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 December 31, 2022 and December 31, 2021: December 31, (dollars in thousands) 2022 2021 Commercial Commercial and Industrial $ 1,389,066 $ 1,361,921 Paycheck Protection Program 19,579 126,779 Commercial Mortgage 3,725,542 3,152,130 Construction 260,825 220,254 Lease Financing 69,491 105,108 Total Commercial 5,464,503 4,966,192 Consumer Residential Mortgage 4,653,072 4,309,602 Home Equity 2,225,950 1,836,588 Automobile 870,396 736,565 Other 1 432,499 410,129 Total Consumer 8,181,917 7,292,884 Total Loans and Leases $ 13,646,420 $ 12,259,076 1 Comprised of other revolving credit, installment, and lease financing. 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, were $0.2 million, $7.1 million, and $15.4 million for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, respectively. Net gains on sales of commercial loans were not material for the years ended December 31, 2022, December 31, 2021, and December 31, 2020. The Company elected to exclude accrued interest receivable from the amortized cost basis of loans disclosed throughout this footnote. As of December 31, 2022, and December 31, 2021, accrued interest receivable for loans totaled $40.1 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 years ended December 31, 2022, December 31, 2021, and December 31, 2020. (dollars in thousands) Commercial Consumer Total For the Year Ended December 31, 2022 Allowance for Credit Losses: Balance at Beginning of Period $ 64,950 $ 92,871 $ 157,821 Loans and Leases Charged-Off (925 ) (12,417 ) (13,342 ) Recoveries on Loans and Leases Previously Charged-Off 552 7,671 8,223 Net Loans and Leases Recovered (Charged-Off) (373 ) (4,746 ) (5,119 ) Provision for Credit Losses (677 ) (7,586 ) (8,263 ) Balance at End of Period $ 63,900 $ 80,539 $ 144,439 For the Year Ended December 31, 2021 Allowance for Credit Losses: Balance at Beginning of Period $ 84,847 $ 131,405 $ 216,252 Loans and Leases Charged-Off (1,117 ) (16,202 ) (17,319 ) Recoveries on Loans and Leases Previously Charged-Off 506 10,848 11,354 Net Loans and Leases Recovered (Charged-Off) (611 ) (5,354 ) (5,965 ) Provision for Credit Losses (19,286 ) (33,180 ) (52,466 ) Balance at End of Period $ 64,950 $ 92,871 $ 157,821 For the Year Ended December 31, 2020 Allowance for Credit Losses: Balance at Beginning of Period $ 55,012 $ 53,278 $ 108,290 Loans and Leases Charged-Off (1,697 ) (19,341 ) (21,038 ) Recoveries on Loans and Leases Previously Charged-Off 2,328 11,572 13,900 Net Loans and Leases Recovered (Charged-Off) 631 (7,769 ) (7,138 ) Provision for Credit Losses 29,204 85,896 115,100 Balance at End of Period $ 84,847 $ 131,405 $ 216,252 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, such as statistical models (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 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 may be current as to principal and interest, but may be considered Classified for a period of generally up to six months following a loan modification. Following a period of demonstrated performance in accordance with the modified contractual terms, the loan may be removed from Classified status. For Pass rated credits in the commercial portfolio, most risk ratings are certified at a minimum annually. For Special Mention or Classified 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 December 31, 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 December 31, 2022 Commercial Commercial and Industrial Pass $ 360,748 $ 348,300 $ 224,264 $ 59,127 $ 46,799 $ 71,906 $ 257,349 $ 155 $ 1,368,648 Special Mention 273 - - - 96 92 1,357 - 1,818 Classified 7,295 91 1,030 - 1,644 6,267 2,252 21 18,600 Total Commercial and Industrial $ 368,316 $ 348,391 $ 225,294 $ 59,127 $ 48,539 $ 78,265 $ 260,958 $ 176 $ 1,389,066 Paycheck Protection Program Pass $ - $ 5,359 $ 14,220 $ - $ - $ - $ - $ - $ 19,579 Total Paycheck Protection Program $ - $ 5,359 $ 14,220 $ - $ - $ - $ - $ - $ 19,579 Commercial Mortgage Pass $ 1,182,831 $ 771,375 $ 691,054 $ 283,553 $ 131,055 $ 494,924 $ 48,771 $ - $ 3,603,563 Special Mention 29,707 37,657 28,105 - 1,482 5,014 - - 101,965 Classified 182 1,964 8,545 624 - 8,699 - - 20,014 Total Commercial Mortgage $ 1,212,720 $ 810,996 $ 727,704 $ 284,177 $ 132,537 $ 508,637 $ 48,771 $ - $ 3,725,542 Construction Pass $ 124,507 $ 69,992 $ 37,133 $ 16,838 $ - $ 297 $ 12,058 $ - $ 260,825 Total Construction $ 124,507 $ 69,992 $ 37,133 $ 16,838 $ - $ 297 $ 12,058 $ - $ 260,825 Lease Financing Pass $ 16,959 $ 17,823 $ 11,408 $ 9,768 $ 6,379 $ 6,444 $ - $ - $ 68,781 Classified - - - - 710 - - - 710 Total Lease Financing $ 16,959 $ 17,823 $ 11,408 $ 9,768 $ 7,089 $ 6,444 $ - $ - $ 69,491 Total Commercial $ 1,722,502 $ 1,252,561 $ 1,015,759 $ 369,910 $ 188,165 $ 593,643 $ 321,787 $ 176 $ 5,464,503 Consumer Residential Mortgage Pass $ 827,909 $ 1,304,831 $ 1,035,285 $ 321,208 $ 138,214 $ 1,023,841 $ - $ - $ 4,651,288 Classified - - - - 552 1,232 - - 1,784 Total Residential Mortgage $ 827,909 $ 1,304,831 $ 1,035,285 $ 321,208 $ 138,766 $ 1,025,073 $ - $ - $ 4,653,072 Home Equity Pass $ - $ - $ - $ - $ - $ 890 $ 2,186,598 $ 36,114 $ 2,223,602 Classified - - - - - 25 1,105 1,218 2,348 Total Home Equity $ - $ - $ - $ - $ - $ 915 $ 2,187,703 $ 37,332 $ 2,225,950 Automobile Pass $ 405,440 $ 216,039 $ 100,608 $ 84,052 $ 45,301 $ 18,366 $ - $ - $ 869,806 Classified 121 260 23 43 92 51 - - 590 Total Automobile $ 405,561 $ 216,299 $ 100,631 $ 84,095 $ 45,393 $ 18,417 $ - $ - $ 870,396 Other 1 Pass $ 185,347 $ 124,759 $ 31,343 $ 39,902 $ 16,364 $ 9,853 $ 23,228 $ 1,020 $ 431,816 Classified 117 114 70 148 129 24 59 22 683 Total Other $ 185,464 $ 124,873 $ 31,413 $ 40,050 $ 16,493 $ 9,877 $ 23,287 $ 1,042 $ 432,499 Total Consumer $ 1,418,934 $ 1,646,003 $ 1,167,329 $ 445,353 $ 200,652 $ 1,054,282 $ 2,210,990 $ 38,374 $ 8,181,917 Total Loans and Leases $ 3,141,436 $ 2,898,564 $ 2,183,088 $ 815,263 $ 388,817 $ 1,647,925 $ 2,532,777 $ 38,550 $ 13,646,420 1 Comprised of other revolving credit, installment, and lease financing. For the year ended December 31, 2022, $6.2 million in 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 PPP Pass $ 86,484 $ 40,295 $ - $ - $ - $ - $ - $ - $ 126,779 Total PPP $ 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 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 2 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 2 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 1 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 Comprised of other revolving credit, installment, and lease financing. 2 Certain prior period information has been reclassified to conform to current presentations. For the year ended December 31, 2021, $4.1 million in 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 December 31, 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 December 31, 2022 Commercial Commercial and Industrial $ 252 $ 9 $ — $ 37 $ 298 $ 1,388,768 $ 1,389,066 $ 37 Paycheck Protection Program — — — — — 19,579 19,579 — Commercial Mortgage — — — 3,309 3,309 3,722,233 3,725,542 3,309 Construction — — — — — 260,825 260,825 — Lease Financing — — — — — 69,491 69,491 — Total Commercial 252 9 — 3,346 3,607 5,460,896 5,464,503 3,346 Consumer Residential Mortgage 3,016 721 2,429 4,239 10,405 4,642,667 4,653,072 1,729 Home Equity 1,639 960 1,673 4,022 8,294 2,217,656 2,225,950 664 Automobile 13,293 1,988 589 — 15,870 854,526 870,396 — Other 1 2,318 1,302 683 — 4,303 428,196 432,499 — Total Consumer 20,266 4,971 5,374 8,261 38,872 8,143,045 8,181,917 2,393 Total $ 20,518 $ 4,980 $ 5,374 $ 11,607 $ 42,479 $ 13,603,941 $ 13,646,420 $ 5,739 As of December 31, 2021 Commercial Commercial and Industrial $ 2,006 $ 14 $ — $ 243 $ 2,263 $ 1,359,658 $ 1,361,921 $ 151 PPP — — — — — 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 as originally structured is still not expected. Non-Accrual Loans and Leases The following presents the non-accrual loans and leases as of December 31, 2022, and December 31, 2021. December 31, 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 Total Non-accrual loans Commercial Commercial and Industrial $ 37 $ — $ 37 $ 243 Commercial Mortgage — 3,309 3,309 8,205 Total Commercial 37 3,309 3,346 8,448 Consumer Residential Mortgage 4,239 — 4,239 3,305 Home Equity 4,022 — 4,022 4,881 Total Consumer 8,261 — 8,261 8,186 Total $ 8,298 $ 3,309 $ 11,607 $ 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 $47.3 million and $70.0 million as of December 31, 2022, and December 31, 2021, respectively. As of December 31, 2022, and December 31, 2021, there were $0.2 Loans modified in a TDR may already 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 years ended December 31, 2022, and December 31, 2021. Loans Modified as a TDR for the Year Ended December 31, 2022 Loans Modified as a TDR for the Year Ended December 31, 2021 Troubled Debt Restructurings (dollars in thousands) Number of Contracts Recorded Investment (as of period end) 1 Increase in Allowance (as of period end) Number of Contracts Recorded Investment (as of period end) 1 Increase in Allowance (as of period end) Commercial Commercial and Industrial 2 $ 210 $ 15 7 $ 251 $ 4 Total Commercial 2 210 15 7 251 4 Consumer Residential Mortgage 6 1,441 71 15 5,889 612 Home Equity 3 276 5 11 1,793 85 Automobile 152 2,860 39 341 7,130 95 Other 2 49 310 12 132 1,160 42 Total Consumer 210 4,887 127 499 15,972 834 Total 212 $ 5,097 $ 142 506 $ 16,223 $ 838 1 The period end balances reflect all partial 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, loans modified in a TDR that defaulted during the year ended December 31, 2022, and December 31, 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. Year Ended December 31, 2022 Year Ended December 31, 2021 TDRs that Defaulted During the Period, Within Twelve Months of their Modification Date (dollars in thousands) Number of Contracts Recorded Investment (as of period end) 1 Number of Contracts Recorded Investment (as of period end) 1 Consumer Residential Mortgage 1 180 1 521 Home Equity 1 65 4 407 Automobile 12 191 38 644 Other 2 10 73 29 189 Total 24 $ 509 72 $ 1,761 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. 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 increased, adjustments may be made in the allocation of the Allowance, or partial charge-offs may be taken to further write-down the carrying value of the loan. Foreclosure Proceedings Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $3.9 million as of December 31, 2022. |