Loans and Leases and the Allowance for Credit Losses | Note 4. Loans and Leases and the Allowance for Credit Losses Loans and Leases The Company’s loan and lease portfolio was comprised of the following as of September 30, 2022, and December 31, 2021: (dollars in thousands) September 30, 2022 December 31, 2021 Commercial Commercial and Industrial $ 1,368,966 $ 1,361,921 Paycheck Protection Program 22,955 126,779 Commercial Mortgage 3,591,943 3,152,130 Construction 236,498 220,254 Lease Financing 73,989 105,108 Total Commercial 5,294,351 4,966,192 Consumer Residential Mortgage 4,585,723 4,309,602 Home Equity 2,185,484 1,836,588 Automobile 820,640 736,565 Other 1 435,408 410,129 Total Consumer 8,027,255 7,292,884 Total Loans and Leases $ 13,321,606 $ 12,259,076 1 The majority of the Company’s lending activity is with customers located in the State of Hawaii. A substantial portion of the Company’s real estate loans are secured by real estate in Hawaii. Net gains related to sales of residential mortgage loans, recorded as a component of mortgage banking income was less than $0.1 The Company elected to exclude AIR from the amortized cost basis of loans disclosed throughout this footnote. As of September 30, 2022, and December 31, 2021, AIR for loans totaled $34.0 million and $28.7 million, respectively, and is included in the “accrued interest receivable” line item on the Company’s consolidated statements of condition. Allowance for Credit Losses (the “Allowance”) The following presents by portfolio segment, the activity in the Allowance for the three and nine months ended September 30, 2022, and September 30, 2021. (dollars in thousands) Commercial Consumer Total Three Months Ended September 30, 2022 Allowance for Credit Losses: Balance at Beginning of Period $ 61,826 $ 86,686 $ 148,512 Loans and Leases Charged-Off (147 ) (2,718 ) (2,865 ) Recoveries on Loans and Leases Previously Charged-Off 45 1,673 1,718 Net Loans and Leases Recovered (Charged-Off) (102 ) (1,045 ) (1,147 ) Provision for Credit Losses 157 (1,086 ) (929 ) Balance at End of Period $ 61,881 $ 84,555 $ 146,436 Nine Months Ended September 30, 2022 Allowance for Credit Losses: Balance at Beginning of Period $ 64,950 $ 92,871 $ 157,821 Loans and Leases Charged-Off (729 ) (9,390 ) (10,119 ) Recoveries on Loans and Leases Previously Charged-Off 465 6,390 6,855 Net Loans and Leases Recovered (Charged-Off) (264 ) (3,000 ) (3,264 ) Provision for Credit Losses (2,805 ) (5,316 ) (8,121 ) Balance at End of Period $ 61,881 $ 84,555 $ 146,436 Three Months Ended September 30, 2021 Allowance for Credit Losses: Balance at Beginning of Period $ 78,639 $ 101,746 $ 180,385 Loans and Leases Charged-Off (196 ) (3,249 ) (3,445 ) Recoveries on Loans and Leases Previously Charged-Off 118 2,134 2,252 Net Loans and Leases Recovered (Charged-Off) (78 ) (1,115 ) (1,193 ) Provision for Credit Losses (9,894 ) (1,378 ) (11,272 ) Balance at End of Period $ 68,667 $ 99,253 $ 167,920 Nine Months Ended September 30, 2021 Allowance for Credit Losses: Balance at Beginning of Period $ 84,847 $ 131,405 $ 216,252 Loans and Leases Charged-Off (900 ) (13,145 ) (14,045 ) Recoveries on Loans and Leases Previously Charged-Off 374 8,378 8,752 Net Loans and Leases Recovered (Charged-Off) (526 ) (4,767 ) (5,293 ) Provision for Credit Losses (15,654 ) (27,385 ) (43,039 ) Balance at End of Period $ 68,667 $ 99,253 $ 167,920 Credit Quality Indicators The Company uses several credit quality indicators to manage credit risk in an ongoing manner. The Company uses an internal credit risk rating system that categorizes loans and leases into pass, special mention, or classified categories. Credit risk ratings are applied individually to those classes of loans and leases that have significant or unique credit characteristics that benefit from a case-by-case evaluation. These are typically loans and leases to businesses or individuals in the classes which comprise the commercial portfolio segment. Groups of loans and leases that are underwritten and structured using standardized criteria and characteristics (e.g., credit scoring or payment performance), are typically risk-rated and monitored collectively. These are typically loans and leases to individuals in the classes which comprise the consumer portfolio segment. The following are the definitions of the Company’s credit quality indicators: Pass: Loans and leases in all classes within the commercial and consumer portfolio segments that are not adversely rated, are contractually current as to principal and interest, and are otherwise in compliance with the contractual terms of the loan or lease agreement. Residential mortgage loans that are past due 90 days or more as to principal or interest may be considered Pass if the current loan-to-value ratio is 60% or less. Home equity loans that are past due 90 days or more as to principal or interest may be considered Pass if: a) the home equity loan is in a first lien position and the current loan-to-value ratio is 60% or less; or b) the first mortgage is with the Company and the current combined loan-to-value ratio is 60% or less. Special Mention: Loans and leases in all classes within the commercial portfolio segment that have potential weaknesses that deserve management’s close attention. If not addressed, these potential weaknesses may result in deterioration of the repayment prospects for the loan or lease. The Special Mention credit quality indicator is not used for the consumer portfolio segment. Classified: Loans and leases in the classes within the commercial portfolio segment that are inadequately protected by the sound worth and paying capacity of the borrower or of the collateral pledged, if any. Classified loans and leases are also those in the classes within the consumer portfolio segment that are past due 90 days or more as to principal or interest. Residential mortgage and home equity loans that are past due 90 days For P ass rated credits, risk ratings are certified at a mini mum annually. For S pecial M ention or C lassified credits, risk ratings are reviewed for appropriateness on an ongoing basis, monthly, or at a minimum, quarterly. The following presents by credit quality indicator, loan class, and year of origination, the amortized cost basis of the Company’s loans and leases as of September 30, 2022 . Term Loans by Origination Year (dollars in thousands) 2022 2021 2020 2019 2018 Prior Revolving Loans Revolving Loans Converted to Term Loans Total Loans and Leases September 30, 2022 Commercial Commercial and Industrial Pass $ 274,968 $ 382,203 $ 240,451 $ 71,445 $ 49,597 $ 76,600 $ 234,231 $ 212 $ 1,329,707 Special Mention 287 - - - 111 94 18,087 - 18,579 Classified - 9,482 1,064 - 1,686 6,378 2,045 25 20,680 Total Commercial and Industrial $ 275,255 $ 391,685 $ 241,515 $ 71,445 $ 51,394 $ 83,072 $ 254,363 $ 237 $ 1,368,966 Paycheck Protection Program Pass $ - $ 7,410 $ 15,545 $ - $ - $ - $ - $ - $ 22,955 Total Paycheck Protection Program $ - $ 7,410 $ 15,545 $ - $ - $ - $ - $ - $ 22,955 Commercial Mortgage Pass $ 943,746 $ 824,641 $ 711,566 $ 285,509 $ 133,164 $ 513,977 $ 58,187 $ - $ 3,470,790 Special Mention 29,854 37,949 31,175 - 1,493 - - - 100,471 Classified 690 3,172 7,264 628 - 8,928 - - 20,682 Total Commercial Mortgage $ 974,290 $ 865,762 $ 750,005 $ 286,137 $ 134,657 $ 522,905 $ 58,187 $ - $ 3,591,943 Construction Pass $ 51,288 $ 65,884 $ 94,072 $ 16,957 $ - $ 594 $ 7,703 $ - $ 236,498 Total Construction $ 51,288 $ 65,884 $ 94,072 $ 16,957 $ - $ 594 $ 7,703 $ - $ 236,498 Lease Financing Pass $ 12,892 $ 18,675 $ 12,879 $ 10,876 $ 8,225 $ 10,442 $ - $ - $ 73,989 Total Lease Financing $ 12,892 $ 18,675 $ 12,879 $ 10,876 $ 8,225 $ 10,442 $ - $ - $ 73,989 Total Commercial $ 1,313,725 $ 1,349,416 $ 1,114,016 $ 385,415 $ 194,276 $ 617,013 $ 320,253 $ 237 $ 5,294,351 Consumer Residential Mortgage Pass $ 694,780 $ 1,319,910 $ 1,048,413 $ 325,127 $ 142,493 $ 1,055,000 $ - $ - $ 4,585,723 Total Residential Mortgage $ 694,780 $ 1,319,910 $ 1,048,413 $ 325,127 $ 142,493 $ 1,055,000 $ - $ - $ 4,585,723 Home Equity Pass $ - $ - $ - $ - $ - $ 985 $ 2,146,118 $ 33,833 $ 2,180,936 Classified - - - - - 189 2,477 1,882 4,548 Total Home Equity $ - $ - $ - $ - $ - $ 1,174 $ 2,148,595 $ 35,715 $ 2,185,484 Automobile Pass $ 299,115 $ 234,767 $ 111,893 $ 95,422 $ 54,835 $ 24,140 $ - $ - $ 820,172 Classified 58 131 54 75 77 73 - - 468 Total Automobile $ 299,173 $ 234,898 $ 111,947 $ 95,497 $ 54,912 $ 24,213 $ - $ - $ 820,640 Other 1 Pass $ 153,897 $ 135,469 $ 36,000 $ 50,763 $ 21,507 $ 12,860 $ 23,277 $ 1,121 $ 434,894 Classified 15 177 16 160 82 33 20 11 514 Total Other $ 153,912 $ 135,646 $ 36,016 $ 50,923 $ 21,589 $ 12,893 $ 23,297 $ 1,132 $ 435,408 Total Consumer $ 1,147,865 $ 1,690,454 $ 1,196,376 $ 471,547 $ 218,994 $ 1,093,280 $ 2,171,892 $ 36,847 $ 8,027,255 Total Loans and Leases $ 2,461,590 $ 3,039,870 $ 2,310,392 $ 856,962 $ 413,270 $ 1,710,293 $ 2,492,145 $ 37,084 $ 13,321,606 1 Comprised of other revolving credit, installment, and lease financing. For the nine months ended September 30, 2022, $4.2 million revolving loans were converted to term loans. The following presents by credit quality indicator, loan class, and year of origination, the amortized cost basis of the Company’s loans and leases as of December 31, 2021. Term Loans by Origination Year (dollars in thousands) 2021 2020 2019 2018 2017 Prior Revolving Loans Revolving Loans Converted to Term Loans Total Loans and Leases December 31, 2021 Commercial Commercial and Industrial Pass $ 455,984 $ 301,646 $ 79,826 $ 68,026 $ 27,246 $ 75,321 $ 256,240 $ 471 $ 1,264,760 Special Mention 1,966 32,667 - - - 101 27,031 - 61,765 Classified 10,851 1,919 87 1,990 505 17,481 2,509 54 35,396 Total Commercial and Industrial $ 468,801 $ 336,232 $ 79,913 $ 70,016 $ 27,751 $ 92,903 $ 285,780 $ 525 $ 1,361,921 Paycheck Protection Program Pass $ 86,484 $ 40,295 $ - $ - $ - $ - $ - $ - $ 126,779 Total Paycheck Protection Program $ 86,484 $ 40,295 $ - $ - $ - $ - $ - $ - $ 126,779 Commercial Mortgage Pass $ 958,719 $ 736,155 $ 338,160 $ 261,991 $ 178,436 $ 459,337 $ 53,386 $ - $ 2,986,184 Special Mention 68,768 39,773 - 30,000 - 6,069 - - 144,610 Classified 3,740 7,815 640 - - 9,141 - - 21,336 Total Commercial Mortgage $ 1,031,227 $ 783,743 $ 338,800 $ 291,991 $ 178,436 $ 474,547 $ 53,386 $ - $ 3,152,130 Construction Pass $ 67,069 $ 94,878 $ 40,051 $ - $ 596 $ - $ 17,660 $ - $ 220,254 Special Mention - - - - - - - - - Total Construction $ 67,069 $ 94,878 $ 40,051 $ - $ 596 $ - $ 17,660 $ - $ 220,254 Lease Financing Pass $ 21,637 $ 15,075 $ 15,697 $ 9,902 $ 2,004 $ 39,937 $ - $ - $ 104,252 Classified - - - 856 - - - - 856 Total Lease Financing $ 21,637 $ 15,075 $ 15,697 $ 10,758 $ 2,004 $ 39,937 $ - $ - $ 105,108 Total Commercial $ 1,675,218 $ 1,270,223 $ 474,461 $ 372,765 $ 208,787 $ 607,387 $ 356,826 $ 525 $ 4,966,192 Consumer Residential Mortgage 1 Pass $ 1,392,337 $ 1,131,330 $ 367,525 $ 177,215 $ 256,825 $ 982,759 $ - $ - $ 4,307,991 Classified - - 294 - 905 412 - - 1,611 Total Residential Mortgage $ 1,392,337 $ 1,131,330 $ 367,819 $ 177,215 $ 257,730 $ 983,171 $ - $ - $ 4,309,602 Home Equity 1 Pass $ - $ - $ - $ - $ - $ 2,986 $ 1,795,107 $ 35,427 $ 1,833,520 Classified - - - - - 58 2,649 361 3,068 Total Home Equity $ - $ - $ - $ - $ - $ 3,044 $ 1,797,756 $ 35,788 $ 1,836,588 Automobile Pass $ 301,285 $ 152,022 $ 138,887 $ 91,411 $ 33,268 $ 18,963 $ - $ - $ 735,836 Classified 165 85 134 137 120 88 - - 729 Total Automobile $ 301,450 $ 152,107 $ 139,021 $ 91,548 $ 33,388 $ 19,051 $ - $ - $ 736,565 Other 2 Pass $ 172,735 $ 49,769 $ 92,983 $ 44,489 $ 16,218 $ 6,444 $ 25,622 $ 1,444 $ 409,704 Classified 39 90 183 47 27 17 22 - 425 Total Other $ 172,774 $ 49,859 $ 93,166 $ 44,536 $ 16,245 $ 6,461 $ 25,644 $ 1,444 $ 410,129 Total Consumer $ 1,866,561 $ 1,333,296 $ 600,006 $ 313,299 $ 307,363 $ 1,011,727 $ 1,823,400 $ 37,232 $ 7,292,884 Total Loans and Leases $ 3,541,779 $ 2,603,519 $ 1,074,467 $ 686,064 $ 516,150 $ 1,619,114 $ 2,180,226 $ 37,757 $ 12,259,076 1 2 For the year ended December 31, 2021, $4.1 million revolving loans were converted to term loans. Aging Analysis Loans and leases are considered to be past due once becoming 30 days delinquent. For the consumer portfolio, this generally represents two missed monthly payments. The following presents by class, an aging analysis of the Company’s loan and lease portfolio as of September 30, 2022, and December 31, 2021. (dollars in thousands) 30 - 59 Days Past Due 60 - 89 Days Past Due Past Due 90 Days or More Non- Accrual Total Past Due and Non- Accrual Current Total Loans and Leases Non- Accrual Loans and Leases that are Current 2 As of September 30, 2022 Commercial Commercial and Industrial $ 132 $ 75 $ — $ 49 $ 256 $ 1,368,710 $ 1,368,966 $ 49 Paycheck Protection Program — — — — — 22,955 22,955 — Commercial Mortgage — — — 3,396 3,396 3,588,547 3,591,943 3,396 Construction — — — — — 236,498 236,498 — Lease Financing — — — — — 73,989 73,989 — Total Commercial 132 75 — 3,445 3,652 5,290,699 5,294,351 3,445 Consumer Residential Mortgage 1,693 888 3,279 4,945 10,805 4,574,918 4,585,723 878 Home Equity 1,772 643 1,061 4,438 7,914 2,177,570 2,185,484 896 Automobile 9,498 1,374 467 — 11,339 809,301 820,640 — Other 1 1,829 775 513 — 3,117 432,291 435,408 — Total Consumer 14,792 3,680 5,320 9,383 33,175 7,994,080 8,027,255 1,774 Total $ 14,924 $ 3,755 $ 5,320 $ 12,828 $ 36,827 $ 13,284,779 $ 13,321,606 $ 5,219 As of December 31, 2021 Commercial Commercial and Industrial $ 2,006 $ 14 $ — $ 243 $ 2,263 $ 1,359,658 $ 1,361,921 $ 151 Paycheck Protection Program — — — — — 126,779 126,779 — Commercial Mortgage — — — 8,205 8,205 3,143,925 3,152,130 8,205 Construction — — — — — 220,254 220,254 — Lease Financing — — — — — 105,108 105,108 — Total Commercial 2,006 14 — 8,448 10,468 4,955,724 4,966,192 8,356 Consumer Residential Mortgage 2,046 1,263 3,159 3,305 9,773 4,299,829 4,309,602 — Home Equity 1,791 748 3,456 4,881 10,876 1,825,712 1,836,588 1,544 Automobile 7,804 1,495 729 — 10,028 726,537 736,565 — Other 1 2,686 904 426 — 4,016 406,113 410,129 — Total Consumer 14,327 4,410 7,770 8,186 34,693 7,258,191 7,292,884 1,544 Total $ 16,333 $ 4,424 $ 7,770 $ 16,634 $ 45,161 $ 12,213,915 $ 12,259,076 $ 9,900 1 Comprised of other revolving credit, installment, and lease financing. 2 Represents non-accrual loans that are not past due 30 days or more; however, full payment of principal and interest is still not expected. Non-Accrual Loans and Leases The following presents the non-accrual loans and leases as of September 30, 2022, and December 31, 2021. September 30, 2022 December 31, 2021 (dollars in thousands) Non-accrual loans with a related ACL Non-accrual loans without a related ACL Total Non- accrual loans Non-accrual loans with a related ACL Non-accrual loans without a related ACL Total Non- accrual loans Commercial Commercial and Industrial $ 49 $ — $ 49 $ 243 $ — $ 243 Commercial Mortgage — 3,396 3,396 4,661 3,544 8,205 Total Commercial 49 3,396 3,445 4,904 3,544 8,448 Consumer Residential Mortgage 4,869 76 4,945 2,959 346 3,305 Home Equity 4,438 — 4,438 4,881 — 4,881 Total Consumer 9,307 76 9,383 7,840 346 8,186 Total $ 9,356 $ 3,472 $ 12,828 $ 12,744 $ 3,890 $ 16,634 All payments received while on non-accrual status are applied against the principal balance of the loan or lease. The Company does not recognize interest income while loans or leases are on non-accrual status. Modifications A modification of a loan constitutes a troubled debt restructuring (“TDR”) when the Company, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. Loans modified in a TDR were $48.3 million as of September 30, 2022, and $70.0 million as of December 31, 2021. There were $0.1 million and $0.2 million commitments to lend additional funds on loans modified in a TDR as of September 30, 2022, and December 31, 2021, respectively. Loans modified in a TDR may be on non-accrual status and partial charge-offs have in some cases already been taken against the outstanding loan balance. As a result, loans modified in a TDR may have the financial effect of reducing the specific Allowance associated with the loan because the potential loss has been recognized. An Allowance for impaired commercial and consumer loans that have been modified in a TDR is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the estimated fair value of the collateral, less any selling costs, if the loan is collateral dependent. Management exercises significant judgment in developing these estimates. The following presents by class, information related to loans modified in a TDR during the three and nine months ended September 30, 2022, and September 30, 2021. Loans Modified as a TDR for the Three Months Ended September 30, 2022 Loans Modified as a TDR for the Three Months Ended September 30, 2021 Recorded Increase in Recorded Increase in Troubled Debt Restructurings Investment Allowance Investment Allowance (dollars in thousands) Number of Contracts (as of period end) 1 (as of period end) Number of Contracts (as of period end) 1 (as of period end) Commercial Commercial and Industrial 1 $ 213 $ 16 2 $ 153 $ 2 Total Commercial 1 213 16 2 153 2 Consumer Residential Mortgage — — — 2 796 21 Home Equity 1 197 — 2 779 46 Automobile 40 793 11 71 1,632 22 Other 2 10 57 2 51 439 16 Total Consumer 51 1,047 13 126 3,646 105 Total 52 $ 1,260 $ 29 128 $ 3,799 $ 107 Loans Modified as a TDR for the Nine Months Ended September 30, 2022 Loans Modified as a TDR for the Nine Months Ended September 30, 2021 Recorded Increase in Recorded Increase in Troubled Debt Restructurings Investment Allowance Investment Allowance (dollars in thousands) Number of Contracts (as of period end) 1 (as of period end) Number of Contracts (as of period end) 1 (as of period end) Commercial Commercial and Industrial 1 $ 213 $ 16 7 $ 258 $ 4 Total Commercial 1 213 16 7 258 4 Consumer Residential Mortgage 5 1,205 71 14 5,785 584 Home Equity 3 282 5 9 1,488 80 Automobile 2 93 1,807 24 331 6,902 95 Other 2,3 39 254 9 144 1,321 48 Total Consumer 140 3,548 109 498 15,496 807 Total 141 $ 3,761 $ 125 505 $ 15,754 $ 811 1 The period end balances reflect all paydowns and charge-offs since the modification date. TDRs fully paid-off, charged-off, or foreclosed upon by period end are not included. 2 Comprised of other revolving credit and installment financing. The following presents by class, all loans modified in a TDR that defaulted during the three and nine months ended September 30, 2022, and September 30, 2021, and within twelve months of their modification date. A TDR is considered to be in default once it becomes 60 days or more past due following a modification. Three Months Ended September 30, 2022 Three Months Ended September 30, 2021 TDRs that Defaulted During the Period, Recorded Recorded Within Twelve Months of their Modification Date Number of Investment Number of Investment (dollars in thousands) Contracts (as of period end) 1 Contracts (as of period end) 1 Consumer Automobile 5 $ 61 8 $ 157 Other 2 4 27 5 27 Total Consumer 9 88 13 184 Total 9 $ 88 13 $ 184 Nine Months Ended September 30, 2022 Nine Months Ended September 30, 2021 TDRs that Defaulted During the Period, Recorded Recorded Within Twelve Months of their Modification Date Number of Investment Number of Investment (dollars in thousands) Contracts (as of period end) 1 Contracts (as of period end) 1 Consumer Residential Mortgage 1 $ 181 1 $ 528 Home Equity 1 65 — — Automobile 14 228 12 213 Other 2 13 92 12 112 Total Consumer 29 566 25 853 Total 29 $ 566 25 $ 853 1 The period end balances reflect all paydowns and charge-offs since the modification date. TDRs fully paid-off, charged-off, or foreclosed upon by period end are not included. 2 Comprised of other revolving credit and installment financing. Commercial and consumer loans modified in a TDR are closely monitored for delinquency as an early indicator of possible future default. If loans modified in a TDR subsequently default, the Company evaluates the loan for possible further impairment. The specific Allowance associated with the loan may be changed by additional increases, adjustments, or partial charge-offs to further write-down the carrying value of the loan. In accordance with Section 4013 of the CARES Act and the joint agency statement issued by banking agencies, certain qualified loan and lease modifications related to the COVID-19 pandemic are not accounted for as TDRs. There were no loan and lease modifications as of September 30, 2022, and $40.5 million (8 loans) for the commercial segment and $3.1 million (11 loans) for the consumer segment as of December 31, 2021. Foreclosure Proceedings Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $6.6 million as of September 30, 2022. |