BANK OF HAWAII CORP (BOH) FY 2024 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following MD&A is intended to help the reader understand the Company and its operations and is focused on our fiscal 2024 and 2023 financial results, including comparisons of year-to-year performance between these years. Discussion and analysis of our 2022 fiscal year, as well as the year-to-year comparison between fiscal 2023 and 2022, are included in Part II, Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023, filed with the SEC on February 29, 2024.

Forward-Looking Statements

This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts and may include statements concerning, among other things, the anticipated economic and business environment in our service area and elsewhere, credit quality and other financial and business matters in future periods, our future results of operations and financial position, our business strategy and plans and our objectives and future operations. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. We also may make forward-looking statements in our other documents filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”). In addition, our senior management may provide forward-looking statements orally to analysts, investors, representatives of the media and others. Given these risks and uncertainties, you should not place undue reliance on any forward-looking statement as a prediction of our actual results.

Our forward-looking statements are based on numerous assumptions, any of which could prove to be inaccurate, and actual results may differ materially from those projected because of a variety of risks and uncertainties, including, but not limited to: (1) Our business is sensitive to regional business and economic conditions, in particular those of Hawaiʻi, Guam and other Pacific Islands; (2) Our loan portfolio is largely secured by real estate, and a downturn in the real estate market may adversely affect our results of operations; (3) A sustained period of high inflation could pose a risk to local economies and the financial performance of the Bank; (4) Climate change and the governmental responses to it could have a material adverse impact on the Bank and its customers; (5) Disruptions, instability and failures in the banking industry may negatively impact us; (6) Any reduction in defense spending by the federal government in the state of Hawaiʻi could adversely impact the economy in Hawaiʻi and the Pacific Islands; (7) Changes in interest rates could adversely impact our results of operations and capital; (8) Our allowance for credit losses may prove to be insufficient to absorb losses or appropriately reflect, at any given time, the inherent risk of loss in our loan portfolio; (9) Consumer protection initiatives and court decisions related to the foreclosure process affect our remedies as a creditor; (10) Changes in the capital markets could materially affect the level of assets under management and the demand for our other fee-based services; (11) The Parent’s liquidity is dependent on dividends from the Bank; (12) There can be no assurance that the Parent will continue to declare cash dividends; (13) Fiscal and monetary policy changes may significantly impact our profitability and liquidity; (14) Legislation and regulatory initiatives affecting the financial services industry, including new interpretations, restrictions and requirements, could detrimentally affect the Company’s business; (15) Changes in income tax laws and interpretations, or in accounting standards, could materially affect our financial condition or results of operations; (16) A failure in or breach of our operational systems, information systems, or infrastructure, or those of our third party vendors and other service providers, may result in financial losses, loss of customers, or damage to our reputation; (17) An interruption or breach in security of our information systems or those related to merchants and third party vendors, including as a result of cyber-attacks, could disrupt our business, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, or result in financial losses; (18) Our mortgage banking income may experience significant volatility; (19) Our mortgage loan servicing business may be impacted if we do not meet our obligations, or if servicing standards change; (20) Risks related to representation and warranty provisions may impact our mortgage loan servicing business; (21) Risks relating to residential mortgage loan servicing activities may adversely affect our results; (22) The requirement to record certain assets and liabilities at fair value may adversely affect our financial results (23) Natural disasters and adverse weather in Hawaiʻi and the Pacific Islands may negatively affect real estate property values and our operations (24) Competition may adversely affect our business; (25) Our future performance will depend on our ability to respond timely to technological change; (26) Negative public opinion could damage our reputation and adversely impact our earnings and liquidity (27) We are subject to certain litigation, and our expenses related to this litigation may adversely affect our results; (28) Our performance depends on attracting and retaining key employees and skilled personnel to operate our business effectively; (29) The soundness of other financial institutions may adversely impact our financial condition or results of operations; and (30) We have experienced increases in FDIC insurance assessments.

The risks and uncertainties that could cause actual results to differ materially from our historical experience and our expectations and projections include but are not limited to those described in Item 1A. “Risk Factors,” Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in our most recent Annual Report on Form 10-K and in subsequent SEC filings. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on

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which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by the federal securities laws.

Critical Accounting Estimates

Our Consolidated Financial Statements were prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and follow general practices within the industries in which we operate. The most significant accounting policies we follow are presented in Note 2 in Item 8. “Notes to Consolidated Financial Statements.” Application of GAAP requires us to make estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Most accounting estimates are not considered by management to be critical accounting estimates. Critical accounting estimates are those estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. In determining which accounting estimates are critical accounting estimates we consider, among other things, whether the application of GAAP requires management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and whether it is likely that materially different amounts would be reported under different conditions or using different assumptions. The accounting estimates that we believe to be most critical in preparing our Consolidated Financial Statements are those that are related to the determination of the reserve for credit losses, fair value estimates, and income taxes. Additional information is presented in Note 2 in Item 8. “Notes to Consolidated Financial Statements.”

Reserve for Credit Losses

A consequence of lending activities is that we may incur credit losses. The amount of such losses will vary depending upon the risk characteristics of the loan and lease portfolio as affected by economic conditions.

The reserve for credit losses consists of the allowance for credit losses (the “Allowance”) and the reserve for unfunded commitments (the “Unfunded Reserve”). Accounting estimates related to the reserve for credit losses are considered to be critical as these estimates involve considerable subjective judgment and estimation by management. These estimates are in accordance with Accounting Standards Codification (“ASC”) Topic 326 (“ASC 326”) Financial Instruments - Credit Losses. In the case of loans and leases, the Allowance is a contra-asset valuation account, calculated in accordance with ASC 326, that is deducted from the amortized cost basis of loans and leases to present the net amount expected to be collected. In the case of off-balance-sheet credit exposures, the Unfunded Reserve is a liability account, calculated in accordance with ASC 326, reported as a component of other liabilities in our consolidated statements of condition.

The estimate of expected credit losses is based on relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. Historical loss experience is generally the starting point for estimating expected credit losses. We then consider whether the historical loss experience should be adjusted for asset-specific risk characteristics or current conditions at the reporting date that did not exist over the period from which historical experience was used. These adjustments can include accounting for new or discontinued products, changes in our portfolio composition, delinquency trends, and with forecasted economic conditions including but not limited to unemployment, real estate market conditions (e.g. prices, sales activity and inventory), visitor arrivals, and the uncertainty of other events (local, national and global). The Unfunded Reserve represents the expected credit losses on off-balance sheet commitments such as unfunded commitments to extend credit and standby letters of credit. The Unfunded Reserve is determined by estimating future draws and applying the expected loss rates on those draws. However, a liability is not recognized for commitments unconditionally cancelable by the Company.

The historical loss experience for the commercial portfolio segment is primarily determined using a Cohort method. This method pools loans and leases into groups (“cohorts”) sharing similar risk characteristics based on product and risk ratings, and tracks each cohort’s historical net charge-offs to calculate a historical loss rate. The historical loss rates for each cohort are then averaged to calculate an overall historical loss rate which is applied to current loan balances to arrive at the quantitative baseline portion of the Allowance for most of the commercial portfolio segment.

The historical loss experience for the consumer portfolio segment is primarily determined using a Vintage method. This method measures historical loss behavior in the form of a historical loss rate for homogenous loan pools that originate in the same period, known as a vintage. The historical loss rates are then applied to origination loan balances by vintage to determine the quantitative baseline portion of the Allowance for most of the consumer portfolio segment. The homogenous loan pools are segmented according to similar risk characteristics (e.g., residential mortgage, home equity) and may be sub-segmented further based on historical loss behavior. For example, we sub-segment residential mortgages by geography and home equity by lien position.

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We also consider qualitative adjustments to the quantitative baseline such as the impact of current environmental factors at the reporting date that did not exist over the period from which historical experience was used. Relevant factors include, but are not limited to, concentrations of credit risk, such as geography, industry, real estate property type; and economic trends and conditions, such as Hawaiʻi unemployment, real estate prices and market conditions, and visitor arrivals. We also consider changes in underwriting standards, and levels and trends in delinquencies and criticized loans and leases.

We also incorporate a reasonable and supportable (“R&S”) loss forecast period, which is currently one year, to account for the effect of forecasted economic conditions and other factors on the performance of the loan portfolios, which could differ from historical loss experience. We also perform asset quality reviews which includes a review of forecasted gross charge-offs and recoveries, nonperforming assets, criticized loans and leases, and risk rating migration. The results of the asset quality review are used to consider qualitative adjustments to the quantitative baseline. After the one-year R&S loss forecast period, this adjustment assumes an immediate reversion to historical loss rates for the remaining expected life of the loan.

The company utilizes the University of Hawaiʻi Economic Research Organization (“UHERO”) macroeconomic forecast that is updated quarterly based on economic conditions and events. The forecast includes various economic variables for Hawaiʻi such as gross domestic product (“GDP”), unemployment rate, visitor arrivals, residential real estate market conditions, personal income, and inflation rate. We also utilize other forecast tools for broader U.S. economic variables such as interest rates, as well as to apply any overlays to the forecast.

The reserve for credit losses is generally sensitive to economic conditions and assumptions given the impact for potential losses for the consumer portfolio and risk rating migration for the commercial portfolio. For the consumer portfolio, as an example, an increase in the forecasted Hawaiʻi unemployment rate could lead to an increase in the rate of delinquencies and consequently charge-offs for consumer borrowers. For the Allowance at December 31, 2024, a 25 basis point increase in the forecasted Hawaiʻi unemployment rates would have increased the quantitative component of the Allowance for consumer loans by an estimated $1.4 million. For the commercial portfolio, the impact of adverse changes in economic conditions on borrowers will vary, and generally evaluated on a case-by-case basis to include the borrower’s existing and expected financial capacity. Borrowers that would be most adversely impacted are identified as having the potential for migrating from a Pass to a Classified risk rating. For the Allowance at December 31, 2024, a 50 basis point increase in the percentage of commercial loans risk rated as Classified would increase the quantitative component of the Allowance for commercial loans by an estimated $2.0 million. This sensitivity analysis is hypothetical and provided only to indicate the potential impact changes in economic conditions and assumptions may have on the Allowance estimate. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

The Unfunded Reserve is determined by estimating future draws and applying the expected loss rates on those draws. Future draws are based on historical averages of utilization rates (i.e., the likelihood of draws taken). To estimate future draws on unfunded balances, current utilization rates are compared to historical utilization rates. If current utilization rates are below historical utilization rates, the rate difference is applied to the committed balance to estimate the future draw. Expected loss rates are estimated using the loss rates calculated for the corresponding loan category in the Allowance. For the commercial portfolio, the historical loss rates were calculated utilizing the Cohort methodology, while the consumer portfolio utilized the Vintage methodology.

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.

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Financial assets that are recorded at fair value on a recurring basis include available-for-sale investment securities, loans held for sale, mortgage servicing rights, investments related to deferred compensation arrangements, and derivative financial instruments. As of December 31, 2024 and 2023, $2.9 billion or 12% and $2.5 billion or 11%, 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 all classified in either Levels 1 or 2 of the fair value hierarchy. Financial liabilities that are recorded at fair value on a recurring basis are comprised of derivative financial instruments. As of December 31, 2024, and 2023, $154.1 million and $143.9 million, respectively, or less than 1% of our total liabilities consisted of financial liabilities recorded at fair value on a recurring basis.

As of December 31, 2024 and 2023, Level 3 financial assets recorded at fair value on a recurring basis were $0.7 million and $0.8 million, respectively, or less than 1% of our total assets, and were comprised primarily of mortgage servicing rights and derivative financial instruments. As of December 31, 2024 and 2023, there were no Level 3 financial liabilities recorded at fair value on a recurring basis.

We also use third party pricing services to assist our management in determining the value of securities. 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 such as: 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. 2) On a quarterly basis, management also selects a sample of securities priced by the Company’s third party pricing service and reviews the significant assumptions and valuation methodologies used by the pricing service with respect to those securities. The information provided is comprised of market reference data, which may include reported trades; bids, offers, or broker-dealer dealer quotes; benchmark yields and spreads; as well as other reference data as appropriate. Periodically, based on these reviews, management determines whether the current placement of the security in the fair value hierarchy is appropriate or whether transfers may be warranted. 3) On a quarterly basis, management reviews the pricing information received from our third party pricing service. This review process includes a comparison to a second source. 4) 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. Generally, we do not adjust the price from the third party service provider. 5) On an annual basis, we obtain and review the third party’s most recently issued Service Organization Controls report related to controls placed in operation and tests of operating effectiveness, to update our understanding of the third party pricing service’s control environment.

See Note 21 in Item 8. “Notes to Consolidated Financial Statements” for more information on our fair value measurements.

Income Taxes

We determine our liabilities for income taxes based on current tax regulations and interpretations in tax jurisdictions where our income is subject to taxation. Currently, we file tax returns for federal, five state and local domestic jurisdictions, and three foreign jurisdictions. 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, 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 condition.

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, character 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. As of December 31, 2024 and 2023, we carried a valuation allowance of $9.7 million and $6.7 million, respectively, related to our deferred tax assets established in connection with our low-income housing investments.

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We are also required to record a liability, referred to as an unrecognized tax benefit (“UTB”), for the entire amount of 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, 2024 and 2023, our liabilities for UTBs were $5.3 million and $3.7 million, respectively.

Overview

We are a regional financial services company serving businesses, consumers, and governments in Hawaiʻi, Guam, and other Pacific Islands. Our principal operating subsidiary, the Bank, was founded in 1897.

Our business strategy is to use our unique market knowledge, prudent management discipline and brand strength to deliver exceptional value to our stakeholders. Our business plan is balanced between growth and risk management while maintaining flexibility to adjust to economic changes. We will continue to focus on providing customers with best-in-class service and an innovative mix of products and services. We will also remain focused on continuing to deliver strong financial results while maintaining prudent risk and capital management strategies as well as our commitment to support our local communities.

Hawaiʻi Economy

Global economic conditions remain broadly favorable for the local economy. The Maui economy continues its gradual post-wildfire recovery while the visitor industry for the rest of the Hawaiʻi is expected to operate at a high level. Due to the weak yen, the Japanese visitor market continues to recover slowly. Considering the ongoing recovery efforts on Maui and weaker Japanese yen, visitor arrivals to Hawaiʻi are expected to have moderate growth in 2025.

The economic environment in Hawaiʻi remained stable with the unemployment rate slightly increasing from 2.9% in December 2023 to 3.0% in December 2024, which was below the U.S. unemployment rate of 4.1%. For the State overall, job growth is expected to expand in 2025 with the main drivers in construction, real estate, and the continued recovery of tourism.

The volume of single-family home sales on Oahu increased 9.1% in 2024 compared to the prior year, while the volume of condominium sales on Oahu decreased 2.5% in 2024 compared to the prior year. The median price of single-family home sales and condominium sales on Oahu increased by 4.8% and 1.3%, respectively, in 2024 compared to the prior year.

Earnings Summary

Net income for 2024 was $150.0 million, a decrease of $21.2 million or 12% compared to the prior year. Diluted earnings per common share were $3.46 in 2024, a decrease of $0.68 or 16% compared to the prior year. Our return on average assets was 0.64% in 2024, a decrease of 7 basis points from 2023, and our return on average shareholders’ equity was 9.78% in 2024, compared to 12.63% in the prior year.

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The return on average common equity for 2024 was 10.85% compared to 13.89% for the prior year.

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Net interest income was $466.6 million in 2024, a decrease of $30.4 million compared to the prior year. The decrease was primarily due to higher funding costs, partially offset by higher earning asset yields. The net interest margin was 2.16% in 2024, a decrease of 8 basis points from the prior year.

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Noninterest income was $172.5 million in 2024, a decrease of 2% from the prior year.

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Noninterest expense was $430.1 million in 2024, a decrease of 1.7% compared to the prior year.

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The effective tax rate for 2024 was 24.19% compared with 24.62% for the prior year.

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Total non-performing assets were $19.3 million as of December 31, 2024, an increase of $7.6 million from the prior year. The ratio of non-performing assets to total loans and leases and foreclosed real estate was 0.14% at December 31, 2024, an increase of 6 basis points from the prior year.

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Net loan and lease charge-offs in 2024 were $12.9 million or 9 basis points of total average loans and leases outstanding. Net loan and lease charge-offs in 2024 were comprised of charge-offs of $15.0 million partially offset by recoveries of $7.2 million. Compared to 2023, net loan and lease charge-offs increased by $2.7 million or 2 basis points on total average loans and leases outstanding.

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The allowance for credit losses on loans and leases was $148.5 million as of December 31, 2024, an increase of $2.1 million from the prior year. The ratio of the allowance for credit losses to total loans and leases outstanding was 1.06% at December 31, 2024, up 1 basis point from the prior year.

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Total assets were $23.6 billion as of December 31, 2024, a decrease of 0.6% from the prior year.

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The investment securities portfolio was $7.3 billion as of December 31, 2024, a decrease of $0.1 billion or 1% from the prior year. The portfolio remains largely comprised of securities issued by U.S. government agencies and U.S. government-sponsored enterprises. In 2024, we purchased $470.8 million of investment securities, the majority of which were floating rate securities.

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Total loans and leases were $14.1 billion as of December 31, 2024, an increase of 1% from the prior year.

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Total deposits were $20.6 billion as of December 31, 2024, a decrease of 2% from the prior year.

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Total shareholders’ equity was $1.7 billion as of December 31, 2024, an increase of 18% from the prior year due to the issuance of Series B Preferred Stock in the second quarter of 2024.

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No shares of common stock were repurchased under the share repurchase program in 2024. Total remaining buyback authority under the share repurchase program was $126.0 million as of December 31, 2024.

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The Company’s Board of Directors declared a quarterly cash dividend of $0.70 per share on the Company’s outstanding common shares. The dividend will be payable on March 14, 2025 to shareholders of record at the close of business on February 28, 2025.

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Analysis of Consolidated Statements of Income

Average balances, related income and expenses, and resulting yields and rates, on a taxable-equivalent basis, are presented in Table 1. An analysis of the change in net interest income, on a taxable-equivalent basis, is presented in Table 2.

1.
Due to rounding, the amounts presented in this schedule may not tie to other amounts presented elsewhere in this report.

2.
Interest income includes taxable-equivalent basis adjustments, based upon a federal statutory tax rate of 21% of $3.8 million and $2.0 million for the years ended December 31, 2024, and 2023, respectively.

3.
Non-performing loans and leases are included in the respective average loan and lease balances.

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1.
The change in interest income or expense due to both rate and volume has been allocated between the factors in proportion to the relationship of the absolute dollar amounts of the change in each.

Net Interest Income

Net interest income is affected by the size and mix of our balance sheet components as well as the spread between interest earned on assets and interest paid on liabilities. Net interest margin is defined as net interest income, on a taxable-equivalent basis, as a percentage of average earning assets.

The average balances of our earning assets decreased by $532.8 million or 2% in 2024 compared to the prior year, primarily due to cashflows from the portfolio being used to reduce our interest-bearing liabilities. Yields on our investment securities portfolio increased by 4 basis points, primarily due to income earned from interest rate swaps that hedge a portion of our AFS securities portfolio partially offset by the impact of a portion of our corporate bonds portfolio converting from fixed-rate securities to lower floating-rate securities in the fourth quarter of 2023. Yields on our loan and lease portfolio increased by 46 basis points due to yield increases on our floating rate loan portfolio, higher rates on loans originated during the period, and income earned from interest rate swaps that hedge a portion of our residential mortgage portfolio.

The average balances of our interest-bearing liabilities decreased by $178.0 million or 1% in 2024 compared to the prior year due to the termination of $1.2 billion in FHLB advances during the third quarter of 2023 and the termination of $625.0 million in repurchase agreements ($575.0 million in the third quarter of 2023 and $50.0 million in the second quarter of 2024). This

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decrease was partially offset by an increase in our interest-bearing deposits. The cost of our interest-bearing liabilities in 2024 increased by 55 basis points compared to the prior year, primarily driven by customer migration from non-interest bearing and low yield deposit accounts to higher rate deposit products. The cost of our interest-bearing deposits increased by 69 basis points in 2024 compared to the prior year.

Noninterest Income

Table 3 presents the major components of noninterest income for 2024 and 2023.

Bank-owned life insurance increased by $1.9 million or 17% in 2024 compared to the prior year primarily due to an increase in the yield on the underlying assets in 2024.

Investment securities losses, net, decreased by $3.9 million in 2024 compared to the prior year primarily due to $4.6 million net losses on sales of investment securities in 2023, partially offset by higher fees paid to counterparties for Visa Class B share conversion rate expense during 2024.

Other noninterest income decreased by $17.4 million or 47% in 2024 compared to the prior year primarily due to a $14.7 million gain on the extinguishments of repurchase agreements during 2023 coupled with a decrease in customer derivative fees earned during 2024 as compared to the prior year.

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Noninterest Expense

Table 4 presents the major components of noninterest expense for 2024 and 2023.

Total salaries and benefits decreased by $1.5 million or 1% in 2024 compared to the prior year primarily due to a decrease in separation expense coupled with a decrease in payroll taxes and share-based compensation, partially offset by an increase in incentive compensation expense and medical, dental, and life insurance expense.

Professional fees expense increased by $1.9 million or 11% in 2024 compared to the prior year primarily due to an increase in consulting fees and various outsourced support functions related to enhancing our risk management efforts.

FDIC insurance expense decreased by $10.5 million or 37% in 2024 compared to the prior year, primarily due to a decrease in the industry-wide FDIC special assessment. We recorded a charge of $1.9 million in 2024 compared to a $14.7 million charge in 2023 in connection with the special assessment. This special assessment was designed to recover the losses to the Deposit Insurance Fund arising from the protection of uninsured depositors following the closures of Silicon Valley Bank, Signature Bank and First Republic Bank. The collection of the special assessment started in the second quarter of 2024 and will be paid in eight quarterly installments.

Total other expense decreased by $0.8 million or 1% in 2024 compared to the prior year primarily due to lower broker's charges as a result of fewer customer swaps in 2024 as compared to 2023.

Income Taxes

Table 5 presents our provision for income taxes and effective tax rates for 2024 and 2023:

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The provision for income taxes was $47.9 million in 2024, a decrease of $8.1 million compared to the prior year. The effective tax rate for 2024 was 24.19%, a decrease from 24.62% for the prior year. The lower effective tax rate in 2024 compared to the prior year was primarily due to return to provision adjustments and discrete items partially offset by changes to uncertain tax positions.

Analysis of Business Segments

Our business segments are Consumer Banking, Commercial Banking, and Treasury and Other. Table 6 summarizes net income from our business segments for 2024 and 2023. Additional information about segment performance is presented in Note 13 in Item 8. “Notes to Consolidated Financial Statements.”

1.
Certain prior period information has been reclassified to conform to current presentation.

Consumer Banking

Net income increased by $2.1 million or 2% in 2024 compared to the prior year, primarily due an increase in noninterest income, partially offset by an increase in the provision for credit losses. Noninterest income increased by $8.2 million or 6% in 2024 compared to the prior year, primarily due to higher trust and asset management fees, overdraft fees, shareholder servicing fees, annuity and insurance fees, and debit card fees. The provision for credit losses increased by $4.2 million or 54% in 2024 compared to the prior year, primarily due to higher net charge-offs in the installment, home equity, auto and residential loan portfolios.

Commercial Banking

Net income decreased by $4.4 million or 4% in 2024 compared to the prior year, primarily due to a decrease in net interest income and noninterest income, partially offset by a decrease in noninterest expense. Net interest income decreased by $3.0 million or 1% in 2024 compared to the prior year, primarily due to lower allocated interest income as a result of a decline in the average balance of commercial deposits, including noninterest bearing balances, partially offset by growth in the commercial and industrial and construction loan portfolios. Noninterest income decreased by $4.2 million or 13% in 2024 compared to the prior year, primarily due to a decrease in customer derivative fees, letter of credit fees, and certificate of deposit breakage fees. This decrease was partially offset by increases in account analysis fees, loan fees, and fees earned on money market sweep balances. Noninterest expense decreased by $3.1 million or 4% in 2024 compared to the prior year, primarily due to a decrease in allocated administrative and support unit expenses, salaries and benefits, and broker charges related to the customer derivative program. This decrease was partially offset by an increase in operational losses, merchant processing fees, allocated rent, and software licensing fees.

Treasury and Other

Net income decreased by $18.9 million or 24% in 2024 compared to the prior year, primarily due to lower net interest income and noninterest income, partially offset by lower noninterest expense. Net interest income decreased by $25.3 million or 24% in 2024 compared to the prior year as a result of higher interest-bearing deposit rates, partially offset by higher earning asset yields. Noninterest income decreased by $8.0 million or 47% in 2024 compared to the prior year, primarily due to a $14.7 million gain on the extinguishment of repurchase agreements reported above, which was partially offset by a $4.7 million net loss related to investment securities sales in the prior year. Noninterest expense decreased by $3.9 million or 20% in 2024 compared to the prior year, primarily due to a decrease in the industry-wide FDIC special assessment. The provision for income taxes in this business segment represents the residual amount to arrive at the total tax expense for the Company.

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Analysis of Consolidated Statements of Condition

Investment Securities

Table 7 presents the maturity distribution at amortized cost, weighted-average yield to maturity, and fair value of our investment securities.

1
Weighted-average yields on investment securities available-for-sale are based on amortized cost.

2
Information for mortgage-backed securities, collateralized mortgage obligations, and small business administration securities reflect weighted average life, including anticipated future prepayments.

As of December 31, 2024, our investment securities portfolio was comprised of securities with an average remaining duration of approximately 4.83 years, which does not consider the impact of the interest rate swaps that hedge a portion of our available-for-sale portfolio.

We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and level of interest rate risk to which we are exposed. These evaluations may cause us to change the level of funds deployed into investment securities, change the composition of our investment securities portfolio, and change the proportion of investments made into the available-for-sale and held-to-maturity investment categories.

Mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac continue to be the largest concentrations in the portfolio. As of December 31, 2024, these mortgage-backed securities were all AAA-rated, with a low probability of a change in their credit ratings in the near future. As of December 31, 2024, our available-for-sale investment securities portfolio was comprised of securities with an average remaining duration of approximately 3.03 years, which does not consider the impact of the interest rate swaps that hedge a portion of our available-for-sale portfolio.

Gross unrealized gains in our investment securities portfolio were $1.3 million and $0.7 million as of December 31, 2024 and 2023, respectively. Gross unrealized losses in the investment securities portfolio were $1.1 billion and $1.0 billion as of

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December 31, 2024 and 2023, respectively. The increase in gross unrealized losses were primarily due to an increase in rates year over year.

The gross unrealized loss positions were primarily related to mortgage-backed securities issued by U.S. government agencies and U.S. government-sponsored enterprises. These securities carry the explicit and/or implicit guarantee of the U.S. government and have a long history of zero credit loss. Total gross unrealized losses were primarily attributable to changes in interest rates, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities. At December 31, 2024, we had the intent and ability to hold the investment securities that were in an unrealized loss position and it is not more likely than not that we will be required to sell the investment securities before recovery of their amortized cost basis, which may be at maturity. See Note 3 in Item 8. “Notes to Consolidated Financial Statements” for more information.

The Company’s corporate bond holdings as of December 31, 2024, had a fair value of $680.0 million. Of this total, $1.2 million was fully guaranteed by the Export-Import Bank of the United States, an agency of the U.S. government, and $8.3 million was fully guaranteed by the U.S. government. Of the remaining $670.4 million of corporate bonds, all were credit-rated A- or better by at least one nationally recognized statistical rating organization.

Loans and Leases

Table 8 presents the composition of our loan and lease portfolio by major categories.

Total loans and leases were $14.1 billion as of December 31, 2024. This represents a $111.0 million or 1% increase from the prior year, due to growth in the commercial loan and lease portfolio.

The commercial loan and lease portfolio is comprised of commercial and industrial loans, commercial mortgages, construction loans, and lease financing. Commercial and industrial loans are made primarily to corporations, middle market, and small businesses for the purpose of financing equipment acquisitions, expansion, working capital, and other general business purposes. Commercial mortgage and construction loans are offered to real estate investors, developers, and builders primarily domiciled in Hawaiʻi. Commercial mortgage loans are secured by first mortgages on commercial real estate at loan-to-value ratios generally not exceeding 75%. Commercial properties are well diversified among property types, including and primarily multi-family, industrial, retail and lodging. The primary source of repayment for investor property is cash flow from the property and for owner-occupied property is the operating cash flow from the business.

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Table 8A presents an additional breakdown of the Company’s commercial mortgage portfolio.

1.
Amount includes unamortized loan origination fees.

Construction loans are made for the purchase or construction of a property for which repayment will be generated by the property. We classify loans as construction until the completion of the construction phase. Following construction, if a loan is retained, the loan is reclassified to the commercial mortgage category. Lease financing consists of sales-type leases used by commercial customers to finance capital purchases. Although our primary market is Hawaiʻi, the commercial portfolio contains loans to some borrowers based on the U.S. Mainland, including some Shared National Credits, which have a business connection to Hawaiʻi or are associated with a Hawaiʻi customer relationship.

Commercial loans and leases were $6.1 billion as of December 31, 2024, an increase of $347.9 million or 6% from the prior year primarily due to increased loan production within our commercial mortgage portfolio. Commercial mortgage loans increased by $271.6 million or 7% from the prior year due to increased demand for funding.

The consumer loan and lease portfolio is comprised of residential mortgage loans, home equity lines and loans, indirect auto loans, and other consumer loans including direct installment loans and indirect auto leases. These products are generally offered in the geographic markets we serve. Our residential mortgage loan portfolio is primarily comprised of fixed-rate loans concentrated in Hawaiʻi. We also offer a variety of home equity lines and loans, which are primarily secured by first lien mortgages on residential property of the borrower. Automobile lending activities include loans and leases secured by new or used automobiles. We originate automobile loans and leases on an indirect basis through selected dealerships. Direct installment loans are generally unsecured and are primarily used for personal expenses or for debt consolidation.

Consumer loans and leases were $8.0 billion as of December 31, 2024, a decrease of $237.0 million or 3% from the prior year primarily due to declines in our home equity and automobile portfolios. Home equity decreased by $99.3 million or 4% from the prior year as a result of paydowns and fewer new originations. Automobile loans decreased by $73.7 million or 9% from the prior year as a result of slower sales, increased competition and slowdown in production.

See Note 4 in Item 8. “Notes to Consolidated Financial Statements” and the “Corporate Risk Profile – Credit Risk” section of Item 7. MD&A for more information on our loan and lease portfolio.

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Table 9 presents the geographic distribution of our loan and lease portfolio.

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

Our commercial and consumer lending activities are concentrated primarily in Hawaiʻi and the West Pacific. Our commercial loan and lease portfolio to borrowers based on the U.S. Mainland includes participation in Shared National Credits.

Table 10 presents a maturity distribution for selected loan categories.

1.
Based on contractual maturities.

Goodwill

Goodwill was $31.5 million as of December 31, 2024, and 2023. As of December 31, 2024, based on our qualitative assessment, there were no reporting units where we concluded that the fair value of a reporting unit was less than its carrying amount, including goodwill. See Note 2 in Item 8. “Notes to Consolidated Financial Statements” for more information on our goodwill impairment policy.

Other Assets

Other assets were $737.0 million as of December 31, 2024, an increase of $95.4 million or 15% from the prior year. The increase resulted from various items. Derivative financial instruments increased by $66.4 million due to an increase in the fair value of our interest rate swaps and the strategic repositioning of our fair value hedge portfolio. Low-income housing and other equity investments increased by $24.3 million due to increased funding of existing projects. Deferred tax assets and tax receivable decreased by $11.2 million or 6.1% due to temporary differences between financial reporting and income tax basis of unrealized losses on investment securities and a decrease in federal income tax receivable. See Note 7 in Item 8. “Notes to Consolidated Financial Statements” for more information on the composition of our other assets.

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Deposits

Table 11 presents the components of our deposits by major customer categories as of December 31, 2024, and 2023.

Total deposits were $20.6 billion as of December 31, 2024, a $422.0 million or 2% decrease from the prior year. This decrease was primarily due to a decrease in commercial and public and other deposits. Commercial deposits decreased by $301.6 million or 4%, due to decreases of $258.2 million in core deposits, defined as all deposits exclusive of time deposits and a decrease of $43.4 million in time deposits. Public and other deposits decreased by $198.3 million or 9%, due to a decrease of $114.4 million in time deposits and $83.9 million in core deposits. Consumer deposits remained relatively unchanged from the prior year.

Table 12 presents the components of our savings deposits as of December 31, 2024, and 2023.

Table 13 presents the maturity distribution of the estimated uninsured time deposits as of December 31, 2024, and 2023.

Uninsured amounts are estimated based on the portion of account balances in excess of FDIC insurance limits.

Estimated uninsured deposits are calculated pursuant to regulatory guidance and reported in our Call Report and include deposits collateralized by government-backed securities and intercompany deposits of wholly-owned subsidiaries. The table below presents a reconciliation of our estimated uninsured deposits reported in our Call Report to our adjusted uninsured deposits. We believe the adjusted uninsured deposits reconciliation provides useful information about our deposits at risk.

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Securities Sold Under Agreements to Repurchase

Table 14 presents the composition of our securities sold under agreements to repurchase.

As of December 31, 2024, securities sold under agreements to repurchase decreased by $50.5 million, or 34%, compared to the previous year. In May 2024, a private institution exercised its right to call on a repurchase agreement with a balance of $50.0 million, resulting in its termination. In November 2024, a repurchase agreement with a government entity with a balance of $0.5 million matured.

Some of our repurchase agreements with private institutions may be terminated at earlier specified dates by either the private institution or the Company. If all such agreements were to terminate at the earliest possible date, the weighted-average maturity of our repurchase agreements with private institutions would be 0.1 years. Each of our repurchase agreements is accounted for as a collateralized financing arrangement (i.e., secured borrowing) and not as a sale and subsequent repurchase of securities. See Note 9 in Item 8. “Notes to Consolidated Statements” for more information.

Other Debt

Other debt was $558.3 million as of December 31, 2024, a decrease of $1.9 million from the prior year. In 2023, we added a net $550.0 million of FHLB advances with a weighted-average interest rate of 4.13% and maturity dates ranging from 2026 to 2028. As of December 31, 2024, our available capacity under our line of credit with the FHLB was $1.7 billion. The FHLB borrowing capacity is secured by residential real estate loan collateral.

Pension and Postretirement Plan Obligations

Retirement benefits payable were $23.8 million as of December 31, 2024, an increase of $0.1 million from the prior year. Our pension and postretirement benefit obligations and net periodic benefit cost are actuarially determined based on a number of key assumptions, including the discount rate, the expected return on plan assets, and the health-care cost trend rate. The accounting for pension and postretirement benefit plans reflect the long-term nature of the obligations and the investment horizon of the plan assets.

The discount rate is used to determine the present value of future benefit obligations and the net periodic benefit cost. The discount rate used to value the present value of future benefit obligations as of each year-end is the rate used to estimate the net periodic benefit cost for the following year. Table 15 presents a sensitivity analysis of a 25 basis point change in discount rates to the pension and postretirement benefit plan’s net periodic benefit cost and benefit obligations:

See Note 14 in Item 8. “Notes to the Consolidated Financial Statements” for more information on our pension and postretirement benefit plans.

Contractual Obligations

The Company has various contractual obligations that affect its cash flows and liquidity. Our non-cancelable operating leases and finance lease obligations are primarily related to branch premises, equipment, and a portion of the Company’s headquarters’ building with lease terms extending through 2052. Purchase obligations arise from agreements to purchase goods or services that

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are enforceable and legally binding. Other contracts included in purchase obligations primarily consist of service agreements for various systems and applications supporting bank operations. Pension and postretirement benefit contributions represent the minimum expected contribution to the unfunded non-qualified pension plan and postretirement benefit plan. Actual contributions may differ from these estimates. Additional information regarding material contractual obligations is presented in Notes 9, 14, 18, 20 and 23 in Item 8. “Notes to Consolidated Financial Statements.”

Foreign Activities

Cross-border outstandings are defined as loans (including accrued interest), acceptances, interest-bearing deposits with other banks, other interest-bearing investments, and any other monetary assets which are denominated in dollars or other non-local currency. As of December 31, 2024 and 2023, we did not have cross-border outstandings to any foreign country which exceeded 0.75% of our total assets.

Corporate Risk Profile

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.

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 guidelines deemed necessary and prudent. Portfolio exposures at the obligor, industry, product, and/or geographic location levels are actively monitored to manage concentration risk. Furthermore, credit risk management includes an independent credit review process that assesses compliance with commercial and consumer credit policies, risk ratings, and other critical credit information. In addition to utilizing risk management practices that are based upon established and sound lending practices, we adhere to Regulatory Safety and Soundness credit standards. This includes understanding and evaluating our customers’ borrowing needs and capacity to repay, in conjunction with specific risks in their line of business, economic factors, character and history.

Commercial and industrial loans are made primarily for the purpose of financing equipment acquisition, expansion, working capital, and other general business purposes. Lease financing primarily consists of sales-type leases to finance capital purchases ranging from computer equipment to equipment and vehicles. The credit decisions for these transactions are based upon an assessment of the overall financial capacity of the applicant. A determination is made as to the applicant’s ability to repay in accordance with the proposed terms as well as an overall assessment of the risks involved. In addition to an evaluation of the applicant’s financial condition, a determination is made of the probable adequacy of the primary and secondary sources of repayment, such as additional collateral or personal guarantees, to be relied upon in the transaction. Credit agency reports of the applicant’s credit history supplement the analysis of the applicant’s and/or guarantor’s creditworthiness.

Commercial mortgages and construction loans are offered to real estate investors, developers, builders, and owner-occupants primarily domiciled in Hawaiʻi. These loans are secured by first mortgages on real estate at loan-to-value (“LTV”) ratios deemed appropriate based on the property type, location, overall quality, and sponsorship. Generally, these LTV ratios do not exceed 75% based on regulatory-compliant appraisals that we obtain for the underlying properties. Commercial properties are well diversified among property types, including and primarily multi-family, industrial, retail and lodging. Commercial mortgage and construction loans are substantially secured by properties located in Hawaiʻi.

Commercial mortgage loans are underwritten based on the economic fundamentals of the property and the creditworthiness of the borrower. In evaluating a proposed commercial mortgage loan, we primarily emphasize the ratio of the property’s projected net cash flows to the loan’s debt servicing requirement. The debt service coverage ratio normally is not less than 125% and it is computed after deducting for a vacancy factor and property expenses as appropriate. In addition, a personal guarantee of the loan or a portion thereof is sometimes required from the principal(s) of the borrower. We typically require title insurance insuring the priority of our lien, fire, and extended coverage casualty insurance, and flood insurance, if appropriate, in order to protect our security interest in the underlying property. In addition, business interruption insurance or other insurance may be required. Owner-occupant commercial mortgage loans are underwritten based upon the cash flow of the business provided that the real estate asset is utilized in the operation of the business. Real estate is evaluated independently as a secondary source of repayment.

Construction loans are underwritten against projected cash flows derived from rental income, business income from an owner-occupant, or the sale of the property to an end-user. We may mitigate the risks associated with these types of loans by requiring

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fixed-price construction contracts, performance and payment bonding, controlled disbursements, and pre-sale contracts or pre-lease agreements.

We offer a variety of first lien and second lien mortgage loans to consumers within our markets with first lien residential mortgages comprising our largest loan category. Residential mortgage loans are secured by a primary residence, or a secondary residence or investor property and are underwritten to assess the credit risks and financial capacity and repayment ability of the applicant. Decisions are primarily based on LTV ratios, debt-to-income (“DTI”) ratios or debt-service coverage ratios (“DSCR”), liquidity, and credit scores. LTV ratios generally do not exceed 80%, although higher levels are permitted with mortgage insurance. We offer variable rate mortgage loans with interest rates that are subject to change every six months after the third, fifth, seventh, or tenth year, depending on the product and are based on the Secured Overnight Financing Rate (“SOFR”). Variable rate mortgage loans are underwritten at fully-indexed interest rates. We do not offer payment-option facilities, sub-prime or Alt-A loans, or any product with negative amortization. We selectively offer interest-only mortgage loans to private banking clients.

Home equity lines and loans are secured primarily by a first lien mortgage, or a second lien mortgage on a primary residence, secondary residence, or investor property. The underwriting terms for the home equity product generally permits borrowing availability, in the aggregate, up to 80% of the value of the collateral property for primary residence and up to 75% of the value of the collateral property for secondary residence or investor at the time of origination. We offer fixed and variable rate home equity loans, with variable rate loans underwritten at fully-indexed interest rates. Our procedures for underwriting home equity loans include an assessment of an applicant’s overall financial capacity and repayment ability. Decisions are primarily based on LTV ratios, DTI ratios or DSCR, liquidity and credit scores. Maximum line and loan amounts and LTVs are determined by collateral value and customer segment.

Automobile lending activities include loans and leases secured by new or used automobiles, and leases secured by new automobiles. We originate automobile loans on an indirect basis through selected dealerships in Hawaiʻi, Guam and Saipan, and we originate automobile leases on an indirect basis through selected dealerships in Hawaiʻi. Our procedures for underwriting automobile loans and leases include an assessment of an applicant’s overall financial capacity and repayment ability. Although an applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the automobile collateral 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.

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

Table 16 presents a five-year history of non-performing assets and accruing loans and leases past due 90 days or more.

Table 17 presents the activity in Non-Performing Assets (“NPAs”) for 2024:

NPAs consist of non-accrual loans and leases and foreclosed real estate. Changes in the level of non-accrual loans and leases typically are caused by 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 foreclosed real estate, or are no longer classified as non-accrual because they have returned to accrual status.

Commercial and Industrial non-accrual loans increased by $4.6 million from the prior year, primarily due to the addition of three loans during 2024. The three loans added during 2024 were attributed to one primary borrower.

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Residential mortgage non-accrual loans increased by $2.1 million or 72% from the prior year. As of December 31, 2024, our residential mortgage non-accrual loans were comprised of 19 loans with a weighted average current loan-to-value of 77%.

Foreclosed real estate represents property acquired as the result of borrower defaults on loans. Foreclosed real estate 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. Foreclosed real estate was $2.7 million as of December 31, 2024.

If interest due on the balances of all non-accrual loans as of December 31, 2024 had been accrued under the original terms, approximately $1.2 million in total interest income would have been recognized in 2024.

Loans and Leases Past Due 90 Days or More and Still Accruing Interest

Loans and leases past due 90 days or more and still accruing interest were $8.3 million as of December 31, 2024, a $1.7 million or 26% increase from the prior year. The increase was primarily in our home equity portfolio. This category includes loans and leases that are well-secured and in the process of collection, as well as loans and leases that have not reached the specified past due status to be placed on non-accrual.

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Reserve for Credit Losses

The reserve for credit losses consists of the Allowance and the Unfunded Reserve. Table 18 presents the activity in the Company’s reserve for credit losses for the years ended December 31:

1.
Certain prior period information has been reclassified to conform to current presentations.

2.
On December 31, 2020, the Company established a reserve on accrued interest receivable related to loans in which interest payment forbearances were granted. The reserve was recorded as a contra-asset against accrued interest receivable with the offset to provision for credit losses. In 2022, the reserve on accrued interest receivable was fully released.

3.
The reserve for unfunded commitments is separately recorded in other liabilities in the consolidated statements of condition. For the years ended December 31, 2021 through 2024, the offsetting provision was recorded in provision for credit losses in the consolidated statements of income. In previous reporting periods, the offsetting provision was recorded in other noninterest expense.

4.
The numerator comprises the Allowance for Credit Losses - Loans and Leases.

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Allowance for Credit Losses

Table 19 and 20 presents the allocation of the Allowance by loan and lease category.