","\u200b"],["Total Loans and Leases","\u200b","\u200b","14,266.3","\u200b","\u200b","750.4","\u200b","\u200b","5.26","\u200b","\u200b","13,314.8","\u200b","\u200b","511.1","\u200b","3.84","\u200b","\u200b","13,034.3","\u200b","\u200b","445.1","\u200b","3.42","\u200b"],["Other Earning Assets","\u200b","\u200b","104.3","\u200b","\u200b","1.3","\u200b","\u200b","1.20","\u200b","\u200b","70.9","\u200b","\u200b","0.6","\u200b","0.89","\u200b","\u200b","69.4","\u200b","\u200b","1.1","\u200b","1.54","\u200b"],["Total Earning Assets(2)","\u200b","\u200b","21,952.0","\u200b","\u200b","929.2","\u200b","\u200b","4.23","\u200b","\u200b","22,272.8","\u200b","\u200b","668.1","\u200b","3.00","\u200b","\u200b","21,921.1","\u200b","\u200b","552.1","\u200b","2.52","\u200b"],["Cash and Due from Banks","\u200b","\u200b","265.1","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","289.0","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","289.3","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Other Assets","\u200b","\u200b","2,408.3","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","2,402.6","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","2,215.9","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total Assets","\u200b","$","24,625.4","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","$","24,964.4","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","$","24,426.3","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Interest-Bearing Liabilities","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Interest-Bearing Deposits","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Savings","\u200b","$","6,124.7","\u200b","$","71.5","\u200b","\u200b","1.17","%","$","6,741.5","\u200b","$","19.2","\u200b","0.29","%","$","6,581.1","\u200b","$","2.5","\u200b","0.04","%"],["Money Market","\u200b","\u200b","3,869.1","\u200b","\u200b","86.1","\u200b","\u200b","2.22","\u200b","\u200b","4,068.8","\u200b","\u200b","16.6","\u200b","0.41","\u200b","\u200b","3,831.4","\u200b","\u200b","2.1","\u200b","0.05","\u200b"],["Time","\u200b","\u200b","3,040.0","\u200b","\u200b","100.6","\u200b","\u200b","3.31","\u200b","\u200b","1,826.7","\u200b","\u200b","13.4","\u200b","0.73","\u200b","\u200b","2,005.0","\u200b","\u200b","9.3","\u200b","0.47","\u200b"],["Total Interest-Bearing Deposits","\u200b","\u200b","13,033.8","\u200b","\u200b","258.2","\u200b","\u200b","1.98","\u200b","\u200b","12,637.0","\u200b","\u200b","49.2","\u200b","0.39","\u200b","\u200b","12,417.5","\u200b","\u200b","13.9","\u200b","0.11","\u200b"],["Federal Funds Purchased","\u200b","\u200b","17.2","\u200b","\u200b","0.8","\u200b","\u200b","4.45","\u200b","\u200b","11.5","\u200b","\u200b","0.5","\u200b","4.08","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b"],["Other Short-Term Borrowings","\u200b","\u200b","261.9","\u200b","\u200b","13.0","\u200b","\u200b","4.98","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b"],["Long-Term Borrowings","\u200b","\u200b","261.6","\u200b","\u200b","12.5","\u200b","\u200b","4.78","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","177.5","\u200b","\u200b","4.9","\u200b","2.76","\u200b"],["Other Interest-Bearing Liabilities","\u200b","\u200b","57.1","\u200b","\u200b","3.0","\u200b","\u200b","5.15","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b"],["Total Interest-Bearing Liabilities","\u200b","\u200b","13,631.6","\u200b","\u200b","287.5","\u200b","\u200b","2.11","\u200b","\u200b","12,648.5","\u200b","\u200b","49.7","\u200b","0.39","\u200b","\u200b","12,595.0","\u200b","\u200b","18.8","\u200b","0.15","\u200b"],["Net Interest Income","\u200b","\u200b","\u200b","\u200b","$","641.7","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","$","618.4","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","$","533.3","\u200b","\u200b","\u200b"],["Interest Rate Spread(3)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","2.12","%","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","2.61","%","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","2.37","%"],["Net Interest Margin(4)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","2.92","%","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","2.78","%","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","2.43","%"],["Noninterest-Bearing Demand Deposits","\u200b","\u200b","8,126.4","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","9,421.5","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","8,594.1","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Other Liabilities","\u200b","\u200b","520.7","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","572.8","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","528.8","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Stockholders' Equity","\u200b","\u200b","2,346.7","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","2,321.6","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","2,708.4","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total Liabilities and Stockholders' Equity","\u200b","$","24,625.4","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","$","24,964.4","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","$","24,426.3","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Interest income includes taxable-equivalent basis adjustments of $5.6 million, $4.9 million and $2.8 million for the years ended December 31, 2023, 2022 and 2021, respectively."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(3)","Interest rate spread is the difference between the average yield on earning assets and the average rate paid on interest-bearing liabilities, on a fully taxable-equivalent basis."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(4)","Net interest margin is net interest income, on a fully taxable-equivalent basis, divided by average total earning assets."]]
[[/GREPCENT_TABLE]]

​

57

Table of Contents

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Analysis of Change in Net Interest Income","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Table 4"],["\u200b","\u200b","Year Ended December 31, 2023","\u200b","Year Ended December 31, 2022"],["\u200b","\u200b","Compared to December 31, 2022","\u200b","Compared to December 31, 2021"],["(dollars in millions)","","Volume","","Rate","","Total(1)","","Volume","","Rate","","Total(1)"],["Change in Interest Income:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Interest-Bearing Deposits in Other Banks","\u200b","$","(5.8)","\u200b","$","22.0","\u200b","$","16.2","\u200b","$","(1.7)","\u200b","$","9.7","\u200b","$","8.0"],["Available-for-Sale Investment Securities","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Taxable","\u200b","\u200b","(38.3)","\u200b","\u200b","28.9","\u200b","\u200b","(9.4)","\u200b","\u200b","(31.6)","\u200b","\u200b","21.5","\u200b","\u200b","(10.1)"],["Non-Taxable","\u200b","\u200b","(6.9)","\u200b","\u200b","2.6","\u200b","\u200b","(4.3)","\u200b","\u200b","(7.7)","\u200b","\u200b","2.4","\u200b","\u200b","(5.3)"],["Held-to-Maturity Investment Securities","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Taxable","\u200b","\u200b","14.4","\u200b","\u200b","0.8","\u200b","\u200b","15.2","\u200b","\u200b","45.5","\u200b","\u200b","\u2014","\u200b","\u200b","45.5"],["Non-Taxable","\u200b","\u200b","3.9","\u200b","\u200b","(0.5)","\u200b","\u200b","3.4","\u200b","\u200b","12.5","\u200b","\u200b","\u2014","\u200b","\u200b","12.5"],["Total Investment Securities","\u200b","\u200b","(26.9)","\u200b","\u200b","31.8","\u200b","\u200b","4.9","\u200b","\u200b","18.7","\u200b","\u200b","23.9","\u200b","\u200b","42.6"],["Loans Held for Sale","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","(0.1)","\u200b","\u200b","\u2014","\u200b","\u200b","(0.1)"],["Loans and Leases","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial and industrial","\u200b","\u200b","6.8","\u200b","\u200b","55.8","\u200b","\u200b","62.6","\u200b","\u200b","(20.0)","\u200b","\u200b","16.2","\u200b","\u200b","(3.8)"],["Commercial real estate","\u200b","\u200b","15.4","\u200b","\u200b","97.4","\u200b","\u200b","112.8","\u200b","\u200b","14.1","\u200b","\u200b","37.5","\u200b","\u200b","51.6"],["Construction","\u200b","\u200b","5.9","\u200b","\u200b","23.7","\u200b","\u200b","29.6","\u200b","\u200b","(1.6)","\u200b","\u200b","8.7","\u200b","\u200b","7.1"],["Residential:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Residential mortgage","\u200b","\u200b","3.7","\u200b","\u200b","7.2","\u200b","\u200b","10.9","\u200b","\u200b","12.7","\u200b","\u200b","(5.5)","\u200b","\u200b","7.2"],["Home equity line","\u200b","\u200b","5.1","\u200b","\u200b","7.7","\u200b","\u200b","12.8","\u200b","\u200b","3.5","\u200b","\u200b","0.8","\u200b","\u200b","4.3"],["Consumer","\u200b","\u200b","(2.3)","\u200b","\u200b","8.5","\u200b","\u200b","6.2","\u200b","\u200b","(3.0)","\u200b","\u200b","0.5","\u200b","\u200b","(2.5)"],["Lease financing","\u200b","\u200b","2.8","\u200b","\u200b","1.6","\u200b","\u200b","4.4","\u200b","\u200b","0.7","\u200b","\u200b","1.4","\u200b","\u200b","2.1"],["Total Loans and Leases","\u200b","\u200b","37.4","\u200b","\u200b","201.9","\u200b","\u200b","239.3","\u200b","\u200b","6.4","\u200b","\u200b","59.6","\u200b","\u200b","66.0"],["Other Earning Assets","\u200b","\u200b","0.4","\u200b","\u200b","0.3","\u200b","\u200b","0.7","\u200b","\u200b","\u2014","\u200b","\u200b","(0.5)","\u200b","\u200b","(0.5)"],["Total Change in Interest Income","\u200b","\u200b","5.1","\u200b","\u200b","256.0","\u200b","\u200b","261.1","\u200b","\u200b","23.3","\u200b","\u200b","92.7","\u200b","\u200b","116.0"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Change in Interest Expense:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Interest-Bearing Deposits","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Savings","\u200b","\u200b","(1.9)","\u200b","\u200b","54.2","\u200b","\u200b","52.3","\u200b","\u200b","\u2014","\u200b","\u200b","16.7","\u200b","\u200b","16.7"],["Money Market","\u200b","\u200b","(0.9)","\u200b","\u200b","70.4","\u200b","\u200b","69.5","\u200b","\u200b","0.1","\u200b","\u200b","14.4","\u200b","\u200b","14.5"],["Time","\u200b","\u200b","13.8","\u200b","\u200b","73.4","\u200b","\u200b","87.2","\u200b","\u200b","(0.8)","\u200b","\u200b","4.9","\u200b","\u200b","4.1"],["Total Interest-Bearing Deposits","\u200b","\u200b","11.0","\u200b","\u200b","198.0","\u200b","\u200b","209.0","\u200b","\u200b","(0.7)","\u200b","\u200b","36.0","\u200b","\u200b","35.3"],["Federal Funds Purchased","\u200b","\u200b","0.2","\u200b","\u200b","0.1","\u200b","\u200b","0.3","\u200b","\u200b","0.5","\u200b","\u200b","\u2014","\u200b","\u200b","0.5"],["Other Short-Term Borrowings","\u200b","\u200b","13.0","\u200b","\u200b","\u2014","\u200b","\u200b","13.0","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014"],["Long-Term Borrowings","\u200b","\u200b","12.5","\u200b","\u200b","\u2014","\u200b","\u200b","12.5","\u200b","\u200b","(2.5)","\u200b","\u200b","(2.4)","\u200b","\u200b","(4.9)"],["Other Interest-Bearing Liabilities","\u200b","\u200b","3.0","\u200b","\u200b","\u2014","\u200b","\u200b","3.0","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014"],["Total Change in Interest Expense","\u200b","\u200b","39.7","\u200b","\u200b","198.1","\u200b","\u200b","237.8","\u200b","\u200b","(2.7)","\u200b","\u200b","33.6","\u200b","\u200b","30.9"],["Change in Net Interest Income","\u200b","$","(34.6)","\u200b","$","57.9","\u200b","$","23.3","\u200b","$","26.0","\u200b","$","59.1","\u200b","$","85.1"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(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."]]
[[/GREPCENT_TABLE]]

​

Net interest income, on a fully taxable-equivalent basis, was $641.7 million for the year ended December 31, 2023, an increase of $23.3 million or 4% as compared to 2022. Our net interest margin was 2.92% for the year ended December 31, 2023, an increase of 14 basis points as compared to 2022. The increase in net interest income, on a fully taxable-equivalent basis, was driven by the rising interest rate environment and was primarily due to higher yields and average balances in our loan and lease portfolio and higher yields on our interest-bearing deposits in other banks. This was partially offset by higher deposit funding cost and higher borrowing costs. Yields on our loans and leases were 5.26% for the year ended December 31, 2023, an increase of 142 basis points as compared to 2022. We experienced an increase in our yields from total loans and leases primarily due to increases in yields from our adjustable-rate commercial real estate loans, commercial and industrial loans and construction loans, which are largely based on the SOFR. For the year ended December 31, 2023, the average balance of our loan and lease portfolio was $14.3 billion, an increase of $951.5 million or 7% compared to the same period in 2022. The increase in the average balance of our loans and leases reflected increases in most loan categories. Yields on our interest-bearing deposits in other banks were 5.18% for the year ended December 31, 2023, an increase of 399 basis points compared to 2022. Deposit funding costs were $258.2 million for the year ended December 31, 2023, an increase of $209.0 million compared to 2022. Rates paid on our interest-bearing deposits were 198 basis points for the year ended December 31, 2023, an increase of 159 basis points compared to 2022. Total borrowing costs were $26.3 million for the year ended December 31, 2023, an increase of $25.8 million compared to 2022, primarily due to the FHLB repo advances and FHLB fixed-rate advances that originated during 2023.  

58

Table of Contents

​

Net interest income, on a fully taxable-equivalent basis, was $618.4 million for the year ended December 31, 2022, an increase of $85.1 million or 16% as compared to 2021. Our net interest margin was 2.78% for the year ended December 31, 2022, an increase of 35 basis points as compared to 2021. The increase in net interest income, on a fully taxable-equivalent basis, was primarily due to higher yields in most loan categories, higher yields and average balances in our investment securities portfolio and higher yields on our interest-bearing deposits in other banks. This was partially offset by higher deposit funding costs. Yields on our loans and leases were 3.84% for the year ended December 31, 2022, an increase of 42 basis points as compared to 2021. We experienced an increase in our yield from total loans primarily due to increases in our commercial real estate and commercial and industrial loans. The increase in our adjustable rate commercial and industrial and commercial real estate loans are typically based on LIBOR. Fees are accelerated into net interest income upon the forgiveness of PPP loans. Net interest income for the years ended December 31, 2022 and 2021, included $5.1 million and $31.6 million, respectively, of fees from PPP loans. As of December 31, 2022, there were approximately $0.3 million of additional fees remaining on our PPP loans that had not yet been recognized into income. For the year ended December 31, 2022, the average balance of our investment securities portfolio increased $928.1 million or 13% to $8.0 billion. Yields on our investment securities portfolio were 1.82% for the year ended December 31, 2022, an increase of 36 basis points compared to 2021. Deposit funding costs were $49.2 million for the year ended December 31, 2022, an increase of $35.3 million compared to 2021. Rates paid on our interest-bearing deposits were 39 basis points for the year ended December 31, 2022, an increase of 28 basis points compared to 2021.

​

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 2021 at 3.25%, where it remained at through the end of the year. During 2022, the prime rate increased a total of 425 basis points (25 basis points in March, 50 basis points in May, 75 basis points in each month of June, July, September and November, and 50 basis points in December) to end the year at 7.50%. During 2023, the prime rate increased 100 basis points (25 basis points each in February, March, May and July) to end 2023 at 8.50%. As noted above, our loan portfolio is also impacted by changes in the SOFR. At December 31, 2023, the one-month and three-month CME Term SOFR interest rates were 5.35% and 5.33%, respectively. At December 31, 2022, the one-month and three-month CME Term SOFR interest rates were 4.36% and 4.59%, respectively. At December 31, 2021, the one-month and three-month CME Term SOFR interest rates were 0.05% and 0.09%, respectively. The target range for the federal funds rate, which is the cost of immediately available overnight funds, began in 2021 at 0.00% to 0.25% where it remained at through the end of the year. During 2022, the federal funds rate increased 425 basis points to end the year at 4.25% to 4.50%. During 2023, the federal funds rate increased 100 basis points to end the year at 5.25% to 5.50%.

​

Provision for Credit Losses

​

The Provision was $26.6 million for the year ended December 31, 2023 compared to a Provision of $1.4 million in 2022. For the year ended December 31, 2023, the Provision included $24.9 million in provision for credit losses for loans and leases, compared to a negative $2.1 million in provision for credit losses for loans and leases in 2022, and $1.8 million in provision for credit losses for the reserve for unfunded commitments, compared to $3.5 million in provision for credit losses for the reserve for unfunded commitments in 2022. The Provision of $26.6 million was primarily due to increases in the provision for consumer loans, construction loans, commercial and industrial loans, residential mortgage loans and commercial real estate loans and the provision for unfunded commercial and industrial and construction commitments. This was partially offset by a decrease in the provision for unfunded home equity line commitments. We recorded net charge-offs of $12.2 million and $11.2 million for the years ended December 31, 2023 and 2022, respectively. This represented net charge-offs of 0.09% and 0.08% of total average loans and leases for the years ended December 31, 2023 and 2022, respectively. The ACL was $156.5 million and $143.9 million as of December 31, 2023 and 2022, respectively, and represented 1.09% of total outstanding loans and leases as of December 31, 2023, compared to 1.02% of total outstanding loans and leases as of December 31, 2022. The reserve for unfunded commitments was $35.6 million as of December 31, 2023, compared to $33.8 million as of December 31, 2022. 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.

​

59

Table of Contents

Noninterest Income

​

Table 5 presents the major components of noninterest income for the years ended December 31, 2023, 2022 and 2021:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Noninterest Income","\u200b","\u200b","\u200b","\u200b","\u200b","Table 5"],["\u200b","\u200b","Year Ended December 31,","\u200b","Change","\u200b","\u200b","Change","\u200b"],["(dollars in thousands)","","2023","","2022","","2021","","\u200b","2023","vs.","2022","","","\u200b","2022","vs.","2021","\u200b"],["Service charges on deposit accounts","\u200b","$","29,647","\u200b","$","28,809","\u200b","$","27,510","\u200b","$","838","\u200b","3","%","\u200b","$","1,299","\u200b","5","%"],["Credit and debit card fees","\u200b","\u200b","63,888","\u200b","\u200b","66,028","\u200b","\u200b","63,580","\u200b","\u200b","(2,140)","\u200b","(3)","\u200b","\u200b","\u200b","2,448","\u200b","4","\u200b"],["Other service charges and fees","\u200b","\u200b","37,299","\u200b","\u200b","37,036","\u200b","\u200b","38,578","\u200b","\u200b","263","\u200b","1","\u200b","\u200b","\u200b","(1,542)","\u200b","(4)","\u200b"],["Trust and investment services income","\u200b","\u200b","38,449","\u200b","\u200b","36,465","\u200b","\u200b","34,719","\u200b","\u200b","1,984","\u200b","5","\u200b","\u200b","\u200b","1,746","\u200b","5","\u200b"],["Bank-owned life insurance","\u200b","\u200b","15,326","\u200b","\u200b","1,248","\u200b","\u200b","13,185","\u200b","\u200b","14,078","\u200b","n/m","\u200b","\u200b","\u200b","(11,937)","\u200b","(91)","\u200b"],["Investment securities gains, net","\u200b","\u200b","792","\u200b","\u200b","\u2014","\u200b","\u200b","102","\u200b","\u200b","792","\u200b","n/m","\u200b","\u200b","\u200b","(102)","\u200b","n/m","\u200b"],["Other","\u200b","\u200b","15,414","\u200b","\u200b","9,939","\u200b","\u200b","7,242","\u200b","\u200b","5,475","\u200b","55","\u200b","\u200b","\u200b","2,697","\u200b","37","\u200b"],["Total noninterest income","\u200b","$","200,815","\u200b","$","179,525","\u200b","$","184,916","\u200b","$","21,290","\u200b","12","%","\u200b","$","(5,391)","\u200b","(3)","%"]]
[[/GREPCENT_TABLE]]

n/m – Denotes a variance that is not a meaningful metric to inform the change in noninterest income from the year ended December 31, 2023 to the same period in 2022 and from the year ended December 31, 2022 to the same period in 2021.

​

Total noninterest income was $200.8 million for the year ended December 31, 2023, an increase of $21.3 million or 12% as compared to 2022. Total noninterest income was $179.5 million for the year ended December 31, 2022, a decrease of $5.4 million or 3% as compared to 2021.

​

Service charges on deposit accounts were $29.6 million for the year ended December 31, 2023, an increase of $0.8 million or 3% as compared to 2022. This increase was primarily due to a $0.9 million increase in dormant account fees, a $0.7 million increase in account analysis service charges and a $0.6 million increase in overdraft and checking account fees, partially offset by a $1.1 million decrease in checking account service fees. Service charges on deposit accounts were $28.8 million for the year ended December 31, 2022, an increase of $1.3 million or 5% as compared to 2021. This increase was primarily due to a $1.8 million increase in overdraft and checking account fees, a $1.0 million increase in dormant account fees and a $0.6 million increase in account analysis service charges, partially offset by a $2.0 million decrease in checking account service fees.

​

Credit and debit card fees were $63.9 million for the year ended December 31, 2023, a decrease of $2.1 million or 3% as compared to 2022. This decrease was primarily due to a $3.1 million increase in network association dues, a $2.1 million decrease in merchant service revenues and a $1.0 million decrease in ATM interchange and surcharge fees, partially offset by a $3.1 million increase in interchange settlement fees and a $1.0 million increase in debit card interchange fees. Credit and debit card fees were $66.0 million for the year ended December 31, 2022, an increase of $2.4 million or 4% as compared to 2021. This increase was primarily due to a $3.3 million increase in interchange settlement fees and a $1.7 million increase in merchant service revenues, partially offset by a $1.6 million increase in network association dues and a $0.9 million decrease in ATM interchange and surcharge fees.

​

Other service charges and fees were $37.3 million for the year ended December 31, 2023, an increase of $0.3 million or 1% as compared to 2022. Other service charges and fees were $37.0 million for the year ended December 31, 2022, a decrease of $1.5 million or 4% as compared to 2021. This decrease was primarily due to a $1.0 million decrease in miscellaneous service fees, a $1.0 million decrease in service fees related to participation loans, a $0.4 million decrease in fees from standby letters of credit arrangements, a $0.3 million decrease in insurance income, a $0.3 million decrease in traveler’s check processing fees and a $0.2 million decrease in safe deposit box rental fees. This was partially offset by a $1.9 million increase in fees from annuities and securities.

​

Trust and investment services income was $38.4 million for the year ended December 31, 2023, an increase of $2.0 million or 5% as compared to 2022. This increase was primarily due to a $1.1 million increase in investment management fees and a $1.1 million increase in business cash management fees. Trust and investment services income was $36.5 million for the year ended December 31, 2022, an increase of $1.7 million or 5% as compared to 2021. This increase was primarily due to a $2.5 million increase in business cash management fees and a $0.5 million increase in investment management fees. This was partially offset by a $0.4 million decrease in irrevocable trust fees, a $0.3 million decrease in trust service fees and a $0.3 million decrease in pension plan fees.

​

60

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BOLI income was $15.3 million for the year ended December 31, 2023, an increase of $14.1 million as compared to 2022. This increase was due to an $11.0 million increase in BOLI earnings and a $3.1 million increase in death benefit proceeds from life insurance policies. BOLI income was $1.2 million for the year ended December 31, 2022, a decrease of $11.9 million or 91% as compared to 2021. This decrease was due to a $9.7 million decrease in BOLI earnings and a $2.3 million decrease in death benefit proceeds from life insurance policies.

​

Net gains on the sale of investment securities were $0.8 million for the year ended December 31, 2023, an increase in net gains of $0.8 million as compared to the same period in 2022. The net gains were primarily due to a $40.8 million net realized gain on the sale of the Company’s remaining approximately 120,000 Visa Class B restricted shares, partially offset by $40.0 million of net realized losses on sales of available-for-sale investment securities. Net gains on the sale of investment securities were nil for the year ended December 31, 2022.

​

Other noninterest income was $15.4 million for the year ended December 31, 2023, an increase of $5.5 million or 55% as compared to 2022. This increase was primarily due to a $7.9 million gain on the sale of a bank property in 2023, a $2.5 million increase in income due to adjustments to certain liabilities assumed as a result of the Reorganization Transactions, a $2.4 million increase in market adjustments on mutual funds purchased, a $1.5 million increase in volume-based incentives and a $0.9 million increase in net mortgage servicing rights income. This was partially offset by a $7.0 million increase in net losses recognized in income related to derivative contracts, a $1.2 million tax refund received during the year ended December 31, 2022, a $0.7 million decrease in customer-related interest rate swap fees and a $0.4 million decrease in debit card merchant discount fees. Other noninterest income was $9.9 million for the year ended December 31, 2022, an increase of $2.7 million or 37% as compared to 2021. This increase was primarily due to a $5.2 million decrease in net losses recognized in income related to derivative contracts, a $1.2 million tax refund received, a $0.7 million increase in net mortgage servicing rights income, a $0.5 million increase in vendor bonuses received and a $0.4 million increase in market adjustments for foreign exchange transactions. This was partially offset by a $2.2 million decrease in gains on the sale of bank properties, a $1.6 million decrease in gains on the sale of residential loans to government-sponsored enterprises and a $1.5 million decrease in market adjustments on mutual funds purchased.

​

Noninterest Expense

​

Table 6 presents the major components of noninterest expense for the years ended December 31, 2023, 2022 and 2021:

​

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

n/m – Denotes a variance that is not a meaningful metric to inform the change in noninterest expense from the year ended December 31, 2023 to the same period in 2022.

​

Total noninterest expense was $501.1 million for the year ended December 31, 2023, an increase of $60.7 million or 14% as compared to 2022. Total noninterest expense was $440.5 million for the year ended December 31, 2022, an increase of $35.0 million or 9% as compared to 2021.

​

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Salaries and employee benefits expense was $225.8 million for the year ended December 31, 2023, an increase of $26.6 million or 13% as compared to 2022. This increase was primarily due to a $12.7 million increase in base salaries and related payroll taxes, a $10.7 million decrease in payroll and benefit costs being deferred as loan origination costs, a $4.3 million increase in other compensation, primarily related to adjustments made to the deferred compensation plan as a result of market conditions and nonrecurring separation agreements and severance costs, a $1.3 million increase in retirement plan expenses, a $1.1 million increase in state unemployment tax expense and a $0.8 million increase in group health plan costs. This was partially offset by a $2.2 million decrease in incentive compensation, a $1.1 million decrease in temporary help expenses and a $0.9 million decrease in employee overtime pay expense. Salaries and employee benefits expense was $199.1 million for the year ended December 31, 2022, an increase of $16.7 million or 9% as compared to 2021. This increase was primarily due to a $15.4 million decrease in payroll and benefit costs being deferred as loan origination costs, an $11.7 million increase in base salaries and related payroll taxes, a $0.6 million increase in employee overtime pay expense and a $0.4 million increase in incentive compensation. This was partially offset by a $7.9 million decrease in other compensation, primarily related to adjustments made to the deferred compensation plan as a result of market conditions and a nonrecurring severance cost of $1.2 million recorded during the year ended December 31, 2021, as well as a $1.6 million decrease in temporary help expenses, a $1.1 million decrease in retirement plan expenses and a $0.9 million decrease in group health plan costs.

​

Contracted services and professional fees were $66.4 million for the year ended December 31, 2023, a decrease of $3.6 million or 5% as compared to 2022. This decrease was primarily due to a $6.2 million decrease in contracted data processing expenses and a $3.2 million decrease in audit, legal and consultant fees. This was partially offset by a $5.8 million increase in outside services, primarily attributable to technology-related projects, marketing and new customer services. Contracted services and professional fees were $70.0 million for the year ended December 31, 2022, an increase of $6.7 million or 11% as compared to 2021. This increase was primarily due to an $11.6 million increase in outside services, primarily attributable to technology-related projects, marketing and new customer services, and a $3.2 million increase in audit, legal and consultant fees. This was partially offset by an $8.0 million decrease in contracted data processing expenses.

​

Occupancy expense was $29.6 million for the year ended December 31, 2023, a decrease of $1.4 million or 5% as compared to 2022. This decrease was due to a $0.9 million decrease in building depreciation, a $0.7 million decrease in building maintenance expense and a $0.5 million decrease in utilities expense, partially offset by a $0.8 million decrease in net sublease rental income. Occupancy expense was $31.0 million for the year ended December 31, 2022, an increase of $1.7 million or 6% as compared to 2021. This increase was due to a $1.6 million increase in utilities expense and a $0.9 million increase in building maintenance expense, partially offset by a $0.4 million decrease in rental expense and a $0.3 million decrease in real property tax expense.

​

Equipment expense was $45.1 million for the year ended December 31, 2023, an increase of $10.6 million or 31% as compared to 2022. This increase was primarily due to an $11.8 million increase in technology-related amortization and licensing and maintenance fees, partially offset by a $0.9 million decrease in furniture and equipment depreciation. Equipment expense was $34.5 million for the year ended December 31, 2022, an increase of $9.8 million or 40% as compared to 2021. This increase was primarily due to a $10.5 million increase in technology-related amortization and licensing and maintenance fees, partially offset by a $0.5 million decrease in furniture and equipment depreciation.

​

Regulatory assessment and fees were $32.1 million for the year ended December 31, 2023, an increase of $22.5 million as compared to 2022. This increase was primarily due to increases in the FDIC insurance assessment. 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 recent bank failures. In November 2023, the FDIC approved a final rule to implement the special assessment and we recorded a $16.3 million loss in December 2023. Regulatory assessment and fees were $9.6 million for the year ended December 31, 2022, an increase of $1.4 million or 16% as compared to 2021. This increase was primarily due to a $1.4 million increase in the FDIC insurance assessment.

​

Advertising and marketing expense was $7.6 million for the year ended December 31, 2023, a decrease of $0.4 million or 5% as compared to 2022. Advertising and marketing expense was $8.0 million for the year ended December 31, 2022, an increase of $1.9 million or 31% as compared to 2021. This increase was primarily due to a $1.5 million increase in advertising costs.

​

62

Table of Contents

Card rewards program expense was $31.6 million for the year ended December 31, 2023, an increase of $0.6 million or 2% as compared to 2022. This increase was primarily due to a $2.1 million increase in credit card cash reward redemptions and a $1.2 million increase in interchange fees paid to our credit card partners, partially offset by a $2.5 million decrease in priority rewards card redemptions. Card rewards program expense was $31.0 million for the year ended December 31, 2022, an increase of $5.7 million or 23% as compared to 2021. This increase was primarily due to a $3.8 million increase in priority rewards card redemptions, a $1.3 million increase in interchange fees paid to our credit card partners and a $0.6 million increase in credit card cash reward redemptions.

​

Other noninterest expense was $62.9 million for the year ended December 31, 2023, an increase of $5.7 million or 10% as compared to 2022. This increase was primarily due to a one-time settlement expense in connection to a lawsuit against the Company, a $2.7 million increase in charitable contributions and increases in postage expenses, signature-based card fraud expenses and travel expenses. This was partially offset by a $1.4 million decrease in pension-related expenses, and decreases in activity charges assessed on the Company’s bank accounts, general and administrative expenses primarily around supplies, insurance, meals and entertainment and shipping and delivery, software amortization expense, mortgage loan charges and other tax expense. Other noninterest expense was $57.2 million for the year ended December 31, 2022, a decrease of $8.9 million or 13% as compared to 2021. This decrease was primarily due to $9.0 million in prepayment fees to terminate the Company’s FHLB fixed-rate advances recorded during the year ended December 31, 2021, a $3.1 million decrease in software amortization expense, and a $1.3 million decrease in pension-related expenses. This was partially offset by a $1.9 million increase in general and administrative expenses primarily around supplies, insurance, meals and entertainment and shipping and delivery, a $1.4 million increase in charitable contributions, a $0.7 million increase in travel expenses and a $0.5 million increase in activity charges assessed on the Company’s bank accounts.

​

Provision for Income Taxes

​

The provision for income taxes was $74.2 million (reflecting an effective tax rate of 24.00%) for the year ended December 31, 2023, compared with a provision for income taxes of $85.5 million (reflecting an effective tax rate of 24.35%) in 2022. 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.

​

Analysis of Business Segments

​

Our business segments are Retail Banking, Commercial Banking, and Treasury and Other. Table 7 summarizes net income (loss) from our business segments for the years ended December 31, 2023, 2022 and 2021. Additional information about operating segment performance 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.

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Business Segment Net Income (Loss)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Table 7","\u200b"],["\u200b","\u200b","Year Ended December 31,","\u200b"],["(dollars in thousands)","\u200b","2023","\u200b","2022","\u200b","2021"],["Retail Banking","\u200b","$","183,055","\u200b","$","179,640","\u200b","$","186,936","\u200b"],["Commercial Banking","\u200b","\u200b","95,200","\u200b","\u200b","95,757","\u200b","\u200b","119,773","\u200b"],["Treasury and Other","\u200b","\u200b","(43,272)","\u200b","\u200b","(9,712)","\u200b","\u200b","(40,974)","\u200b"],["Total","\u200b","$","234,983","\u200b","$","265,685","\u200b","$","265,735","\u200b"]]
[[/GREPCENT_TABLE]]

​

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

​

63

Table of Contents

Net income for the Retail Banking segment was $183.1 million for the year ended December 31, 2023, an increase of $3.4 million or 2% as compared to 2022. The increase in net income for the Retail Banking segment was primarily due to a $21.9 million increase in net interest income and a $3.6 million increase in noninterest income. This was partially offset by an $11.2 million increase in noninterest expense and a Provision of $9.9 million for the year ended December 31, 2023, compared to a negative Provision of $1.0 million for the year ended December 31, 2022. The increase in net interest income was primarily due to higher deposit spreads, partially offset by lower loan spreads. The increase in noninterest income was primarily due to increases in trust and investment services income, net mortgage servicing rights income and service charges on deposit accounts. The increase in noninterest expense was primarily due to increases in salaries and employee benefits expense, regulatory assessments and fees, occupancy expense and costs related to natural disaster events, partially offset by lower overall expenses that were allocated to the Retail Banking segment. The increase in the Provision was primarily due to an increase in our provision for credit losses for loans and leases allocated to the Retail Banking segment. The increase in total assets for the Retail Banking segment was primarily due to increases in our residential real estate and commercial real estate loan portfolios.

​

Net income for the Retail Banking segment was $179.6 million for the year ended December 31, 2022, a decrease of $7.3 million or 4% as compared to 2021. The decrease in net income for the Retail Banking segment was primarily due to a $45.6 million increase in noninterest expense and a negative Provision of $1.0 million for the year ended December 31, 2022, compared to a negative Provision of $16.3 million for the year ended December 31, 2021. This was partially offset by a $50.6 million increase in net interest income and a $2.4 million increase in noninterest income. The increase in noninterest expense was primarily due to higher overall expenses that were allocated to the Retail Banking segment and increases in salaries and employee benefits expense, occupancy expense and contracted services and professional fees. The increase in the Provision was primarily due to higher expected credit losses as a result of the risk of economic recession due to inflation resulting from higher oil prices and the continued impact of the COVID-19 pandemic on Hawaii’s economy, key industries, businesses and our customers. The increase in net interest income was primarily due to higher deposit credit rates paid to the Retail Banking segment, partially offset by higher earnings charges on our consumer, residential real estate and commercial loans. The increase in noninterest income was primarily due to increases in trust and investment services income, service charges on deposit accounts and net mortgage servicing rights income, partially offset by a decrease in gains on the sale of residential loans to government-sponsored enterprises. The increase in total assets for the Retail Banking segment was primarily due to an increase in our residential real estate loan portfolio.

​

Commercial Banking.  Our Commercial Banking segment includes our corporate banking related products, residential and 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.

​

Net income for the Commercial Banking segment was $95.2 million for the year ended December 31, 2023, a decrease of $0.6 million or 1% as compared to 2022. The decrease in net income for the Commercial Banking segment was primarily due to a Provision of $15.0 million for the year ended December 31, 2023, compared to a negative Provision of $1.2 million for the year ended December 31, 2022, in addition to a $2.9 million increase in noninterest expense and a $2.2 million decrease in noninterest income. This was partially offset by an $18.4 million increase in net interest income and a $2.2 million decrease in the provision for income taxes. The increase in the Provision was primarily due to an increase in our provision for credit losses for loans and leases allocated to the Commercial Banking segment. The increase in noninterest expense was primarily due to an increase in regulatory assessment and fees, a one-time settlement expense in connection to a lawsuit against the Company, and increases in salaries and benefits expense and card rewards program expense, partially offset by lower overall expenses that were allocated to the Commercial Banking segment. The decrease in noninterest income was primarily due to a decrease in credit and debit card fees. The increase in net interest income was primarily due to higher loan average balances and spreads, partially offset by a decrease in loan fees. The decrease in the provision for income taxes was primarily due to the decrease in pretax income. The increase in total assets for the Commercial Banking segment was primarily due to increases in our commercial real estate loan and lease financing portfolios, partially offset by a decrease in our consumer loan portfolio.

​

64

Table of Contents

Net income for the Commercial Banking segment was $95.8 million for the year ended December 31, 2022, a decrease of $24.0 million or 20% as compared to 2021. The decrease in net income for the Commercial Banking segment was primarily due to a negative Provision of $1.2 million for the year ended December 31, 2022, compared to a negative Provision of $22.5 million for the year ended December 31, 2021. The decrease in net income for the Commercial Banking segment also stemmed from a $9.0 million increase in noninterest expense and a $5.9 million decrease in net interest income, partially offset by a $7.4 million decrease in the provision for income taxes and a $4.8 million increase in noninterest income. The increase in the Provision was primarily due to higher expected credit losses as a result of the risk of economic recession due to inflation resulting from higher oil prices and the continued impact of the COVID-19 pandemic on Hawaii’s economy, key industries, businesses and our customers. The increase in noninterest expense was primarily due to an increase in card rewards program expense and higher overall expenses that were allocated to the Commercial Banking segment, partially offset by a decrease in salaries and benefits expense. The decrease in net interest income was primarily due to a decrease in loan fees in our commercial and industrial portfolio from PPP loans, partially offset by higher deposit credit rates paid to the Commercial Banking segment. The decrease in the provision for income taxes was primarily due to the decrease in pretax income. The increase in noninterest income was primarily due to an increase in credit and debit card fees, a tax refund received during the year ended December 31, 2022, an increase in service charges on deposit accounts and vendor bonuses received, partially offset by a decrease in other service charges and fees. The increase in total assets for the Commercial Banking segment was primarily due to increases in our commercial real estate, commercial and industrial and lease financing loan portfolios.

​

Treasury and Other.  Our Treasury and Other segment includes our treasury business, which consists of corporate asset and liability management activities, including interest rate risk management. The assets and liabilities (and related interest income and expense) of our treasury business consist of interest-bearing deposits, investment securities, federal funds sold and purchased, government deposits, short and long-term borrowings and bank-owned properties. Our primary sources of noninterest income are from BOLI, net gains from the sale of investment securities, foreign exchange income related to customer driven cross-border wires for business and personal reasons 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 $43.3 million for the year ended December 31, 2023, an increase in net loss of $33.6 million as compared to 2022. The increase in net loss was primarily due to a $46.6 million increase in noninterest expense and a $17.8 million decrease in net interest income, partially offset by a $19.9 million increase in noninterest income, a $9.1 million increase in the benefit for income taxes and a $1.7 million decrease in the Provision. The increase in noninterest expense was primarily due to lower overall credits that were allocated to the Treasury and Other segment and increases in equipment expense, salaries and employee benefits expense and regulatory assessment and fees. This was partially offset by decreases in contracted services and professional fees and occupancy expense. The decrease in net interest income was primarily due to an increase in interest expense from public deposits and higher borrowing costs, partially offset by an increase in net transfer pricing credits that reside in the Treasury and Other segment and higher yields on our interest-bearing deposits in other banks. The increase in noninterest income was primarily due to increases in BOLI income, a gain on the sale of a bank property in 2023, market adjustments on mutual funds purchased, income due to adjustments to certain liabilities assumed as a result of the Reorganization Transactions and net gains on the sale of investment securities, partially offset by an increase in net losses recognized in income related to derivative contracts. The increase in the benefit for income taxes was primarily due to the increase in pretax loss. The decrease in the Provision was primarily due to the decrease in the provision for unfunded home equity line commitments. The increase in total assets for the Treasury and Other segment was primarily due to an increase in our interest-bearing deposits in other banks, partially offset by a decrease in our investment securities portfolio.

​

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Net loss for the Treasury and Other segment was $9.7 million for the year ended December 31, 2022, a decrease in net loss of $31.3 million or 76% as compared to 2021. The decrease in net loss was primarily due to a $38.3 million increase in net interest income and a $19.6 million decrease in noninterest expense, partially offset by a $12.6 million decrease in noninterest income, a $3.8 million increase in the Provision and a $10.3 million decrease in the benefit for income taxes. The increase in net interest income was primarily due to higher average balances and yields on our investment securities portfolio, partially offset by an increase in net transfer pricing charges that reside in the Treasury and Other segment. The decrease in noninterest expense was primarily due to higher overall credits that were allocated to the Treasury and Other segment and prepayment termination fees paid in 2021 that did not occur in 2022. This was partially offset by increases in equipment expense, contracted services and professional fees, salaries and employee benefits expense and advertising and marketing expense. The decrease in noninterest income was primarily due to decreases in BOLI income, gains on the sale of bank properties, market adjustments on mutual funds purchased and service charges on deposit accounts, partially offset by a decrease in net losses recognized in income related to derivative contracts. The increase in the Provision was due to the increase in the reserve for unfunded commitments for the year ended December 31, 2022. The decrease in the benefit for income taxes was primarily due to the decrease in pretax loss. The decrease in total assets for the Treasury and Other segment was primarily due to decreases in our investment securities portfolio and interest-bearing deposits in other banks.

​

​

Analysis of Financial Condition

​

Liquidity and Capital Resources

​

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

​

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

​

Immediate liquid resources are available in cash which is primarily on deposit with the Federal Reserve Bank of San Francisco (the “FRB”). As of December 31, 2023 and 2022, cash and cash equivalents were $1.7 billion and $0.5 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 $2.3 billion and $4.0 billion as of December 31, 2023, respectively. The carrying values of our available-for-sale investment securities and held-to-maturity investment securities were $3.2 billion and $4.3 billion as of December 31, 2022, respectively. As of December 31, 2023 and 2022, 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, 2023, our available-for-sale investment securities portfolio was comprised of securities with a weighted average life of approximately 4.2 years and our held-to-maturity investment securities portfolio was comprised of securities with a weighted average life of approximately 7.9 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, 2023, we have borrowing capacity of $2.5 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 $19.5 billion and $20.2 billion as of December 31, 2023 and 2022, which represented 91% and 93%, respectively, of our total deposits as of December 31, 2023 and 2022, respectively. 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.

​

In March 2023, to enhance liquidity as a precaution in light of recent volatility in the banking sector, the Bank took $500.0 million in FHLB advances. For information with respect to the financial terms of such advances, see “ – Short-term Borrowings.” We also utilize short-term advances to help manage liquidity needs that may arise from time to time.

​

Our material cash requirements from our current and long-term contractual obligations as of December 31, 2023 are summarized in the following table:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Contractual Obligations","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Table 8"],["\u200b","\u200b","Less Than","\u200b","\u200b","\u200b","\u200b","\u200b","After","\u200b","\u200b","\u200b"],["(dollars in thousands)","","One Year","","1 - 3 Years","","4 - 5 Years","","5 Years","","Total"],["Contractual Obligations","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Time certificates of deposits","\u200b","$","3,262,048","\u200b","$","143,534","\u200b","$","50,166","\u200b","$","410","\u200b","$","3,456,158"],["Short-term borrowings","\u200b","\u200b","500,000","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","500,000"],["Noncancelable operating leases","\u200b","\u200b","8,009","\u200b","\u200b","10,785","\u200b","\u200b","8,451","\u200b","\u200b","62,557","\u200b","\u200b","89,802"],["Postretirement benefit contributions","\u200b","\u200b","1,220","\u200b","\u200b","2,743","\u200b","\u200b","3,068","\u200b","\u200b","7,863","\u200b","\u200b","14,894"],["Purchase obligations","\u200b","\u200b","97,391","\u200b","\u200b","104,204","\u200b","\u200b","33,259","\u200b","\u200b","4,832","\u200b","\u200b","239,686"],["Affordable housing commitments","\u200b","\u200b","49,686","\u200b","\u200b","29,667","\u200b","\u200b","248","\u200b","\u200b","1,104","\u200b","\u200b","80,705"],["Total Contractual Obligations","\u200b","$","3,918,354","\u200b","$","290,933","\u200b","$","95,192","\u200b","$","76,766","\u200b","$","4,381,245"]]
[[/GREPCENT_TABLE]]

​

Commitments to extend credit, standby letters of credit and commercial letters of credit do not necessarily represent future cash requirements in that these commitments often expire without being drawn upon; therefore, these items are not included in the table above. Purchase obligations arise from agreements to purchase goods or services that are enforceable and legally binding. Other contracts included in purchase obligations primarily consist of service agreements for various systems and applications supporting bank operations, including the systems and applications in the Bank’s core system. Postretirement benefit contributions represent the minimum expected contribution to the postretirement benefit plan. Actual contributions may differ from these estimates.

​

Our liability for unrecognized tax benefits (“UTBs”) as of December 31, 2023 and 2022 was $212.0 million and $206.2 million, respectively. The increase in UTB was primarily due to additions related to previously identified tax positions. We are unable to reasonably estimate the period of cash settlement with the respective taxing authority. As a result, our liability for UTBs is not disclosed in the table above.

​

See the discussion of credit, lease and other contractual commitments in “Note 4. Loans and Leases” and “Note 17. Commitments and Contingent Liabilities” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data.

​

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

​

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

​

Potential Demands on Liquidity from Off-Balance Sheet Arrangements

​

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

​

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 $80.7 million and $47.2 million as of December 31, 2023 and 2022, respectively.

​

Guarantees

​

We sell residential mortgage loans in the secondary market primarily to Fannie Mae or Freddie Mac. The agreements under which we sell residential mortgage loans to Fannie Mae or Freddie Mac contain provisions that include various representations and warranties regarding the origination and characteristics of the residential mortgage loans. Although the specific representations and warranties vary among investors, insurance or guarantee agreements, they typically cover: ownership of the loan; validity of the lien securing the loan; the absence of delinquent taxes or liens against the property securing the loan; compliance with loan criteria set forth in the applicable agreement; compliance with applicable federal, state, and local laws; and other matters. As of December 31, 2023 and 2022, the unpaid principal balance of our portfolio of residential mortgage loans sold was $1.3 billion and $1.4 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, 2023, there was one residential mortgage loan repurchase totaling $0.2 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 year ended December 31, 2023, we had no repurchase requests related to loan servicing activities, nor were there any pending repurchase requests as of December 31, 2023.

​

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, 2023, 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, 2023, 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

​

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.

​

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.

​

Investment Securities

​

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, 2023 and 2022:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Investment Securities","\u200b","\u200b","\u200b","\u200b","\u200b","Table 9"],["\u200b","","December 31,","\u200b","December 31,"],["(dollars in thousands)","\u200b","2023","\u200b","2022"],["U.S. Treasury and government agency debt securities","\u200b","$","32,503","\u200b","$","150,982"],["Government-sponsored enterprises debt securities","\u200b","\u200b","19,592","\u200b","\u200b","44,301"],["Mortgage-backed securities:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Residential - Government agency","\u200b","\u200b","10,182","\u200b","\u200b","59,723"],["Residential - Government-sponsored enterprises","\u200b","\u200b","783,297","\u200b","\u200b","1,160,455"],["Commercial - Government agency","\u200b","\u200b","218,674","\u200b","\u200b","237,853"],["Commercial - Government-sponsored enterprises","\u200b","\u200b","86,431","\u200b","\u200b","119,573"],["Commercial - Non-agency","\u200b","\u200b","21,683","\u200b","\u200b","21,471"],["Collateralized mortgage obligations:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Government agency","\u200b","\u200b","471,150","\u200b","\u200b","653,322"],["Government-sponsored enterprises","\u200b","\u200b","363,970","\u200b","\u200b","462,132"],["Collateralized loan obligations","\u200b","\u200b","247,854","\u200b","\u200b","241,321"],["Total available-for-sale securities","\u200b","$","2,255,336","\u200b","$","3,151,133"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Government agency debt securities","\u200b","$","52,051","\u200b","$","54,318"],["Mortgage-backed securities:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Residential - Government agency","\u200b","\u200b","43,885","\u200b","\u200b","46,302"],["Residential - Government-sponsored enterprises","\u200b","\u200b","99,379","\u200b","\u200b","106,534"],["Commercial - Government agency","\u200b","\u200b","30,795","\u200b","\u200b","30,544"],["Commercial - Government-sponsored enterprises","\u200b","\u200b","1,129,738","\u200b","\u200b","1,150,449"],["Collateralized mortgage obligations:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Government agency","\u200b","\u200b","989,130","\u200b","\u200b","1,080,492"],["Government-sponsored enterprises","\u200b","\u200b","1,642,274","\u200b","\u200b","1,798,178"],["Debt securities issued by states and political subdivisions","\u200b","\u200b","54,197","\u200b","\u200b","53,822"],["Total held-to-maturity securities","\u200b","$","4,041,449","\u200b","$","4,320,639"]]
[[/GREPCENT_TABLE]]

​

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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, 2023:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Maturities and Weighted-Average Yield on Securities(1)","\u200b","\u200b","Table 10"],["\u200b","\u200b","1 Year or Less","\u200b","After 1 Year - 5 Years","\u200b","After 5 Years - 10 Years","\u200b","Over 10 Years","\u200b","Total"],["\u200b","\u200b","\u200b","\u200b","Weighted","\u200b","\u200b","\u200b","Weighted","\u200b","\u200b","\u200b","Weighted","\u200b","\u200b","\u200b","Weighted","\u200b","\u200b","\u200b","Weighted","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","Average","\u200b","\u200b","\u200b","Average","\u200b","\u200b","\u200b","Average","\u200b","\u200b","\u200b","Average","\u200b","\u200b","\u200b","Average","\u200b","Fair"],["(dollars in millions)","","Amount","","Yield","\u200b","Amount","","Yield","\u200b","Amount","","Yield","\u200b","Amount","","Yield","\u200b","Amount","","Yield","\u200b","Value"],["As of December 31, 2023","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Available-for-sale securities","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["U.S. Treasury and government agency debt securities","\u200b","$","25.1","\u200b","1.48","%","$","8.1","\u200b","0.89","%","$","\u2014","\u200b","\u2014","%","$","\u2014","\u200b","\u2014","%","$","33.2","\u200b","1.33","%","$","32.5"],["Government-sponsored enterprises debt securities","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","20.0","\u200b","3.33","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","20.0","\u200b","3.33","\u200b","\u200b","19.6"],["Mortgage-backed securities:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Residential - Government agency(2)","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","11.3","\u200b","2.84","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","11.3","\u200b","2.84","\u200b","\u200b","10.2"],["Residential - Government-sponsored enterprises(2)","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","895.4","\u200b","1.33","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","895.4","\u200b","1.33","\u200b","\u200b","783.3"],["Commercial - Government agency(2)","\u200b","\u200b","4.1","\u200b","3.18","\u200b","\u200b","232.0","\u200b","1.88","\u200b","\u200b","32.8","\u200b","1.76","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","268.9","\u200b","1.89","\u200b","\u200b","218.7"],["Commercial - Government-sponsored enterprises(2)","\u200b","\u200b","28.3","\u200b","2.97","\u200b","\u200b","65.2","\u200b","1.32","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","93.5","\u200b","1.82","\u200b","\u200b","86.4"],["Commercial - Non-agency","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","22.0","\u200b","6.02","\u200b","\u200b","22.0","\u200b","6.02","\u200b","\u200b","21.7"],["Collateralized mortgage obligations(2):","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Government agency","\u200b","\u200b","5.6","\u200b","1.81","\u200b","\u200b","225.2","\u200b","1.85","\u200b","\u200b","307.9","\u200b","1.79","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","538.7","\u200b","1.81","\u200b","\u200b","471.1"],["Government-sponsored enterprises","\u200b","\u200b","5.7","\u200b","1.51","\u200b","\u200b","260.7","\u200b","1.27","\u200b","\u200b","159.4","\u200b","1.82","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","425.8","\u200b","1.48","\u200b","\u200b","364.0"],["Collateralized loan obligations","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","9.3","\u200b","6.26","\u200b","\u200b","97.7","\u200b","6.14","\u200b","\u200b","142.9","\u200b","5.71","\u200b","\u200b","249.9","\u200b","5.90","\u200b","\u200b","247.8"],["Total available-for-sale securities as of December 31, 2023","\u200b","$","68.8","\u200b","2.22","%","$","1,715.9","\u200b","1.51","%","$","609.1","\u200b","2.51","%","$","164.9","\u200b","5.75","%","$","2,558.7","\u200b","2.04","%","$","2,255.3"],["Held-to-maturity securities","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Government agency debt securities","\u200b","$","\u2014","\u200b","\u2014","%","$","\u2014","\u200b","\u2014","%","$","\u2014","\u200b","\u2014","%","$","52.0","\u200b","1.58","%","$","52.0","\u200b","1.58","%","$","47.5"],["Mortgage-backed securities(2):","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Residential - Government agency","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","43.9","\u200b","2.15","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","43.9","\u200b","2.15","\u200b","\u200b","38.7"],["Residential - Government-sponsored enterprises","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","46.3","\u200b","1.42","\u200b","\u200b","53.1","\u200b","1.75","\u200b","\u200b","99.4","\u200b","1.59","\u200b","\u200b","88.4"],["Commercial - Government agency","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","6.3","\u200b","1.64","\u200b","\u200b","24.5","\u200b","2.02","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","30.8","\u200b","1.94","\u200b","\u200b","23.8"],["Commercial - Government-sponsored enterprises","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","167.8","\u200b","1.80","\u200b","\u200b","538.8","\u200b","1.74","\u200b","\u200b","423.1","\u200b","2.40","\u200b","\u200b","1,129.7","\u200b","2.00","\u200b","\u200b","999.2"],["Collateralized mortgage obligations(2):","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Government agency","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","865.4","\u200b","1.40","\u200b","\u200b","123.7","\u200b","1.36","\u200b","\u200b","989.1","\u200b","1.39","\u200b","\u200b","879.7"],["Government-sponsored enterprises","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","206.3","\u200b","1.60","\u200b","\u200b","1,335.2","\u200b","1.49","\u200b","\u200b","100.8","\u200b","1.43","\u200b","\u200b","1,642.3","\u200b","1.50","\u200b","\u200b","1,448.4"],["Debt securities issued by state and political subdivisions","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u2014","\u200b","\u200b","22.1","\u200b","2.13","\u200b","\u200b","32.1","\u200b","2.37","\u200b","\u200b","54.2","\u200b","2.27","\u200b","\u200b","49.2"],["Total held-to-maturity securities as of December 31, 2023","\u200b","$","\u2014","\u200b","\u2014","%","$","380.4","\u200b","1.69","%","$","2,876.2","\u200b","1.53","%","$","784.8","\u200b","2.01","%","$","4,041.4","\u200b","1.64","%","$","3,574.9"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Weighted-average yields were computed on a fully taxable-equivalent basis."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Maturities for mortgage-backed securities and collateralized mortgage obligations anticipate future prepayments."]]
[[/GREPCENT_TABLE]]

​

The carrying value of our investment securities portfolio was $6.3 billion as of December 31, 2023, a decrease of $1.2 billion or 16% compared to December 31, 2022. The lower balances in investment securities were driven by sales, maturities, and payments during the year ended December 31, 2023, which were used to fund loan growth and offset a decline in deposits. 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.

​

During the year ended December 31, 2022, we reclassified at fair value $4.6 billion in available-for-sale investment securities to the held-to-maturity category. The related total unrealized after-tax losses of approximately $372.4 million remained in accumulated other comprehensive loss to be amortized over the estimated remaining life of the securities as an adjustment of yield, offsetting the related accretion of the discount on the transferred securities. No gains or losses were recognized at the time of reclassification. In addition, we consider the held-to-maturity classification of these investment securities to be appropriate as there is both the positive intent and ability to hold these securities to maturity. There were no securities transferred from available-for-sale investment securities to the held-to-maturity category during the year ended December 31, 2023.

​

As of December 31, 2023, 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 $3.5 billion invested in collateralized mortgage obligations issued by Ginnie Mae, Fannie Mae and Freddie Mac. Our investment securities portfolio also included $2.4 billion in mortgage-backed securities issued by Ginnie Mae, Fannie Mae, Freddie Mac and Municipal Housing Authorities and non-agency entities, $247.9 million in collateralized loan obligations, $104.1 million in debt securities issued by the U.S. Treasury, government agencies (U.S. International Development Finance Corporation bonds) and government-sponsored enterprises and $54.2 million in debt securities issued by states and political subdivisions.

​

70

Table of Contents

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 $0.2 million and $0.1 million as of December 31, 2023 and 2022, respectively. Gross unrealized losses in our investment securities portfolio were $770.2 million and $904.3 million as of December 31, 2023 and 2022. The lower gross unrealized loss position was primarily due to paydowns in our investment securities portfolio.

​

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, 2023 and 2022, we did not record any credit losses related to our available-for-sale investment securities portfolio.

​

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, 2023 and 2022, we did not record an allowance for credit losses related to our held-to-maturity investment securities portfolio.

​

We are required to hold non-marketable equity securities, comprised of FHLB stock, as a condition of our membership in the FHLB system. Our FHLB stock is accounted for at cost, which equals par or redemption value. As of December 31, 2023 and 2022, we held $32.6 million and $10.1 million in FHLB stock, respectively, which is recorded as a component of other assets in our consolidated balance sheets.

​

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

​

Loans and Leases

​

Table 11 presents the composition of our loan and lease portfolio by major categories as of December 31, 2023 and 2022:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Loans and Leases","\u200b","\u200b","\u200b","\u200b","\u200b","Table 11"],["\u200b","\u200b","December 31,","\u200b","December 31,"],["(dollars in thousands)","","2023","","2022"],["Commercial and industrial:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial and industrial excluding Paycheck Protection Program loans","\u200b","$","2,156,872","\u200b","$","2,217,604"],["Paycheck Protection Program loans","\u200b","\u200b","8,477","\u200b","\u200b","18,293"],["Total commercial and industrial","\u200b","\u200b","2,165,349","\u200b","\u200b","2,235,897"],["Commercial real estate","\u200b","\u200b","4,340,243","\u200b","\u200b","4,132,309"],["Construction","\u200b","\u200b","900,292","\u200b","\u200b","844,643"],["Residential:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Residential mortgage","\u200b","\u200b","4,283,315","\u200b","\u200b","4,302,788"],["Home equity line","\u200b","\u200b","1,174,588","\u200b","\u200b","1,055,351"],["Total residential","\u200b","\u200b","5,457,903","\u200b","\u200b","5,358,139"],["Consumer","\u200b","\u200b","1,109,901","\u200b","\u200b","1,222,934"],["Lease financing","\u200b","\u200b","379,809","\u200b","\u200b","298,090"],["Total loans and leases","\u200b","$","14,353,497","\u200b","$","14,092,012"]]
[[/GREPCENT_TABLE]]

​

71

Table of Contents

Total loans and leases were $14.4 billion as of December 31, 2023, an increase of $261.5 million or 2% from December 31, 2022, with increases in commercial real estate loans, construction loans, residential real estate loans and lease financing, partially offset by decreases in commercial and industrial 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 $2.2 billion as of December 31, 2023, a decrease of $70.5 million or 3% from December 31, 2022.

​

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 $4.3 billion as of December 31, 2023, an increase of $207.9 million or 5% from December 31, 2022. This increase was primarily due to completed construction loans that were converted to commercial real estate loans during the year.

​

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 $900.3 million as of December 31, 2023, an increase of $55.6 million or 7% from December 31, 2022. The increase in construction loans was primarily due to draws on existing lines, partially offset by the completion of construction loans mentioned above during the year.

​

Residential real estate loans are generally secured by 1-4 unit residential properties and are underwritten using traditional underwriting systems to assess the credit risks and financial capacity and repayment ability of the consumer. Decisions are primarily based on LTV ratios, debt-to-income (“DTI”) ratios, liquidity and credit scores. LTV ratios generally do not exceed 80%, although higher levels are permitted with mortgage insurance. We offer fixed rate mortgage products and variable rate mortgage products including HELOC. Since our transition from LIBOR in late 2021, we now offer 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. Prior to this, we offered variable rate mortgage products based on LIBOR with interest rates that were subject to change every year after the first, third, fifth 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, Alt-A loans or any product with negative amortization. Residential real estate loans were $5.5 billion as of December 31, 2023, an increase of $99.8 million or 2% from December 31, 2022.

​

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 $1.1 billion as of December 31, 2023, a decrease of $113.0 million or 9% from December 31, 2022. This decrease was primarily due to a $115.0 million decrease in indirect automobile loans, partially offset by a slight increase in credit card balances.

​

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 $379.8 million as of December 31, 2023, an increase of $81.7 million or 27% from December 31, 2022. The increase was primarily due to the closing of several large lease transactions during the year.

​

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.

​

72

Table of Contents

The Company’s loan and lease portfolio includes adjustable-rate loans, primarily tied to SOFR and Prime, 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, 2023:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Loans and Leases by Rate Type","\u200b","\u200b","\u200b","\u200b","Table 12"],["\u200b","\u200b","December 31, 2023","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","Adjustable Rate","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Hybrid","\u200b","Fixed","\u200b","\u200b","\u200b","\u200b"],["(dollars in thousands)","","Treasury","","LIBOR","","BSBY","","Prime","","SOFR (1)","","Other","","Total","","Rate","","Rate","","Total","\u200b"],["Commercial and industrial","\u200b","$","\u2014","\u200b","$","\u2014","\u200b","$","40,636","\u200b","$","289,544","\u200b","$","885,392","\u200b","$","640,555","\u200b","$","1,856,127","\u200b","$","24,153","\u200b","$","285,069","\u200b","$","2,165,349","\u200b"],["Commercial real estate","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","84,935","\u200b","\u200b","483,260","\u200b","\u200b","2,384,924","\u200b","\u200b","904,599","\u200b","\u200b","3,857,718","\u200b","\u200b","145,953","\u200b","\u200b","336,572","\u200b","\u200b","4,340,243","\u200b"],["Construction","\u200b","\u200b","9","\u200b","\u200b","\u2014","\u200b","\u200b","26,298","\u200b","\u200b","96,807","\u200b","\u200b","603,457","\u200b","\u200b","14,395","\u200b","\u200b","740,966","\u200b","\u200b","5,173","\u200b","\u200b","154,153","\u200b","\u200b","900,292","\u200b"],["Residential:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Residential mortgage","\u200b","\u200b","6,033","\u200b","\u200b","86,461","\u200b","\u200b","\u2014","\u200b","\u200b","11,542","\u200b","\u200b","147,441","\u200b","\u200b","71,514","\u200b","\u200b","322,991","\u200b","\u200b","552,275","\u200b","\u200b","3,408,049","\u200b","\u200b","4,283,315","\u200b"],["Home equity line","\u200b","\u200b","91","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","534","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","625","\u200b","\u200b","920,577","\u200b","\u200b","253,386","\u200b","\u200b","1,174,588","\u200b"],["Total residential","\u200b","\u200b","6,124","\u200b","\u200b","86,461","\u200b","\u200b","\u2014","\u200b","\u200b","12,076","\u200b","\u200b","147,441","\u200b","\u200b","71,514","\u200b","\u200b","323,616","\u200b","\u200b","1,472,852","\u200b","\u200b","3,661,435","\u200b","\u200b","5,457,903","\u200b"],["Consumer","\u200b","\u200b","1,020","\u200b","\u200b","\u2014","\u200b","\u200b","50","\u200b","\u200b","337,088","\u200b","\u200b","\u2014","\u200b","\u200b","1,134","\u200b","\u200b","339,292","\u200b","\u200b","729","\u200b","\u200b","769,880","\u200b","\u200b","1,109,901","\u200b"],["Lease financing","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","379,809","\u200b","\u200b","379,809","\u200b"],["Total loans and leases","\u200b","$","7,153","\u200b","$","86,461","\u200b","$","151,919","\u200b","$","1,218,775","\u200b","$","4,021,214","\u200b","$","1,632,197","\u200b","$","7,117,719","\u200b","$","1,648,860","\u200b","$","5,586,918","\u200b","$","14,353,497","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["% by rate type at December 31, 2023","\u200b","\u200b","1","%","\u200b","1","%","\u200b","1","%","\u200b","8","%","\u200b","28","%","\u200b","11","%","\u200b","50","%","\u200b","11","%","\u200b","39","%","\u200b","100","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Includes $3.3 billion in CME Term SOFR loans."]]
[[/GREPCENT_TABLE]]

​

Tables 13 and 14 present the geographic distribution of our loan and lease portfolio as of December 31, 2023 and 2022:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Geographic Distribution of Loan and Lease Portfolio","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Table 13"],["\u200b","\u200b","December 31, 2023"],["\u200b","\u200b","\u200b","\u200b","\u200b","U.S.","\u200b","Guam &","\u200b","Foreign &","\u200b","\u200b","\u200b"],["(dollars in thousands)","","Hawaii","","Mainland(1)","","Saipan","","Other","","Total"],["Commercial and industrial","\u200b","$","862,698","\u200b","$","1,179,343","\u200b","$","97,416","\u200b","$","25,892","\u200b","$","2,165,349"],["Commercial real estate","\u200b","\u200b","2,353,847","\u200b","\u200b","1,599,984","\u200b","\u200b","386,412","\u200b","\u200b","\u2014","\u200b","\u200b","4,340,243"],["Construction","\u200b","\u200b","392,328","\u200b","\u200b","459,314","\u200b","\u200b","48,650","\u200b","\u200b","\u2014","\u200b","\u200b","900,292"],["Residential:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Residential mortgage","\u200b","\u200b","4,134,062","\u200b","\u200b","2,682","\u200b","\u200b","146,571","\u200b","\u200b","\u2014","\u200b","\u200b","4,283,315"],["Home equity line","\u200b","\u200b","1,130,999","\u200b","\u200b","313","\u200b","\u200b","43,276","\u200b","\u200b","\u2014","\u200b","\u200b","1,174,588"],["Total residential","\u200b","\u200b","5,265,061","\u200b","\u200b","2,995","\u200b","\u200b","189,847","\u200b","\u200b","\u2014","\u200b","\u200b","5,457,903"],["Consumer","\u200b","\u200b","761,328","\u200b","\u200b","38,577","\u200b","\u200b","307,358","\u200b","\u200b","2,638","\u200b","\u200b","1,109,901"],["Lease financing","\u200b","\u200b","171,629","\u200b","\u200b","193,740","\u200b","\u200b","14,440","\u200b","\u200b","\u2014","\u200b","\u200b","379,809"],["Total Loans and Leases","\u200b","$","9,806,891","\u200b","$","3,473,953","\u200b","$","1,044,123","\u200b","$","28,530","\u200b","$","14,353,497"],["Percentage of Total Loans and Leases","\u200b","\u200b","68%","\u200b","\u200b","24%","\u200b","\u200b","7%","\u200b","\u200b","1%","\u200b","\u200b","100%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","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."]]
[[/GREPCENT_TABLE]]

​

73

Table of Contents

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Geographic Distribution of Loan and Lease Portfolio","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Table 14"],["\u200b","\u200b","December 31, 2022"],["\u200b","\u200b","\u200b","\u200b","\u200b","U.S.","\u200b","Guam &","\u200b","Foreign &","\u200b","\u200b","\u200b"],["(dollars in thousands)","","Hawaii","","Mainland(1)","","Saipan","","Other","","Total"],["Commercial and industrial","\u200b","$","917,232","\u200b","$","1,192,766","\u200b","$","98,601","\u200b","$","27,298","\u200b","$","2,235,897"],["Commercial real estate","\u200b","\u200b","2,306,075","\u200b","\u200b","1,435,512","\u200b","\u200b","390,722","\u200b","\u200b","\u2014","\u200b","\u200b","4,132,309"],["Construction","\u200b","\u200b","361,899","\u200b","\u200b","475,744","\u200b","\u200b","7,000","\u200b","\u200b","\u2014","\u200b","\u200b","844,643"],["Residential:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Residential mortgage","\u200b","\u200b","4,152,272","\u200b","\u200b","452","\u200b","\u200b","150,064","\u200b","\u200b","\u2014","\u200b","\u200b","4,302,788"],["Home equity line","\u200b","\u200b","1,020,538","\u200b","\u200b","\u2014","\u200b","\u200b","34,813","\u200b","\u200b","\u2014","\u200b","\u200b","1,055,351"],["Total residential","\u200b","\u200b","5,172,810","\u200b","\u200b","452","\u200b","\u200b","184,877","\u200b","\u200b","\u2014","\u200b","\u200b","5,358,139"],["Consumer","\u200b","\u200b","877,550","\u200b","\u200b","41,647","\u200b","\u200b","300,324","\u200b","\u200b","3,413","\u200b","\u200b","1,222,934"],["Lease financing","\u200b","\u200b","90,755","\u200b","\u200b","193,423","\u200b","\u200b","13,912","\u200b","\u200b","\u2014","\u200b","\u200b","298,090"],["Total Loans and Leases","\u200b","$","9,726,321","\u200b","$","3,339,544","\u200b","$","995,436","\u200b","$","30,711","\u200b","$","14,092,012"],["Percentage of Total Loans and Leases","\u200b","\u200b","69%","\u200b","\u200b","23%","\u200b","\u200b","7%","\u200b","\u200b","1%","\u200b","\u200b","100%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(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."]]
[[/GREPCENT_TABLE]]

​

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

​

Table 15 presents the contractual maturities of our loan and lease portfolio by major categories and the sensitivities to changes in interest rates as of December 31, 2023:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Maturities for Loan and Lease Portfolio(1)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Table 15"],["\u200b","\u200b","December 31, 2023"],["\u200b","\u200b","Due in One","\u200b","Due After One","\u200b","Due After Five","\u200b","Due After","\u200b","\u200b","\u200b"],["(dollars in thousands)","","Year or Less","","to Five Years","","to Fifteen Years","","Fifteen Years","","Total"],["Commercial and industrial","\u200b","$","709,528","\u200b","$","1,161,302","\u200b","$","220,928","\u200b","$","73,591","\u200b","$","2,165,349"],["Commercial real estate","\u200b","\u200b","711,807","\u200b","\u200b","2,161,736","\u200b","\u200b","1,439,768","\u200b","\u200b","26,932","\u200b","\u200b","4,340,243"],["Construction","\u200b","\u200b","283,216","\u200b","\u200b","497,980","\u200b","\u200b","88,193","\u200b","\u200b","30,903","\u200b","\u200b","900,292"],["Residential:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Residential mortgage","\u200b","\u200b","15,368","\u200b","\u200b","48,057","\u200b","\u200b","454,488","\u200b","\u200b","3,765,402","\u200b","\u200b","4,283,315"],["Home equity line","\u200b","\u200b","18,903","\u200b","\u200b","104,408","\u200b","\u200b","150,736","\u200b","\u200b","900,541","\u200b","\u200b","1,174,588"],["Total residential","\u200b","\u200b","34,271","\u200b","\u200b","152,465","\u200b","\u200b","605,224","\u200b","\u200b","4,665,943","\u200b","\u200b","5,457,903"],["Consumer","\u200b","\u200b","177,501","\u200b","\u200b","757,675","\u200b","\u200b","174,725","\u200b","\u200b","\u2014","\u200b","\u200b","1,109,901"],["Lease financing","\u200b","\u200b","21,235","\u200b","\u200b","148,253","\u200b","\u200b","147,122","\u200b","\u200b","63,199","\u200b","\u200b","379,809"],["Total Loans and Leases","\u200b","$","1,937,558","\u200b","$","4,879,411","\u200b","$","2,675,960","\u200b","$","4,860,568","\u200b","$","14,353,497"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total of loans and leases with:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Adjustable interest rates","\u200b","$","1,756,286","\u200b","$","3,593,548","\u200b","$","1,510,697","\u200b","$","257,188","\u200b","$","7,117,719"],["Hybrid interest rates","\u200b","\u200b","47,461","\u200b","\u200b","186,323","\u200b","\u200b","136,877","\u200b","\u200b","1,278,199","\u200b","\u200b","1,648,860"],["Fixed interest rates","\u200b","\u200b","133,811","\u200b","\u200b","1,099,540","\u200b","\u200b","1,028,386","\u200b","\u200b","3,325,181","\u200b","\u200b","5,586,918"],["Total Loans and Leases","\u200b","$","1,937,558","\u200b","$","4,879,411","\u200b","$","2,675,960","\u200b","$","4,860,568","\u200b","$","14,353,497"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Based on contractual maturities, including extension and renewal options that are not unconditionally cancellable by the Company."]]
[[/GREPCENT_TABLE]]

​

74

Table of Contents

Credit Quality

​

We evaluate certain loans and leases, including commercial and industrial loans, commercial real estate loans and construction loans, individually for impairment and non-accrual status. A loan is considered to be impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan. We generally place a loan on non-accrual status when management believes that collection of principal or interest has become doubtful or when a loan or lease becomes 90 days past due as to principal or interest, unless it is well secured and in the process of collection. Loans on non-accrual status are generally classified as impaired, but not all impaired loans are necessarily placed on non-accrual status. See “Note 5. Allowance for Credit Losses” in the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information about our credit quality indicators.

​

For purposes of managing credit risk and estimating the ACL, management has identified three portfolio segments (commercial, residential and consumer) that we use to develop our systematic methodology to determine the ACL. The categorization of loans for the evaluation of credit risk is specific to our credit risk evaluation process and these loan categories are not necessarily the same as the loan categories used for other evaluations of our loan portfolio. See “Note 5. Allowance for Credit Losses” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information about our approach to estimating the ACL.

​

The following tables and discussion address non-performing assets and loans and leases that are 90 days past due but are still accruing interest.

​

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

​

Table 16 presents information on our Non-Performing Assets (“NPAs”) and Accruing Loans and Leases Past Due 90 Days or More as of December 31, 2023 and 2022:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More","\u200b","\u200b","\u200b","\u200b","\u200b","Table 16"],["\u200b","\u200b","December 31,","\u200b"],["(dollars in thousands)","","2023","\u200b","2022","\u200b"],["Non-Performing Assets","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Non-Accrual Loans and Leases","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial Loans:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial and industrial","\u200b","$","970","\u200b","$","1,215","\u200b"],["Commercial real estate","\u200b","\u200b","2,953","\u200b","\u200b","727","\u200b"],["Total Commercial Loans","\u200b","\u200b","3,923","\u200b","\u200b","1,942","\u200b"],["Residential Loans:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Residential mortgage","\u200b","\u200b","7,620","\u200b","\u200b","6,166","\u200b"],["Home equity line","\u200b","\u200b","7,052","\u200b","\u200b","3,797","\u200b"],["Total Residential Loans","\u200b","\u200b","14,672","\u200b","\u200b","9,963","\u200b"],["Total Non-Accrual Loans and Leases","\u200b","\u200b","18,595","\u200b","\u200b","11,905","\u200b"],["Other Real Estate Owned (\"OREO\")","\u200b","\u200b","\u2014","\u200b","\u200b","91","\u200b"],["Total Non-Performing Assets","\u200b","$","18,595","\u200b","$","11,996","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Accruing Loans and Leases Past Due 90 Days or More","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial Loans:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial and industrial","\u200b","$","494","\u200b","$","291","\u200b"],["Commercial real estate","\u200b","\u200b","300","\u200b","\u200b","\u2014","\u200b"],["Total Commercial Loans","\u200b","\u200b","794","\u200b","\u200b","291","\u200b"],["Residential mortgage","\u200b","\u200b","\u2014","\u200b","\u200b","58","\u200b"],["Consumer","\u200b","\u200b","2,702","\u200b","\u200b","2,885","\u200b"],["Total Accruing Loans and Leases Past Due 90 Days or More","\u200b","$","3,496","\u200b","$","3,234","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Total Loans and Leases","\u200b","$","14,353,497","\u200b","$","14,092,012","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Ratio of Non-Accrual Loans and Leases to Total Loans and Leases","\u200b","\u200b","0.13","%","\u200b","0.08","%"],["Ratio of Non-Performing Assets to Total Loans and Leases and OREO","\u200b","\u200b","0.13","%","\u200b","0.09","%"],["Ratio of Non-Performing Assets and Accruing Loans and Leases Past Due 90 Days or More to Total Loans and Leases and OREO","\u200b","\u200b","0.15","%","\u200b","0.11","%"]]
[[/GREPCENT_TABLE]]

​

75

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Table 17 presents the activity in NPAs for the years ended December 31, 2023 and 2022:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Non-Performing Assets","\u200b","\u200b","\u200b","\u200b","\u200b","Table 17"],["\u200b","\u200b","Year Ended December 31,"],["(dollars in thousands)","","2023","","2022"],["Balance at beginning of year","\u200b","$","11,996","\u200b","$","7,257"],["Additions","\u200b","\u200b","13,238","\u200b","\u200b","8,527"],["Reductions","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Payments","\u200b","\u200b","(3,684)","\u200b","\u200b","(1,906)"],["Return to accrual status","\u200b","\u200b","(2,571)","\u200b","\u200b","(760)"],["Sales of other real estate owned","\u200b","\u200b","(91)","\u200b","\u200b","(314)"],["Transfers to loans held for sale","\u200b","\u200b","\u2014","\u200b","\u200b","(288)"],["Charge-offs/write-downs","\u200b","\u200b","(293)","\u200b","\u200b","(520)"],["Total Reductions","\u200b","\u200b","(6,639)","\u200b","\u200b","(3,788)"],["Balance at end of year","\u200b","$","18,595","\u200b","$","11,996"]]
[[/GREPCENT_TABLE]]

​

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

​

Total NPAs were $18.6 million as of December 31, 2023, an increase of $6.6 million or 55% from December 31, 2022. The ratio of our NPAs to total loans and leases and OREO was 0.13% as of December 31, 2023, a four basis point increase from December 31, 2022. The increase in total NPAs was due to a $3.3 million increase in home equity lines, a $2.2 million increase in commercial real estate loans and a $1.5 million increase in residential mortgage loans, offset by a $0.2 million decrease in commercial and industrial loans and a $0.1 million decrease in OREO.

​

The largest component of our NPAs continues to be residential mortgage loans. The level of these NPAs remains elevated due to a lengthy judicial foreclosure process in Hawaii. As of December 31, 2023, residential mortgage non-accrual loans were $7.6 million, an increase of $1.5 million or 24% from December 31, 2022. This increase was primarily due to additions in residential mortgage loans of $3.3 million, offset by $1.0 million in payments, $0.8 million in returns to accrual status and a $0.1 million transfer to OREO. As of December 31, 2023, our residential mortgage non-accrual loans were comprised of 37 loans with a weighted average current loan-to-value (“LTV”) ratio of 37%.

​

Home equity line non-accrual loans were $7.1 million as of December 31, 2023, an increase of $3.3 million or 86% from December 31, 2022. This increase was due to additions in home equity lines of $7.0 million, offset by returns to accrual status of $1.8 million, payments of $1.6 million and charge-offs of $0.3 million.

​

Commercial and industrial non-accrual loans were $1.0 million as of December 31, 2023, a decrease of $0.2 million or 20% from December 31, 2022, primarily due to payments during the year.

​

Commercial real estate non-accrual loans were $3.0 million as of December 31, 2023, an increase of $2.2 million from December 31, 2022. This increase was due to additions in commercial real estate loans of $2.9 million, offset by $0.7 million in payments.

​

OREO represents property acquired as a result of borrower defaults on loans. OREO is recorded at fair value, less estimated selling costs, at the time of foreclosure. On an ongoing basis, properties are appraised as required by market conditions and applicable regulations. There was no OREO held as of December 31, 2023. OREO was $0.1 million as of December 31, 2022, which was comprised of one residential property.

​

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.

​

76

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Loans and leases past due 90 days or more and still accruing interest were $3.5 million as of December 31, 2023, an increase of $0.3 million or 8% as compared to December 31, 2022. This increase was due to increases in commercial real estate loans of $0.3 million, commercial and industrial loans of $0.2 million, offset by a decrease in consumer loans of $0.2 million that were past due 90 days or more and still accruing interest as of December 31, 2023.

​

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

​

Table 18 presents an analysis of our ACL for the years ended December 31, 2023 and 2022:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Allowance for Credit Losses and Reserve for Unfunded Commitments","\u200b","\u200b","\u200b","\u200b","\u200b","Table 18"],["\u200b","\u200b","December 31,"],["(dollars in thousands)","","2023","\u200b","2022","\u200b"],["Balance at Beginning of Year","\u200b","$","177,735","\u200b","$","187,584","\u200b"],["Loans and Leases Charged-Off","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial Loans:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial and industrial","\u200b","\u200b","(3,482)","\u200b","\u200b","(2,012)","\u200b"],["Commercial real estate","\u200b","\u200b","(2,500)","\u200b","\u200b","(750)","\u200b"],["Total Commercial Loans","\u200b","\u200b","(5,982)","\u200b","\u200b","(2,762)","\u200b"],["Residential Loans:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Residential mortgage","\u200b","\u200b","(122)","\u200b","\u200b","(103)","\u200b"],["Home equity line","\u200b","\u200b","(292)","\u200b","\u200b","(1,175)","\u200b"],["Total Residential Loans","\u200b","\u200b","(414)","\u200b","\u200b","(1,278)","\u200b"],["Consumer","\u200b","\u200b","(17,110)","\u200b","\u200b","(16,848)","\u200b"],["Total Loans and Leases Charged-Off","\u200b","\u200b","(23,506)","\u200b","\u200b","(20,888)","\u200b"],["Recoveries on Loans and Leases Previously Charged-Off","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial Loans:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Commercial and industrial","\u200b","\u200b","3,346","\u200b","\u200b","897","\u200b"],["Commercial real estate","\u200b","\u200b","\u2014","\u200b","\u200b","14","\u200b"],["Lease financing","\u200b","\u200b","\u2014","\u200b","\u200b","60","\u200b"],["Total Commercial Loans","\u200b","\u200b","3,346","\u200b","\u200b","971","\u200b"],["Residential Loans:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Residential mortgage","\u200b","\u200b","141","\u200b","\u200b","418","\u200b"],["Home equity line","\u200b","\u200b","702","\u200b","\u200b","713","\u200b"],["Total Residential Loans","\u200b","\u200b","843","\u200b","\u200b","1,131","\u200b"],["Consumer","\u200b","\u200b","7,090","\u200b","\u200b","7,545","\u200b"],["Total Recoveries on Loans and Leases Previously Charged-Off","\u200b","\u200b","11,279","\u200b","\u200b","9,647","\u200b"],["Net Loans and Leases Charged-Off","\u200b","\u200b","(12,227)","\u200b","\u200b","(11,241)","\u200b"],["Provision for Credit Losses","\u200b","\u200b","26,630","\u200b","\u200b","1,392","\u200b"],["Balance at End of Year","\u200b","$","192,138","\u200b","$","177,735","\u200b"],["Components:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Allowance for Credit Losses","\u200b","$","156,533","\u200b","$","143,900","\u200b"],["Reserve for Unfunded Commitments","\u200b","\u200b","35,605","\u200b","\u200b","33,835","\u200b"],["Total Allowance for Credit Losses and Reserve for Unfunded Commitments","\u200b","$","192,138","\u200b","$","177,735","\u200b"],["Average Loans and Leases Outstanding","\u200b","$","14,266,291","\u200b","$","13,314,821","\u200b"],["Ratio of Net Loans and Leases Charged-Off to Average Loans and Leases Outstanding","\u200b","\u200b","0.09","%","\u200b","0.08","%"],["Ratio of Allowance for Credit Losses for Loans and Leases to Loans and Leases Outstanding","\u200b","\u200b","1.09","%","\u200b","1.02","%"],["Ratio of Allowance for Credit Losses for Loans and Leases to Non-accrual Loans and Leases","\u200b","\u200b","8.42x","\u200b","\u200b","12.09x","\u200b"]]
[[/GREPCENT_TABLE]]

​

77

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Tables 19 and 20 present the allocation of the ACL by loan category, in both dollars and as a percentage of total loans and leases outstanding, as of December 31, 2023 and 2022:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Allocation of the Allowance for Credit Losses by Loan and Lease Category","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Table 19"],["\u200b","\u200b","December 31, 2023"],["\u200b","\u200b","\u200b","\u200b","\u200b","Allocated","\u200b","Loan","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","ACL as","\u200b","category as","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","% of loan or","\u200b","% of total","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","lease","\u200b","loans and","\u200b"],["(dollars in thousands)","","Amount","\u200b","category","\u200b","leases","\u200b"],["Commercial and industrial","\u200b","$","14,956","\u200b","0.69","%","15.09","%"],["Commercial real estate","\u200b","\u200b","43,944","\u200b","1.01","\u200b","30.24","\u200b"],["Construction","\u200b","\u200b","10,392","\u200b","1.15","\u200b","6.27","\u200b"],["Lease financing","\u200b","\u200b","1,754","\u200b","0.46","\u200b","2.65","\u200b"],["Total commercial","\u200b","\u200b","71,046","\u200b","0.91","\u200b","54.25","\u200b"],["Residential mortgage","\u200b","\u200b","36,880","\u200b","0.86","\u200b","29.84","\u200b"],["Home equity line","\u200b","\u200b","11,728","\u200b","1.00","\u200b","8.18","\u200b"],["Total residential","\u200b","\u200b","48,608","\u200b","0.89","\u200b","38.02","\u200b"],["Consumer","\u200b","\u200b","36,879","\u200b","3.32","\u200b","7.73","\u200b"],["Total","\u200b","$","156,533","\u200b","1.09","%","100.00","%"]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Allocation of the Allowance for Credit Losses by Loan and Lease Category","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","Table 20"],["\u200b","\u200b","December 31, 2022"],["\u200b","\u200b","\u200b","\u200b","\u200b","Allocated","\u200b","Loan","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","ACL as","\u200b","category as","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","% of loan or","\u200b","% of total","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","lease","\u200b","loans and","\u200b"],["(dollars in thousands)","\u200b","Amount","\u200b","category","\u200b","leases","\u200b"],["Commercial and industrial","\u200b","$","14,564","\u200b","0.65","%","15.87","%"],["Commercial real estate","\u200b","\u200b","43,810","\u200b","1.06","\u200b","29.31","\u200b"],["Construction","\u200b","\u200b","5,843","\u200b","0.69","\u200b","5.99","\u200b"],["Lease financing","\u200b","\u200b","1,551","\u200b","0.52","\u200b","2.13","\u200b"],["Total commercial","\u200b","\u200b","65,768","\u200b","0.88","\u200b","53.30","\u200b"],["Residential mortgage","\u200b","\u200b","35,175","\u200b","0.82","\u200b","30.53","\u200b"],["Home equity line","\u200b","\u200b","8,296","\u200b","0.79","\u200b","7.49","\u200b"],["Total residential","\u200b","\u200b","43,471","\u200b","0.81","\u200b","38.02","\u200b"],["Consumer","\u200b","\u200b","34,661","\u200b","2.83","\u200b","8.68","\u200b"],["Total","\u200b","$","143,900","\u200b","1.02","%","100.00","%"]]
[[/GREPCENT_TABLE]]

​

Table 21 presents the net charge-offs (recoveries) to average loans and leases by category during the years ended December 31, 2023 and 2022:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net Charge-Offs (Recoveries) to Average Loans and Leases By Category","\u200b","\u200b","\u200b","\u200b","\u200b","Table 21"],["\u200b","\u200b","December 31,","\u200b"],["\u200b","","2023","","2022"],["Commercial and industrial","\u200b","\u200b","0.01","%","\u200b","0.06","%"],["Commercial real estate","\u200b","\u200b","0.06","\u200b","\u200b","0.02","\u200b"],["Construction","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b"],["Lease financing","\u200b","\u200b","\u2014","\u200b","\u200b","(0.02)","\u200b"],["Total commercial","\u200b","\u200b","0.03","\u200b","\u200b","0.03","\u200b"],["Residential mortgage","\u200b","\u200b","\u2014","\u200b","\u200b","(0.01)","\u200b"],["Home equity line","\u200b","\u200b","(0.04)","\u200b","\u200b","0.05","\u200b"],["Total residential","\u200b","\u200b","(0.01)","\u200b","\u200b","\u2014","\u200b"],["Consumer","\u200b","\u200b","0.85","\u200b","\u200b","0.76","\u200b"],["Total loans and leases","\u200b","\u200b","0.09","%","\u200b","0.08","%"]]
[[/GREPCENT_TABLE]]

78

Table of Contents

​

As of December 31, 2023, the ACL was $156.5 million or 1.09% of total loans and leases outstanding, compared with an ACL of $143.9 million or 1.02% of total loans and leases outstanding as of December 31, 2022. The level of the Allowance was commensurate with our stable credit risk profile, loan portfolio growth and composition and a stable Hawaii economy.

​

Net charge-offs of loans and leases were $12.2 million or 0.09% of total average loans and leases for the year ended December 31, 2023 compared to $11.2 million or 0.08% for 2022. Net charge-offs in our commercial lending portfolio were $2.6 million for the year ended December 31, 2023 compared to net charge-offs of $1.8 million for 2022. Net recoveries in our residential lending portfolio were $0.4 million for the year ended December 31, 2023 compared to net charge-offs of $0.1 million for 2022. Net charge-offs in our consumer lending portfolio were $10.0 million for the year ended December 31, 2023 compared to net charge-offs of $9.3 million for 2022. Net charge-offs in our consumer portfolio segment include those related to credit card, automobile loans, installment loans and small business lines of credit and reflect the inherent risk associated with these loans.

​

Although we determine the amount of each component of the ACL separately, the ACL as a whole was considered appropriate by management as of December 31, 2023 and 2022. Furthermore, as of December 31, 2023, the ACL was considered adequate based on our ongoing analysis of estimated expected credit losses, credit risk profiles, current economic outlook, coverage ratios and other relevant factors. The ACL anticipates cyclical losses consistent with a recession and includes a qualitative overlay for potential macroeconomic impacts. We will continue to monitor factors that drive expected credit losses including the uncertainty of the economy, inflation and geopolitical instability.

​

See “Note 5. Allowance for Credit Losses” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information on the ACL.

​

Goodwill

​

Goodwill was $995.5 million as of both December 31, 2023 and 2022. Our goodwill originated from the acquisition of the Company by BNPP in December of 2001. Goodwill generated in that acquisition was recorded on the balance sheet of the Bank as a result of push down accounting treatment, and remains on our consolidated balance sheets.

​

The Company’s policy is to assess goodwill for impairment at the reporting unit level on an annual basis or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Impairment is the condition that exists when the carrying amount of a reporting unit exceeds its fair value. The Company performed its annual assessment of the criteria included in Accounting Standards Codification Topic 350, Intangibles – Goodwill and Other, and based on such assessment, the Company concluded that there was no impairment in our goodwill for the year ended December 31, 2023. Future events, including volatility in domestic and global markets, geopolitical concerns, inflation concerns, global supply chain issues, and other factors affecting the economy, 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 $845.7 million as of December 31, 2023, an increase of $48.7 million or 6% from December 31, 2022. This increase was due to a $39.5 million increase in affordable housing and other tax credit investment partnership interests and a $14.8 million increase in variable interest securities.

​

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.

79

Table of Contents

​

Table 22 presents the composition of our deposits as of December 31, 2023 and December 31, 2022:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Deposits","\u200b","\u200b","\u200b","\u200b","\u200b","Table 22"],["\u200b","\u200b","December 31,"],["(dollars in thousands)","","2023","","2022"],["U.S.:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Demand","\u200b","$","6,609,483","\u200b","$","7,978,046"],["Savings","\u200b","\u200b","5,986,066","\u200b","\u200b","5,957,368"],["Money Market","\u200b","\u200b","3,583,191","\u200b","\u200b","3,714,244"],["Time","\u200b","\u200b","3,162,658","\u200b","\u200b","2,265,163"],["Foreign(1):","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Demand","\u200b","\u200b","974,079","\u200b","\u200b","886,600"],["Savings","\u200b","\u200b","459,018","\u200b","\u200b","425,542"],["Money Market","\u200b","\u200b","264,662","\u200b","\u200b","251,179"],["Time","\u200b","\u200b","293,500","\u200b","\u200b","210,887"],["Total Deposits(2)","\u200b","$","21,332,657","\u200b","$","21,689,029"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Foreign deposits were comprised of Guam and Saipan deposit accounts."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(2)","Public deposits were $1.8 billion as of December 31, 2023, a decrease of $129.2 million or 7% compared to December 31, 2022."]]
[[/GREPCENT_TABLE]]

​

Total deposits were $21.3 billion as of December 31, 2023, a decrease of $356.4 million or 2% from December 31, 2022. The decrease in deposit balances stemmed primarily from a $951.1 million decrease in non-public demand deposit balances, a $330.0 million decrease in public demand deposit balances, a $116.4 million decrease in non-public savings deposit balances and a $115.3 million decrease in non-public money market deposit balances. These decreases were partially offset by a $955.7 million increase in non-public time deposit balances, a $178.6 million increase in public savings deposit balances and a $24.4 million increase in public time deposit balances.

​

As of December 31, 2023 and 2022, the amount of deposits that exceeded FDIC insurance limits were estimated to be $10.8 billion, or 51% of total deposits, and $11.1 billion, or 51% of total deposits, respectively. At December 31, 2023 and 2022, the Company had $1.8 billion and $1.9 billion, respectively, of public deposits, all of which were fully collateralized with investment securities. As of December 31, 2023 and 2022, the amount of deposits excluding public deposits that exceeded FDIC insurance limits were estimated to be $9.1 billion, or 42% of total deposits, and $9.2 billion, or 42% of total deposits, respectively. As of December 31, 2023 and 2022, deposits accounts above $250,000 were estimated to be $12.6 billion and $13.3 billion, respectively. As of December 31, 2023 and 2022, deposit balances over $250,000 in corporate operating accounts were estimated to be $2.3 billion and $2.9 billion, respectively.

​

Table 23 presents the amount of time deposits that were in excess of the FDIC insurance limit, further segregated by time remaining until maturity, as of December 31, 2023:

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b"],["Uninsured Time Deposits","\u200b","\u200b","Table 23"],["(dollars in thousands)","","\u200b","December 31, 2023"],["Three months or less","\u200b","$","910,680"],["Over three through six months","\u200b","\u200b","315,844"],["Over six through twelve months","\u200b","\u200b","426,165"],["Over twelve months","\u200b","\u200b","34,388"],["Total(1)","\u200b","$","1,687,077"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(1)","Includes $0.9 billion in public time deposits that are fully collateralized with investment securities."]]
[[/GREPCENT_TABLE]]

​

Short-term Borrowings

​

As of December 31, 2023, the Company’s short-term borrowings consisted of $500.0 million in short-term FHLB fixed-rate advances with a weighted average interest rate of 4.71% and maturity dates in September 2024. As of December 31, 2022, the Company’s short-term borrowings consisted of $75.0 million in federal funds purchased with a 4.35% annual interest rate that matured in January 2023.

​

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As of both December 31, 2023 and 2022, the Company had a remaining line of credit of $2.5 billion available from the FHLB. The FHLB borrowing capacity was secured by commercial real estate and residential real estate loan collateral as of December 31, 2023 and residential real estate loan collateral as of December 31, 2022.

​

Pension and Postretirement Plan Obligations

​

We have a qualified noncontributory defined benefit pension plan, an unfunded supplemental executive retirement plan for certain key executives (“SERP”), a directors’ retirement plan, a non-qualified pension plan for eligible directors and a postretirement benefit plan providing life insurance and healthcare benefits that we offer to our directors and employees, as applicable. The qualified noncontributory defined benefit pension plan, the SERP and the directors’ retirement plan are all frozen plans to new participants. In March 2019, the Company’s board of directors approved an amendment to the SERP to freeze the SERP, which became effective on July 1, 2019. As a result of the amendment, since the effective date, there have not been any, and there will be no, new accruals of benefits, including service accruals. Existing benefits under the SERP, as of the effective date of the amendment described above, will otherwise continue in accordance with the terms of the SERP. To calculate annual pension costs, we use the following key variables: (1) size of the employee population, length of service and estimated compensation increases; (2) actuarial assumptions and estimates; (3) expected long-term rate of return on plan assets; and (4) discount rate.

​

Pension and postretirement benefit plan obligations, net of pension plan assets, were $92.8 million as of December 31, 2023, a decrease of $1.1 million or 1% from December 31, 2022. The balance as of December 31, 2023 included retirement benefits payable of $103.3 million for the Company’s underfunded plans, partially offset by pension plan assets for overfunded plans, recorded as a component of other assets on the consolidated balance sheets, of $10.5 million.

​

See “Note 14. Benefit Plans” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information on our pension and postretirement benefit plans.

​

Capital

​

The Company and the Bank are subject to the Capital Rules, which implemented the Basel Committee on Banking Supervision’s December 2010 final capital framework for strengthening international capital standards, known as Basel III, and various provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Capital Rules require bank holding companies and their bank subsidiaries to maintain substantially more capital than previously required, with a greater emphasis on common equity. The Capital Rules, among other things, (i) impose a capital measure called CET1, (ii) specify that Tier 1 capital consists of CET1 and ‘‘Additional Tier 1 capital’’ instruments meeting specified requirements, (iii) define CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments to capital as compared to existing regulations.

​

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

​

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As of December 31, 2023, 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 24 below. There have been no conditions or events since December 31, 2023 that management believes have changed either the Company’s or the Bank’s capital classifications.

​

[[GREPCENT_TABLE]]
[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Regulatory Capital","\u200b","\u200b","\u200b","\u200b","\u200b","Table 24"],["\u200b","\u200b","December 31,","\u200b"],["(dollars in thousands)","","2023","\u200b","2022","\u200b"],["Stockholders' Equity","\u200b","$","2,486,066","\u200b","$","2,269,005","\u200b"],["Less:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Goodwill","\u200b","\u200b","995,492","\u200b","\u200b","995,492","\u200b"],["Accumulated other comprehensive loss, net","\u200b","\u200b","(530,210)","\u200b","\u200b","(639,254)","\u200b"],["Common Equity Tier 1 Capital and Tier 1 Capital","\u200b","$","2,020,784","\u200b","$","1,912,767","\u200b"],["Add:","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Qualifying allowance for credit losses and reserve for unfunded commitments","\u200b","\u200b","192,138","\u200b","\u200b","177,735","\u200b"],["Total Capital","\u200b","$","2,212,922","\u200b","$","2,090,502","\u200b"],["Risk-Weighted Assets","\u200b","$","16,308,345","\u200b","$","16,182,743","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["FHI's Key Regulatory Capital Ratios","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Common Equity Tier 1 Capital Ratio","\u200b","\u200b","12.39","%","\u200b","11.82","%"],["Tier 1 Capital Ratio","\u200b","\u200b","12.39","%","\u200b","11.82","%"],["Total Capital Ratio","\u200b","\u200b","13.57","%","\u200b","12.92","%"],["Tier 1 Leverage Ratio","\u200b","\u200b","8.64","%","\u200b","8.11","%"]]
[[/GREPCENT_TABLE]]

​

Total stockholders’ equity was $2.5 billion as of December 31, 2023, an increase of $217.1 million or 10% from December 31, 2022. The increase in stockholders’ equity was primarily due to net unrealized gains in our investment securities portfolio, net of tax, of $105.1 million and earnings for the year ended December 31, 2023 of $235.0 million. This was partially offset by dividends declared and paid to the Company’s stockholders of $132.6 million.

​

In January 2023, the Company announced a stock repurchase program for up to $40.0 million of its outstanding common stock during 2023. The Company did not repurchase any common stock outstanding under this stock repurchase program during the year ended December 31, 2023. In January 2024, the Company announced a stock repurchase program for up to $40.0 million of its outstanding common stock during 2024. The timing and exact amount of stock repurchases, if any, will be subject to management’s discretion and various factors, including the Company’s capital position and financial performance, as well as market conditions. The stock repurchase program may be suspended, terminated or modified at any time for any reason.

​

In January 2024, the Company’s Board of Directors declared a quarterly cash dividend of $0.26 per share on our outstanding shares. The dividend is to be paid on March 1, 2024 to shareholders of record at the close of business on February 16, 2024.

​

Critical Accounting Policies

​

Our consolidated financial statements were prepared in accordance with GAAP and follow general practices within the industries in which we operate. The most significant accounting policies we follow are presented in “Note 1. Organization and Summary of Significant Accounting Policies” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data. Application of these principles requires us to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. Most accounting policies are not considered by management to be critical accounting policies. Several factors are considered in determining whether or not a policy is critical in the preparation of the consolidated financial statements. These factors include among other things, whether the policy requires management to make difficult, subjective and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions. The accounting policies which we believe to be most critical in preparing our consolidated financial statements are those that are related to the determination of the ACL, goodwill, fair value estimates, pension and postretirement benefit obligations and income taxes.

​

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Allowance for Credit Losses

​

Management’s evaluation of the adequacy of the ACL is often the most critical of accounting estimates for a financial institution. Our determination of the amount of the ACL is a critical accounting estimate as it requires significant reliance on the accuracy of credit risk ratings on individual borrowers, the use of estimates and significant judgment as to the amount and timing of expected future cash flows on impaired loans, significant reliance on estimated loss rates on portfolios and consideration of our evaluation of macro-economic factors and trends. While our methodology involves estimating an ACL for each of our commercial, residential real estate and consumer portfolio segments, the entire ACL is available to absorb credit losses in the total loan and lease portfolio.

​

The ACL is a valuation account that is deducted from the amortized cost basis of loans and leases to present the net amount expected to be collected from loans and leases. Loans and leases are charged-off against the ACL when management believes the loan or lease balance is deemed uncollectible. Recoveries do not exceed the aggregate of amounts previously charged-off. Changes in the ACL and, therefore, in the related Provision, can materially affect net income. In applying the judgment and review required to determine the ACL, management considers changes in economic conditions, customer behavior, and collateral value, among other factors. Economic factors or business decisions may affect the composition and mix of the loan and lease portfolio, causing management to increase or decrease the ACL.

​

The following are some of the significant judgments and inherent limitations which affect the estimate of the ACL:

​

[[GREPCENT_TABLE]]
[["","\u25cf","The Accuracy of Internal Credit Risk Ratings, Monitoring of Loans Past Due and Delinquency Trends. The ACL related to our commercial portfolio segment is generally most sensitive to the accuracy of internal credit risk ratings assigned to each borrower. Commercial loan risk ratings are evaluated based on each situation by experienced senior credit officers and are subject to periodic review by an internal team of credit specialists."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Data. We have applied considerable judgments about the sufficiency and applicability of our internal data to provide an accurate view of historical loss information. For each of our portfolio segments we have examined between 8 and 12 years of historical data. For many of our residential real estate and consumer loan classes, we have assumed that the historical loss period observed is sufficient to capture a full credit loss cycle and that the credit loss exposures observed over this historical loss period are representative of those for which we will be making estimates of future expected credit losses under CECL. In making this assumption, we have relied on the fact that the historical loss period incorporated the most recent observed recessionary period as well as the subsequent period of sustained recovery and growth."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Reasonable and Supportable Forecast Period. For contractual periods which extend beyond the one-year reasonable and supportable forecast period, management elected an immediate reversion to the mean approach. Management will continue to assess whether a one-year reasonable and supportable forecast period is appropriate. Changes to the economic environment and uncertainty with regards to the timing and extent of an economic recovery may result in management decreasing or increasing the current reasonable and supportable forecast period."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Economic Adjustments over the Reasonable and Supportable Forecast Period. The Company uses a one-variable regression model to estimate the impact of Management\u2019s economic outlook over the reasonable and supportable forecast period. The model uses the economic forecast as the input and outputs modifiers that adjust the long-run default rates. The Company\u2019s economic forecast framework allows management to use judgment in selecting the economic model input and output."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Qualitative Adjustments. For risks not captured in the long-run default rates or in the economic forecast model, the Company applies segment level dollar adjustments. These adjustments are estimated based on the best information available as of the reporting date and may include, as appropriate, overlays to account for economic related conditions not captured in the economic forecast model but expected to potentially impact losses, adjustments for model limitations, regulatory determinants, overlays for natural disasters, and other events such as the COVID-19 pandemic and the Maui wildfires."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","\u25cf","Identification and Measurement of Individually Assessed Loans, including Loans Modified with a Borrower Experiencing Financial Difficulty. Our experienced senior credit officers may consider a loan impaired based on their evaluation of current information and events, including loans modified with a borrower experiencing financial difficulty. The measurement of impairment is typically based on an analysis of the present value of expected future cash flows. The development of these expectations requires significant management judgment and estimation."]]
[[/GREPCENT_TABLE]]

The ACL for loans and leases was $156.5 million as of December 31, 2023, which represented an increase of $12.6 million, compared to the ACL for loans and leases of $143.9 million as of December 31, 2022. The level of the ACL was commensurate with our stable credit risk profile, loan portfolio growth and composition and a stable Hawaii economy. The reserve for unfunded commitments was $35.6 million as of December 31, 2023, which represented an increase of $1.8 million, compared to the reserve for unfunded commitments of $33.8 million as of December 31, 2022. The ACL for loans and leases and the reserve for unfunded commitments was considered adequate based on our ongoing analysis of estimated expected credit losses, credit risk profiles, current economic outlook, coverage ratios and other relevant factors. The ACL anticipates cyclical losses consistent with a recession and includes a qualitative overlay for potential macroeconomic impacts. We will continue to monitor factors that drive expected credit losses including the uncertainty of the economy, inflation and geopolitical instability.

​

To illustrate the sensitivity of the Company’s ACL model to credit quality, we downgraded the internal credit risk ratings on commercial loans by one grade and reduced FICO scores on retail loans by ten points. Downgrading 1% of our commercial portfolio would increase the ACL at December 31, 2023 by approximately $1.3 million, and reducing FICO scores on the entire retail portfolio would increase the ACL at December 31, 2023 by approximately $4.1 million. These sensitivity analyses are hypothetical and have been provided only to indicate the potential impact that changes in internal credit risk ratings and FICO scores may have on the ACL estimate, with all other inputs remaining constant.

​

See “Note 5. Allowance for Credit Losses” in the notes to the consolidated financial statements included in Item 8. Financial Statement and Supplementary Data and “Analysis of Financial Condition — Allowance for Credit Losses for Loans and Leases & Reserve for Unfunded Commitments” for more information on the ACL.

​

Goodwill

​

Goodwill represents the cost of acquired businesses in excess of the fair value of the net assets acquired. The Company’s policy is to assess goodwill for impairment at the reporting unit level on an annual basis at December 31 or between annual assessments if a triggering event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill is tested for impairment by comparing the estimated fair value of each reporting unit with its carrying amount. Impairment is the condition that exists when the carrying amount of a reporting unit exceeds its fair value, and an impairment loss would be recognized in an amount equal to that excess. Subsequent reversals of goodwill impairment are prohibited.

​

The fair value of our reporting units is estimated using valuation methods based on the market and income approaches:

​

[[GREPCENT_TABLE]]
[["","\u25cf","The market approach primarily involves the calculation of valuation multiples of comparable public companies (e.g., based on market capitalization, net income, book equity and tangible book equity). Because the initial fair value determined under the market approach represents a noncontrolling interest, a control premium is applied to arrive at the estimated fair value on a controlling basis. The key assumptions with respect to this method are the selected multiples and control premium."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["","\u25cf","The income approach uses a discounted cash flow (DCF) method to value a company on a going concern basis. The DCF method is based on the present value of (1) multi-period projections of free cash flows and (2) a terminal value. The sum of the present value of the cash flows from the discrete period and the present value of the terminal value represents the fair value of the reporting unit under the income approach. The projected cash flows and terminal value are converted to present value through applying a discount rate. The key assumptions with respect to this method are the determination of the free cash flows, discount rate and terminal value."]]
[[/GREPCENT_TABLE]]

​

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The Company performed its annual quantitative impairment test in accordance with Accounting Standards Codification Topic 350, Intangibles – Goodwill and Other, and based on such assessment, the Company concluded that there was no impairment in our goodwill for the year ended December 31, 2023.

​

Estimating the fair value of a reporting unit requires significant judgment and often involves the use of estimates and assumptions that could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. Changes in these factors, as well as downturns in economic or business conditions, including volatility in domestic and global markets, geopolitical concerns, inflation concerns, global supply chain issues, and other factors affecting the economy, could have a significant adverse impact on the fair value of our reporting units in relation to their carrying amounts and could necessitate taking charges in future reporting periods related to the impairment of our goodwill.

​

Because there was no impairment for the current year ended December 31, 2023, our goodwill balance remained unchanged at December 31, 2023, compared to December 31, 2022.

​

To illustrate a hypothetical sensitivity analysis, a 100-basis point increase in the discount rate assumption across each of the Company’s reporting units would not have resulted in a fair value below the respective reporting unit’s carrying value.

​

See “Note 7. Other Assets” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information on goodwill.

​

Fair Value Measurements

​

Fair value is the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for an asset or liability in an orderly transaction between market participants at the measurement date. The degree of management judgment involved in determining the fair value of a financial instrument is dependent upon the availability of quoted market prices or observable market inputs. For financial instruments that are traded actively and have quoted market prices or observable market inputs, there is minimal subjectivity involved in measuring fair value. However, when quoted market prices or observable market inputs are not fully available, significant management judgment may be necessary to estimate fair value. In developing our fair value measurements, we maximize the use of observable inputs and minimize the use of unobservable inputs.

​

The fair value hierarchy defines Level 1 valuations as those based on quoted prices, unadjusted, for identical instruments traded in active markets. Level 2 valuations are those based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active or model-based valuation techniques for which all significant assumptions are observable in the market. Level 3 valuations are based on model-based techniques that use at least one significant assumption not observable in the market, or significant management judgment or estimation, some of which may be internally developed.

​

Financial assets that are recorded at fair value on a recurring basis include available for sale investment securities, and derivative financial instruments. As of December 31, 2023 and 2022, $2.3 billion or 9% and $3.2 billion or 13%, respectively, of our total assets consisted of financial assets recorded at fair value on a recurring basis and most of these financial assets consisted of available for sale investment securities measured using information from a third-party pricing service. These investments in debt securities and mortgage backed securities were classified in Level 2 of the fair value hierarchy. Financial liabilities that were recorded at fair value on a recurring basis were comprised of derivative financial instruments. As of December 31, 2023 and 2022, $4.6 million or less than 1% and $50.1 million or less than 1%, respectively, of our total liabilities, consisted of financial liabilities recorded at fair value on a recurring basis. As of December 31, 2023 and 2022, $2.3 million and $49.3 million, respectively, was classified in Level 2 of the fair value hierarchy and $2.3 million and $0.9 million, respectively, was classified in Level 3 of the fair value hierarchy. As of December 31, 2023 and 2022, the liability which was classified in Level 3 of the fair value hierarchy was related to the sale of our Visa Class B restricted shares in 2016. We recorded a derivative liability which requires payment to the buyer of the Visa Class B restricted shares in the event Visa further reduces the conversion rate to its publicly traded Visa Class A shares.

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​

Our third-party pricing service makes no representations or warranties that the pricing data provided to us is complete or free from errors, omissions or defects. As a result, we have processes in place to monitor and periodically review the information provided to us by our third-party pricing service:

​

[[GREPCENT_TABLE]]
[["(1)","Our third-party pricing service provides us with documentation by asset class of inputs and methodologies used to value securities. We review this documentation to evaluate the inputs and valuation methodologies used to place securities into the appropriate level of the fair value hierarchy. This documentation is periodically updated by our third-party pricing service. Accordingly, transfers of securities within the fair value hierarchy are made if deemed necessary."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["(2)","On a monthly basis, management reviews the pricing information received from our third-party pricing service. This review process includes a comparison to non-binding third-party broker quotes, as well as a review of market related conditions impacting the information provided by our third-party pricing service. We also identify investment securities which may have traded in illiquid or inactive markets by identifying instances of a significant decrease in the volume or frequency of trades relative to historic levels, as well as instances of a significant widening of the bid ask spread in the brokered markets."]]
[[/GREPCENT_TABLE]]

​

[[GREPCENT_TABLE]]
[["(3)","Our third-party pricing service has also established processes for us to submit inquiries regarding quoted prices. Periodically, we will challenge the quoted prices provided by our third-party pricing service. Our third-party pricing service will review the inputs to the evaluation in light of the new market data presented by us. Our third-party pricing service may then affirm the original quoted price or may update the evaluation on a going forward basis."]]
[[/GREPCENT_TABLE]]

​

Based on the composition of our investment securities portfolio, we believe that we have developed appropriate internal controls and performed appropriate due diligence procedures to prevent or detect material misstatements by our third-party pricing service. See “Note 21. Fair Value” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information on our use of fair value estimates.

​

Pension and Postretirement Benefit Obligations

​

We use the following key variables to calculate annual pension costs: (1) size of the employee population, length of service and estimated compensation increases; (2) actuarial assumptions and estimates; (3) expected long-term rate of return on plan assets; and (4) discount rate. Pension cost is directly affected by the number of employees eligible for pension benefits and their estimated compensation increases. To calculate estimated compensation increases, management reviews our salary increases each year and compares this data with industry information. For all pension and postretirement plan calculations, we use a measurement date of December 31.

​

The expected long-term rate of return was based on a calculated rate of return from average rates of return on various asset classes over a 20-year historical time horizon. Using long-term historical data allows the Company to capture multiple economic environments, which management believes is relevant when using historical returns. Net actuarial gains or losses that exceed a 5% corridor of the greater of the projected benefit obligation or the fair value of plan assets as of the beginning of the year are amortized from accumulated other comprehensive income into net periodic pension cost on a straight-line basis over five years.

​

In estimating the projected benefit obligation, an independent actuary bases assumptions on factors such as mortality rate, turnover rate, retirement rate, disability rate and other assumptions related to the population of individuals in the pension plan. If significant actuarial gains or losses occur, the actuary reviews the demographic and economic assumptions with management, at which time the Company considers revising these assumptions based on actual results.

​

Our determination of the pension and postretirement benefit plan obligations and net periodic benefit cost is a critical accounting estimate as it requires the use of estimates and judgment related to the amount and timing of expected future cash outflows for benefit payments and cash inflows for maturities and return on plan assets. Changes in estimates and assumptions related to mortality rates and future health care costs could also have a material impact to our financial condition or results of operations. The discount rate assumption is used to determine the present value of future benefit obligations and the net periodic benefit cost. The discount rate assumption used to value the present value of future benefit obligations as of each year end is the rate used to determine the net periodic benefit cost for the following year.

​

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The projected benefit obligation for pension benefits was $153.6 million as of December 31, 2023, which represented a decrease of $2.0 million, compared to the projected benefit obligation for pension benefits of $155.6 million as of December 31, 2022. The accumulated postretirement benefit obligation for other benefits was $16.8 million as of December 31, 2023, which represented an increase of $0.4 million, compared to the accumulated postretirement benefit obligation for other benefits of $16.4 million as of December 31, 2022.

​

To illustrate a hypothetical sensitivity analysis, if the discount rate assumption decreased by 100 basis points, the projected benefit obligation for pension benefits and accumulated postretirement benefit obligation for other benefits at December 31, 2023 would increase by approximately $11.9 million and $1.5 million, respectively.

​

See “Note 14. Benefit Plans” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information on pension and postretirement benefit plan obligations.

​

Income Taxes

​

In estimating income taxes payable or receivable, we assess the relative merits and risks of the appropriate tax treatment considering statutory, judicial and regulatory guidance in the context of each tax position. Accordingly, previously estimated liabilities are regularly reevaluated and adjusted through the provision for income taxes. Changes in the estimate of income taxes payable or receivable occur periodically due to changes in tax rates, interpretations of tax law, the status of examinations being conducted by various taxing authorities, the expiration of statutes of limitations and newly enacted statutory, judicial and regulatory guidance that impact the relative merits and risks of each tax position. These changes, when they occur, may affect the provision for income taxes as well as current and deferred income taxes, and may be significant to our consolidated statements of income and balance sheets.

​

Management's determination of the realization of net deferred tax assets is based upon management's judgment of various future events and uncertainties, including the timing and amount of future income, as well as the implementation of various tax planning strategies to maximize realization of the deferred tax assets. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized.

​

We are also required to record a liability for UTBs for the entire amount of a tax benefit taken in a prior or future income tax return when we determine that a tax position has a less than 50% likelihood of being accepted by the taxing authority. As of December 31, 2023 and 2022, our liabilities for UTBs were $212.0 million and $206.2 million, respectively. See “Note 15. Income Taxes” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information on income taxes.

​

Future Application of Accounting Pronouncements

​

For a discussion of the expected impact of accounting pronouncements recently issued but not adopted by us as of December 31, 2023, see “Note 1. Organization and Summary of Significant Accounting Policies — Recent Accounting Pronouncements” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data for more information.

​

Risk Governance and Quantitative and Qualitative Disclosures About Market Risk

​

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

​

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Credit Risk

​

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

​

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

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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 or preleasing requirements 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.

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Residential lending is further categorized into the following classes: residential mortgages (loans secured by 1-4 family residential properties and home equity loans) and home equity lines of credit. Our Bank’s underwriting standards typically require LTV ratios of not more than 80%, although higher levels are permitted with accompanying mortgage insurance. First mortgage loans secured by residential properties generally carry a moderate level of credit risk, with an average loan size of approximately $395,000 as of December 31, 2023. Residential mortgage loan production is added to our loan portfolio or is sold in the secondary market, based on management’s evaluation of our liquidity, capital and loan portfolio mix as well as market conditions. Changes in interest rates, the economic environment and other market factors have impacted, and will likely continue to impact, the marketability and value of collateral and the financial condition of our borrowers which impacts the level of credit risk inherent in this portfolio, although we remain in a supply constrained housing environment in Hawaii. Geographic concentrations exist for this portfolio as nearly all residential mortgage loans and home equity lines of credit are for residences located in Hawaii, Guam or Saipan. These island locales are susceptible to a wide array of potential natural disasters including, but not limited to, hurricanes, floods, tsunamis and earthquakes. We offer home equity lines of credit with variable rates; fixed rate lock options may be available post-closing.  All lines are underwritten at 2% over the fully indexed rate. Our procedures for underwriting home equity lines of credit include an assessment of an applicant’s overall financial capacity and repayment ability. Decisions are primarily based on repayment ability via debt-to-income ratios, LTV ratios and an evaluation of credit history.

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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.

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Market Risk

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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.

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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 U.S. interest rates. In the banking industry, changes in interest rates can significantly impact earnings and the safety and soundness of an entity.

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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.

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

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Market Risk Measurement

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

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Table 25 presents, for the twelve months subsequent to December 31, 2023 and 2022, 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 December 31, 2023 and 2022 are held constant.

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[["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Net Interest Income Sensitivity Profile - Estimated Percentage Change Over 12 Months","\u200b","\u200b","Table 25"],["\u200b","\u200b","\u200b","Static Forecast","\u200b","\u200b","Static Forecast","\u200b"],["\u200b","\u200b","December 31, 2023","\u200b","December 31, 2022","\u200b"],["Gradual Change in Interest Rates (basis points)","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["+100","\u200b","\u200b","\u200b","\u200b","1.9","%","\u200b","\u200b","\u200b","3.2","%"],["+50","\u200b","\u200b","\u200b","\u200b","1.0","\u200b","\u200b","\u200b","\u200b","1.6","\u200b"],["(50)","\u200b","\u200b","\u200b","\u200b","(1.0)","\u200b","\u200b","\u200b","\u200b","(1.7)","\u200b"],["(100)","\u200b","\u200b","\u200b","\u200b","(2.1)","\u200b","\u200b","\u200b","\u200b","(3.4)","\u200b"],["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["Immediate Change in Interest Rates (basis points)","\u200b","\u200b","\u200b","","\u200b","\u200b","\u200b","\u200b","","\u200b","\u200b"],["+100","\u200b","\u200b","\u200b","\u200b","3.6","%","\u200b","\u200b","\u200b","5.8","%"],["+50","\u200b","\u200b","\u200b","\u200b","1.8","\u200b","\u200b","\u200b","\u200b","2.9","\u200b"],["(50)","\u200b","\u200b","\u200b","\u200b","(2.0)","\u200b","\u200b","\u200b","\u200b","(3.1)","\u200b"],["(100)","\u200b","\u200b","\u200b","\u200b","(4.0)","\u200b","\u200b","\u200b","\u200b","(6.3)","\u200b"]]
[[/GREPCENT_TABLE]]

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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.

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Currently, our interest rate profile, assuming a constant balance sheet, 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. Other factors such as changes in balance sheet composition or deposit rate behavior could result in a change in repricing sensitivity.

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Under the static balance sheet forecast as of December 31, 2023, our net interest income sensitivity profile is lower in higher interest rate scenarios compared to similar forecasts as of December 31, 2022. The sensitivity outcomes described above are primarily due to the impact of accelerated deposit repricing as compared with December 31, 2022.

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

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

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Limitations of Market Risk Measures

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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.

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Market Risk Governance

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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.

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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.

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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 16. Derivative Financial Instruments” in the notes to the consolidated financial statements included in Item 8. Financial Statements and Supplementary Data, has generally been limited. This is due to natural on balance sheet hedges arising out of offsetting interest rate exposures from loans and investment securities with deposits and other interest-bearing liabilities. In particular, the investment securities portfolio is utilized to manage the interest rate exposure and sensitivity to within the guidelines and limits established by the ALCO. We utilize natural and offsetting economic hedges in an effort to reduce the need to employ off-balance sheet derivative financial instruments to hedge interest rate risk exposures. Expected movements in interest rates are also considered in managing interest rate risk. Thus, as interest rates change, we may use different techniques to manage interest rate risk.

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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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In addition, our business relied upon a large volume of loans, derivative contracts and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR to establish their interest rate and/or value. According to the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, U.S. Dollar LIBOR settings have ceased to be provided or ceased to be representative after June 30, 2023. The publication of all other LIBOR settings ceased to be provided or ceased to be representative as of December 31, 2021. We transitioned our financial instruments associated to LIBOR currencies and tenors that ceased or became nonrepresentative on December 31, 2021, to alternative reference rates (collectively, “Alternative Rates”), with limited exceptions. As such, effective December 31, 2021, we have ceased the use of U.S Dollar LIBOR as a reference rate on all new contracts and continue to increase the usage of Alternative Rates such as the Secured Overnight Financing Rate (“SOFR”). A working group of key stakeholders from throughout the Company spearheaded the transition from LIBOR to Alternative Rates. There are risks inherent with the transition to any Alternative Rate as the rate may behave differently than LIBOR in reaction to monetary, market and economic events. The working group disbanded after the conclusion of the transition in December 2023.

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Our LIBOR transition plan included work to ensure that our technology systems were prepared for the transition, our loan documents that reference LIBOR-based rates were appropriately amended to reference other methods of interest rate determinations and internal and external stakeholders were apprised of the transition. We have implemented certain Prime Rate and SOFR conventions as we transitioned our products and transaction agreements to reference rates other than LIBOR. Commercial loans and investment securities have fully transitioned to SOFR rates. Residential mortgages with adjustable rates will fully transition off LIBOR to SOFR during the fourth quarter of 2024. To see the recorded investment in our loan and lease portfolio by rate type, refer to Table 12 in the section titled “Loans and Leases” in this MD&A.

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Operational Risk

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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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