First Hawaiian(FHB) - 2020 Q1 - Quarterly Report

Part I Financial Information Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements, including statements of income, comprehensive income, balance sheets, stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, financial instrument specifics, and regulatory compliance Consolidated Statements of Income | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net interest income | $138,683 | $145,089 | | Provision for credit losses | $41,200 | $5,680 | | Noninterest income | $49,228 | $47,072 | | Noninterest expense | $96,466 | $92,623 | | Net income | $38,865 | $69,924 | | Basic earnings per share | $0.30 | $0.52 | | Diluted earnings per share | $0.30 | $0.52 | - Net income decreased by $31,059 thousand (44%) for the three months ended March 31, 2020, compared to the same period in 2019, primarily due to a significant increase in the provision for credit losses[8] Consolidated Statements of Comprehensive Income | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Net income | $38,865 | $69,924 | | Other comprehensive income | $35,878 | $53,441 | | Total comprehensive income | $74,743 | $123,365 | - Total comprehensive income decreased by $48,622 thousand for the three months ended March 31, 2020, compared to the same period in 2019, mainly driven by the decrease in net income[10] Consolidated Balance Sheets | Metric (in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------- | :------------- | :---------------- | | Total assets | $20,755,891 | $20,166,734 | | Total deposits | $17,020,002 | $16,444,994 | | Total liabilities | $18,091,206 | $17,526,476 | | Total stockholders' equity | $2,664,685 | $2,640,258 | | Loans and leases | $13,380,270 | $13,211,650 | | Allowance for credit losses | $166,013 | $130,530 | - Total assets increased by $589,157 thousand (2.9%) from December 31, 2019, to March 31, 2020, primarily driven by an increase in interest-bearing deposits in other banks and loans and leases[14] - Total deposits increased by $575,008 thousand (3.5%) from December 31, 2019, to March 31, 2020[14] Consolidated Statements of Stockholders' Equity | Metric (in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------- | :------------- | :---------------- | | Balance as of December 31, 2019 | $2,640,258 | $2,524,839 | | Cumulative-effect adjustment of a change in accounting principle, net of tax | $(12,517) | N/A | | Net income | $38,865 | $69,924 | | Cash dividends declared | $(33,782) | $(35,067) | | Other comprehensive income, net of tax | $35,878 | $53,441 | | Balance as of March 31, 2020 | $2,664,685 | $2,613,202 | - Stockholders' equity increased by $24,427 thousand from December 31, 2019, to March 31, 2020, driven by net income and other comprehensive income, partially offset by dividends and a cumulative-effect adjustment[18] Consolidated Statements of Cash Flows | Cash Flow Activity (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash (used in) provided by operating activities | $(51,849) | $63,404 | | Net cash used in investing activities | $(124,058) | $(57,754) | | Net cash provided by (used in) financing activities | $534,722 | $(391,420) | | Net increase (decrease) in cash and cash equivalents | $358,815 | $(385,770) | | Cash and cash equivalents at end of period | $1,052,832 | $617,867 | - Net cash provided by financing activities significantly increased to $534,722 thousand in Q1 2020 from a net use of $391,420 thousand in Q1 2019, primarily due to a net increase in deposits[21] - Cash and cash equivalents at the end of the period increased to $1,052,832 thousand as of March 31, 2020, from $617,867 thousand as of March 31, 2019[21] Notes to Consolidated Financial Statements (Unaudited) Note 1. Organization and Basis of Presentation This note outlines the company's structure, services, and the basis for preparing interim financial statements in accordance with GAAP. It details the adoption of new accounting standards, including CECL, Goodwill Impairment, and Fair Value Measurement disclosures, and mentions the evaluation of the new Reference Rate Reform guidance - First Hawaiian, Inc. (FHI) is a bank holding company that owns 100% of First Hawaiian Bank (FHB), offering comprehensive banking services to consumer and commercial customers[23] - The Company adopted ASU No. 2016-13 (CECL) on January 1, 2020, resulting in a cumulative effect adjustment to retained earnings and an increase in the Allowance for Credit Losses (ACL) by $770 thousand and the Reserve for Unfunded Commitments by $16,300 thousand[52][55] - ASU No. 2017-04 (Goodwill Impairment) and ASU No. 2018-13 (Fair Value Measurement Disclosure) were adopted on January 1, 2020, with no material impact on consolidated financial statements[57][58] - The Company is evaluating the impact of ASU No. 2020-04 (Reference Rate Reform), issued in March 2020, which provides optional expedients for contracts referencing LIBOR[60][61][63] Note 2. Investment Securities This note details the composition of the company's available-for-sale investment securities, primarily consisting of U.S. Treasury, government-sponsored enterprise debt, mortgage-backed, and collateralized mortgage obligations. It also provides information on unrealized gains and losses, and pledged securities | Investment Category (in thousands) | March 31, 2020 Fair Value | December 31, 2019 Fair Value | | :--------------------------------- | :------------------------ | :------------------------- | | U.S. Treasury securities | $30,927 | $29,888 | | Government-sponsored enterprises debt securities | $26,721 | $101,439 | | Mortgage-backed securities | $883,414 | $792,419 | | Collateralized mortgage obligations | $3,117,395 | $3,151,897 | | Total available-for-sale securities | $4,058,457 | $4,075,644 | - Gross unrealized gains on investment securities increased to $54,483 thousand as of March 31, 2020, from $18,968 thousand as of December 31, 2019[68] - Gross unrealized losses on investment securities decreased to $10,423 thousand as of March 31, 2020, from $23,987 thousand as of December 31, 2019[68] - Pledged securities totaled $2.2 billion as of March 31, 2020, up from $1.8 billion as of December 31, 2019[71] Note 3. Loans and Leases This note provides a detailed breakdown of the loan and lease portfolio by category, including commercial and industrial, real estate, construction, residential, consumer, and lease financing. It also outlines collateral pledges and the geographic concentration of the portfolio | Loan Category (in thousands) | March 31, 2020 | December 31, 2019 | | :--------------------------- | :------------- | :---------------- | | Commercial and industrial | $3,025,345 | $2,743,242 | | Commercial real estate | $3,413,014 | $3,463,953 | | Construction | $572,062 | $519,241 | | Residential | $4,565,153 | $4,662,175 | | Consumer | $1,568,073 | $1,620,556 | | Lease financing | $236,623 | $202,483 | | Total loans and leases | $13,380,270 | $13,211,650 | - Commercial and industrial loans increased by $282,103 thousand (10.3%) from December 31, 2019, to March 31, 2020[80] - Residential real estate loans totaling $3.0 billion were pledged to collateralize borrowing capacity at the FHLB, and $1.3 billion were pledged to the FRB as of March 31, 2020[81][82] Note 4. Allowance for Credit Losses This note details the Allowance for Credit Losses (ACL) and the reserve for unfunded commitments, including the impact of adopting the CECL standard. It provides rollforwards of ACL activity, credit quality indicators (internal grades and FICO scores), past-due status, nonaccrual loans, collateral-dependent loans, and troubled debt restructurings (TDRs) | Metric (in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------- | :------------- | :---------------- | | Allowance for credit losses (ACL) | $166,013 | $130,530 | | Reserve for unfunded commitments | $17,251 | $600 | | Net charge-offs (3 months ended) | $6,136 | $5,852 | | ACL to total loans and leases outstanding | 1.24% | 0.99% | - The ACL increased by $35,483 thousand (27.2%) from December 31, 2019, to March 31, 2020, primarily due to higher expected credit losses resulting from COVID-19's impact on Hawaii's economy[87][88][317] - The reserve for unfunded commitments increased significantly to $17,251 thousand as of March 31, 2020, from $600 thousand as of December 31, 2019, largely due to the adoption of ASU No. 2016-13 (CECL)[91][115][426] - Nonaccrual loans and leases increased to $6,926 thousand as of March 31, 2020, from $5,468 thousand as of January 1, 2020[115] Note 5. Mortgage Servicing Rights This note details the company's mortgage servicing activities, including income, amortization, and the net carrying value of Mortgage Servicing Rights (MSRs). It also provides quantitative assumptions used in determining the fair value of MSRs | Metric (in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------- | :------------- | :---------------- | | Net carrying value of MSRs | $11,979 | $12,668 | | Amortization of MSRs (3 months ended) | $1,980 | $764 | | Servicing fees (3 months ended) | $1,500 | $1,600 | - No impairment of MSRs was recorded for the three months ended March 31, 2020, and 2019[131] Note 6. Transfers of Financial Assets This note describes the company's transfers of financial assets, primarily pledges of collateral to secure public deposits, borrowing arrangements with FHLB and FRB, ACH transactions, and interest rate swaps | Pledged Asset Category (in thousands) | March 31, 2020 | December 31, 2019 | | :------------------------------------ | :------------- | :---------------- | | Public deposits | $1,997,472 | $1,543,492 | | Federal Home Loan Bank | $3,008,321 | $2,928,581 | | Federal Reserve Bank | $1,250,553 | $953,169 | | ACH transactions | $152,967 | $155,360 | | Interest rate swaps | $55,831 | $43,296 | | Total pledged assets | $6,465,144 | $5,623,898 | - Total pledged assets increased by $841,246 thousand (15%) from December 31, 2019, to March 31, 2020[136] Note 7. Deposits This note categorizes deposits into interest-bearing and noninterest-bearing, by U.S. and foreign sources, and presents the maturity distribution of time certificates of deposit | Deposit Category (in thousands) | March 31, 2020 | December 31, 2019 | | :------------------------------ | :------------- | :---------------- | | U.S. Interest-bearing | $10,539,824 | $9,782,957 | | U.S. Noninterest-bearing | $5,073,463 | $5,188,696 | | Foreign Interest-bearing | $734,639 | $781,965 | | Foreign Noninterest-bearing | $672,076 | $691,376 | | Total deposits | $17,020,002 | $16,444,994 | - Total deposits increased by $575,008 thousand (3.5%) from December 31, 2019, to March 31, 2020[137] Time Certificates of Deposit Maturity (in thousands) | Time Certificates of Deposit Maturity (in thousands) | Total March 31, 2020 | | :--------------------------------------------------- | :------------------- | | Three months or less | $738,736 | | Over three through six months | $721,323 | | Over six through twelve months | $936,590 | | One to two years | $196,352 | | Two to three years | $181,599 | | Three to four years | $89,893 | | Four to five years | $47,692 | | Thereafter | $113 | | Total | $2,912,298 | Note 8. Short-Term Borrowings This note details the company's short-term borrowings, which consist entirely of FHLB fixed-rate advances, including their weighted average interest rate and remaining borrowing capacity | Short-Term Borrowings (in thousands) | March 31, 2020 | December 31, 2019 | | :----------------------------------- | :------------- | :---------------- | | Short-term FHLB fixed-rate advances | $400,000 | $400,000 | | Total short-term borrowings | $400,000 | $400,000 | - Short-term FHLB fixed-rate advances had a weighted average interest rate of 2.84% and maturity dates in 2020[140] - Available remaining borrowing capacity with the FHLB was $1.8 billion as of March 31, 2020[140] Note 9. Long-Term Borrowings This note outlines the company's long-term borrowings, comprising FHLB fixed-rate advances and a finance lease obligation, detailing their interest rates and future contractual principal payments | Long-Term Borrowings (in thousands) | March 31, 2020 | December 31, 2019 | | :---------------------------------- | :------------- | :---------------- | | Finance lease | $19 | $19 | | FHLB fixed-rate advances | $200,000 | $200,000 | | Total long-term borrowings | $200,019 | $200,019 | - FHLB fixed-rate advances of $200.0 million had a weighted average interest rate of 2.73% and maturity dates ranging from 2023 to 2024[142] Principal Payments (in thousands) | Year | Principal Payments (in thousands) | | :--- | :-------------------------------- | | 2020 | $9 | | 2021 | $10 | | 2022 | $0 | | 2023 | $100,000 | | 2024 | $100,000 | | Total| $200,019 | Note 10. Accumulated Other Comprehensive Income (Loss) This note details the components of accumulated other comprehensive income (loss), including pension and other benefits, and net unrealized gains or losses on investment securities, and presents changes over the reporting periods | Metric (in thousands) | March 31, 2020 | December 31, 2019 | | :-------------------- | :------------- | :---------------- | | Accumulated other comprehensive income (loss), net of tax | $4,129 | $(31,749) | - Accumulated other comprehensive income (loss), net of tax, increased by $35,878 thousand from December 31, 2019, to March 31, 2020, primarily due to a net change in investment securities[149] - Net change in investment securities, net of tax, was a gain of $35,974 thousand for the three months ended March 31, 2020[149] Note 11. Regulatory Capital Requirements This note outlines the company's and the bank's compliance with federal regulatory capital requirements, including Common Equity Tier 1 (CET1), Tier 1, Total Capital, and Leverage Ratios, confirming their 'well-capitalized' status | Capital Ratio | March 31, 2020 | December 31, 2019 | | :------------ | :------------- | :---------------- | | CET1 Capital Ratio | 11.65% | 11.88% | | Tier 1 Capital Ratio | 11.65% | 11.88% | | Total Capital Ratio | 12.90% | 12.81% | | Tier 1 Leverage Ratio | 8.63% | 8.79% | - Both the Company and the Bank were classified as 'well-capitalized' as of March 31, 2020, meeting all minimum regulatory capital requirements, including the 2.5% capital conservation buffer[155] Note 12. Derivative Financial Instruments This note details the company's use of derivative contracts, primarily interest rate swaps and foreign exchange contracts, for risk management (fair value hedges) and customer accommodation (free-standing instruments). It also addresses counterparty credit risk and credit-risk related contingent features | Derivative Type (in thousands) | March 31, 2020 Notional Amount | December 31, 2019 Notional Amount | | :----------------------------- | :----------------------------- | :-------------------------------- | | Interest rate swaps (hedging) | $23,190 | $23,190 | | Interest rate swaps (non-hedging) | $2,901,085 | $2,818,803 | | Funding swap | $85,645 | $82,900 | | Foreign exchange contracts | $1,834 | $1,428 | Derivative Fair Value (in thousands) | Derivative Fair Value (in thousands) | March 31, 2020 Asset | March 31, 2020 Liability | December 31, 2019 Asset | December 31, 2019 Liability | | :----------------------------------- | :------------------- | :----------------------- | :---------------------- | :-------------------------- | | Interest rate swaps (hedging) | $0 | $(1,635) | $0 | $(682) | | Interest rate swaps (non-hedging) | $158,711 | $0 | $63,527 | $0 | | Funding swap | $0 | $(3,199) | $0 | $(4,233) | | Foreign exchange contracts | $0 | $(52) | $12 | $0 | - The aggregate fair value of derivative instruments with credit-risk related contingent features in a net liability position was $12.3 million as of March 31, 2020, up from $4.0 million as of December 31, 2019[174] Note 13. Commitments and Contingent Liabilities This note addresses various commitments and contingent liabilities, including legal proceedings, off-balance sheet risks like commitments to extend credit and letters of credit, guarantees related to residential mortgage loan sales, and foreign exchange contracts - Management does not expect legal proceedings to have a material effect on the company's financial position[175] Financial Instrument (in thousands) | Financial Instrument (in thousands) | March 31, 2020 | December 31, 2019 | | :---------------------------------- | :------------- | :---------------- | | Commitments to extend credit | $5,727,850 | $5,907,690 | | Standby letters of credit | $185,315 | $181,412 | | Commercial letters of credit | $8,850 | $7,334 | - The company sells residential mortgage loans with representations and warranties that may require repurchase under certain conditions, but management does not anticipate material losses[182] Note 14. Revenue from Contracts with Customers This note explains the company's revenue recognition policies under Topic 606 and disaggregates revenue by type of service and business segment. It covers service charges, card fees, trust and investment services income, and other fees | Revenue Type (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Net interest income | $138,683 | $145,089 | | Service charges on deposit accounts | $8,950 | $8,060 | | Credit and debit card fees | $14,486 | $21,434 | | Other service charges and fees | $5,815 | $6,244 | | Trust and investment services income | $9,591 | $8,618 | | Other noninterest income | $1,479 | $1,932 | | Total revenue | $187,911 | $192,161 | - Total revenue decreased by $4,250 thousand (2.2%) for the three months ended March 31, 2020, compared to the same period in 2019[188] - Credit and debit card fees decreased by $6,948 thousand (32.4%) for the three months ended March 31, 2020, compared to the same period in 2019[188] Note 15. Earnings per Share This note provides the computation of basic and diluted earnings per share, confirming no adjustments to net income for calculation purposes and the absence of antidilutive securities | EPS Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--------- | :-------------------------------- | :-------------------------------- | | Basic earnings per share | $0.30 | $0.52 | | Diluted earnings per share | $0.30 | $0.52 | - Basic and diluted earnings per share decreased by $0.22 (42.3%) for the three months ended March 31, 2020, compared to the same period in 2019[199] Note 16. Noninterest Income and Noninterest Expense This note details the components of net periodic benefit cost for the company's pension and postretirement benefit plans, and reports operating lease income | Net Periodic Benefit Cost (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--------------------------------------- | :-------------------------------- | :-------------------------------- | | Pension Benefits | $1,856 | $2,430 | | Other Benefits | $314 | $182 | - Operating lease income was $1.5 million for both the three months ended March 31, 2020, and 2019[202] Note 17. Fair Value This note explains the fair value hierarchy (Level 1, 2, and 3) and the valuation techniques used for assets and liabilities measured at fair value on both a recurring and nonrecurring basis. It highlights that most available-for-sale securities and derivatives are Level 2, while the Visa derivative, collateral-dependent loans, MSRs, and OREO are Level 3 - Available-for-sale debt securities are classified as Level 2, valued using quoted prices or proprietary models with market observable parameters[212] - Most derivatives are classified as Level 2, measured using proprietary valuation models with market observable inputs[213] - The Visa derivative liability is classified as Level 3 due to significant unobservable inputs, including potential future changes in conversion rate, expected term, and growth rate of Visa Class A common shares[215][216] - Mortgage servicing rights, collateral-dependent loans, and other real estate owned are measured at fair value on a nonrecurring basis and classified as Level 3, utilizing significant unobservable inputs like prepayment rates or appraisal values[228][229][230] Note 18. Reportable Operating Segments This note describes the company's three reportable operating segments: Retail Banking, Commercial Banking, and Treasury and Other. It outlines the services offered by each segment and how financial performance is measured and allocated, noting changes in internal measurement and deposit cost allocation in 2019 - The company operates through three business segments: Retail Banking, Commercial Banking, and Treasury and Other[238] Net Income by Segment (in thousands) | Segment (in thousands) | Net Income (3 months ended March 31, 2020) | Net Income (3 months ended March 31, 2019) | | :--------------------- | :----------------------------------------- | :----------------------------------------- | | Retail Banking | $27,027 | $53,310 | | Commercial Banking | $7,276 | $22,530 | | Treasury and Other | $4,562 | $(5,916) | - Retail Banking net income decreased by 49% and Commercial Banking net income decreased by 68% year-over-year, primarily due to increased provision for credit losses related to COVID-19[355][359] - Treasury and Other segment's net income increased by $10.5 million year-over-year, moving from a loss to a gain, driven by higher net interest income and lower noninterest expense[362] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a comprehensive analysis of the company's financial performance and condition, including the significant impact of the COVID-19 pandemic on operations, economic outlook, and financial results. It details changes in net interest income, credit losses, noninterest income/expense, and segment performance, alongside an in-depth review of liquidity, capital, and risk management strategies Company Overview - First Hawaiian, Inc. (FHI) is a bank holding company that wholly owns First Hawaiian Bank (FHB), operating through Retail Banking, Commercial Banking, and Treasury and Other segments[259] Recent Developments regarding COVID-19 and the Hawaii and Global Economy - The COVID-19 pandemic has caused widespread volatility, uncertainty, and deterioration in global and U.S. economic conditions, leading to a national unemployment rate increase from 3.5% in February 2020 to 4.4% in March 2020[264][265] - Hawaii's economy, heavily dependent on tourism, has been significantly impacted by mandatory 14-day self-quarantine and stay-at-home orders, effectively halting the tourism industry[268][269] - The Federal Reserve cut the federal funds rate to a range of 0.00% to 0.25% and implemented quantitative easing, while the U.S. government enacted the $2 trillion CARES Act, including the Paycheck Protection Program (PPP)[273][276] - The company expects negative impacts on its financial position, results of operations, net interest margin, and credit risk profile due to the economic downturn and record low interest rates, and has implemented customer relief programs and participates in the PPP[278][279][280][282][283] Selected Financial Data | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change (YoY) | | :------------------------------------ | :-------------------------------- | :-------------------------------- | :----------- | | Net income | $38,865 | $69,924 | $(31,059) (44%) | | Basic earnings per share | $0.30 | $0.52 | $(0.22) (42%) | | Provision for credit losses | $41,200 | $5,680 | $35,520 (625%) | | Net interest income | $138,683 | $145,089 | $(6,406) (4%) | | Net interest margin | 3.12% | 3.23% | -11 bps | | Efficiency ratio | 51.33% | 48.20% | +313 bps | Balance Sheet Data | Balance Sheet Data | March 31, 2020 | December 31, 2019 | Change (QoQ) | | :----------------- | :------------- | :---------------- | :----------- | | Total loans and leases | $13,380,270 | $13,211,650 | $168,620 (1%) | | Allowance for credit losses | $166,013 | $130,530 | $35,483 (27%) | | Total deposits | $17,020,002 | $16,444,994 | $575,008 (3%) | | Total stockholders' equity | $2,664,685 | $2,640,258 | $24,427 (1%) | Analysis of Results of Operations - Net interest income decreased by $6.4 million (4%) to $138.7 million for the three months ended March 31, 2020, with net interest margin decreasing by 11 basis points to 3.12%, primarily due to lower yields in most loan categories and lower average balances in investment securities, partially offset by lower deposit funding costs[328][309] - The Provision for Credit Losses increased by $35.5 million to $41.2 million, primarily due to expected credit losses from COVID-19's impact on Hawaii's economy. The ACL to total loans and leases outstanding increased to 1.24% from 0.99%[332][310] - Total noninterest income increased by $2.2 million (5%) to $49.2 million, driven by a $2.7 million net gain on investment securities (vs. a loss in prior year) and increases in trust and investment services income, partially offset by decreases in credit and debit card fees and bank-owned life insurance income[334][311][313][335][337][338][340] - Total noninterest expense increased by $3.8 million (4%) to $96.5 million, mainly due to a $2.4 million increase in contracted services and professional fees and a $0.5 million increase in regulatory assessment and fees[342][314][344][346] - Net income for Retail Banking decreased by 49% and Commercial Banking by 68% year-over-year, largely due to the increased Provision. Treasury and Other segment's net income increased by $10.5 million, moving from a loss to a gain[355][359][362] Analysis of Financial Condition - Cash and cash equivalents increased to $1.1 billion as of March 31, 2020, from $0.7 billion as of December 31, 2019, with available-for-sale investment securities remaining stable at $4.1 billion[367] - Total loans and leases increased by $168.6 million (1%) to $13.4 billion, driven by a 10% increase in commercial and industrial loans, partially offset by decreases in residential real estate and consumer portfolios[381][382][386][388] - Non-performing assets (NPAs) increased by 24% to $7.2 million, and impaired loans increased to $25.4 million as of March 31, 2020, reflecting early impacts of COVID-19[407][415] - Total deposits increased by $575.0 million (3%) to $17.0 billion, primarily due to a $424.9 million increase in public time deposit balances, in anticipation of PPP funding needs[442] - Total stockholders' equity increased by $24.4 million (1%) to $2.7 billion, and the company maintained 'well-capitalized' status with a CET1 Capital Ratio of 11.65% as of March 31, 2020[457][455] Risk Governance and Quantitative and Qualitative Disclosures About Market Risk - The company manages credit risk through well-defined underwriting criteria, account administration standards, and portfolio diversification across obligor, industry, product, and geographic locations[469] - Market risk, primarily interest rate risk, is measured using net interest income simulation analysis and market value of equity (MVE) sensitivity analysis, with results indicating net interest income benefits from higher interest rates and is less sensitive to lower rates[480][484][489][492] Estimated Percentage Change in Net Interest Income Over 12 Months (March 31, 2020) | Interest Rate Change (basis points) | Estimated Percentage Change in Net Interest Income Over 12 Months (March 31, 2020) | | :---------------------------------- | :------------------------------------------------------------------------------- | | +100 (Ramp) | 4.5% | | -100 (Ramp) | (4.1%) | | +100 (Immediate Shock) | 10.3% | | -100 (Immediate Shock) | (8.9%) | - Operational risk is managed through a framework that includes reporting and assessment of operational risk events, and evaluation of mitigating strategies within key business lines[502] Critical Accounting Policies - The Allowance for Credit Losses (ACL) is identified as the most critical accounting estimate, requiring significant judgment and reliance on credit risk ratings, expected future cash flows, estimated loss rates, and macroeconomic factors under the CECL standard[505][506] - Key judgments for ACL estimation include the accuracy of internal credit risk ratings, sufficiency and applicability of historical data (8-12 years), the one-year reasonable and supportable forecast period, qualitative adjustments for economic outlook, and the identification and measurement of individually assessed loans, including TDRs[507][508][510][511][512] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section refers to the detailed discussion of market risk, including interest rate risk measurement and governance, provided within Item 2 of the Management's Discussion and Analysis of Financial Condition and Results of Operations - For quantitative and qualitative disclosures about market risk, refer to 'Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations — Risk Governance and Quantitative and Qualitative Disclosures About Market Risk'[515] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2020. There were no material changes in internal control over financial reporting during the quarter - The Company's disclosure controls and procedures were effective as of March 31, 2020[515] - There were no changes in the Company's internal control over financial reporting that materially affected or are reasonably likely to materially affect internal control over financial reporting during the quarter ended March 31, 2020[516] Part II Other Information Item 1. Legal Proceedings The company is involved in various legal proceedings incidental to its business but does not anticipate that the aggregate liability from these proceedings would have a material adverse effect on its financial condition or operations - The Company is not presently party to any legal proceedings the resolution of which is believed to have a material adverse effect on its business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels[517] Item 1A. Risk Factors This section supplements existing risk factors by detailing the significant adverse impacts of the COVID-19 pandemic on the company, its customers, and the broader economy. It highlights risks such as higher credit losses, reduced demand for services, operational disruptions, and specific risks associated with participation in the Paycheck Protection Program (PPP) - The COVID-19 pandemic and containment measures are adversely affecting the company, its customers, and the economy, with significant and difficult-to-predict impacts on business, financial position, results of operations, and prospects[519][520] - Governmental actions, including travel bans, quarantines, and stay-at-home orders, have significantly impacted the travel and tourism industry, particularly in Hawaii, leading to increased unemployment and a general downturn in business activity[523][524] - Federal Reserve interest rate reductions to 0.00%-0.25% may adversely affect net interest income, margins, and profitability, especially if prolonged[525] - Participation in the PPP under the CARES Act exposes the company to increased risks related to borrower non-compliance and potential deficiencies in loan origination, funding, or servicing, which could lead to denial or reduction of SBA guarantees[528][530] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the company's common stock repurchase activities during the quarter ended March 31, 2020, and notes the subsequent suspension of the stock repurchase program in April 2020 | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :----------------------------------- | :----------------------------- | :--------------------------- | | March 1, 2020 through March 31, 2020 | 274,120 | $21.64 | - The company had an authorized stock repurchase program for up to $80 million for 2020, with $75.0 million remaining as of March 31, 2020[531] - The company's Board of Directors voted to suspend the stock repurchase program in April 2020[531] Item 6. Exhibits This section provides a list of exhibits filed as part of the Form 10-Q, including certifications from the Chief Executive Officer and Chief Financial Officer, and XBRL-related documents - The exhibits include certifications from the Chief Executive Officer and Chief Financial Officer, as well as various XBRL (eXtensible Business Reporting Language) documents[534] Signatures This section contains the official signatures of the registrant's principal executive officer and principal financial and accounting officer, certifying the report - The report is signed by Robert S. Harrison, Chairman of the Board, President and Chief Executive Officer, and Ravi Mallela, Chief Financial Officer[537]