BANK OF HAWAII CORP (BOH) FY 2022 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 2022 and 2021 financial results, including comparisons of year-to-year performance between these years. Discussion and analysis of our 2020 fiscal year, as well as the year-to-year comparison between fiscal 2021 and 2020, are included "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on March 1, 2022.

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.  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.  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) general economic conditions either nationally, internationally, or locally may be different than expected, and particularly, any event that negatively impacts the tourism industry in Hawaii; 2) the compounding effects of the COVID-19 pandemic, including reduced tourism in Hawaii, the duration and scope of government mandates or other limitations of or restrictions on travel, volatility in the international and national economy and credit markets, inflation, worker absenteeism, quarantines or other travel or health-related restrictions, the length and severity of the COVID-19 pandemic, the pace of recovery following the COVID-19 pandemic, and the effect of government, business and individual actions intended to mitigate the effects of the COVID-19 pandemic; 3) changes in market interest rates that may affect credit markets and our ability to maintain our net interest margin; 4) changes in our credit quality or risk profile that may increase or decrease the required level of our reserve for credit losses; 5) the impact of legislative and regulatory initiatives, particularly the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018; 6) changes to the amount and timing of proposed common stock repurchases; 7) unanticipated changes in the securities markets, public debt markets, and other capital markets in the U.S. and internationally, including, without limitation, the anticipated elimination of the London Interbank Offered Rate (“LIBOR”) as a benchmark interest rate; 8) changes in fiscal and monetary policies of the markets in which we operate; 9) the increased cost of maintaining or the Company’s ability to maintain adequate liquidity and capital, based on the requirements adopted by the Basel Committee on Banking Supervision and U.S. regulators; 10) changes in accounting standards; 11) changes in tax laws or regulations, including Public Law 115-97, commonly known as the Tax Cuts and Jobs Act, or the interpretation of such laws and regulations; 12) any failure in or breach of our operational systems, information systems or infrastructure, or those of our merchants, third party vendors and other service providers; 13) any interruption or breach of security of our information systems resulting in failures or disruptions in customer account management, general ledger processing, and loan or deposit systems; 14) natural disasters, public unrest or adverse weather, public health, disease outbreaks, and other conditions impacting us and our customers’ operations or negatively impacting the tourism industry in Hawaii; 15) competitive pressures in the markets for financial services and products; 16) actual or alleged conduct which could harm our reputation; and 17) the impact of litigation and regulatory investigations of the Company, including costs, expenses, settlements, and judgments. Given these risks and uncertainties, investors should not place undue reliance on any forward-looking statement as a prediction of our actual results.  A detailed discussion of these and other risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included under the section entitled “Risk Factors” in Part I of this report.  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 undertake no obligation to update forward-looking statements to reflect later events or circumstances, except as may be required by law.

For the reasons described above, we caution you against relying on any forward-looking statements. You should not consider any list of such factors to be an exhaustive statement of all of the risks, uncertainties, or potentially inaccurate assumptions that could cause our current expectations or beliefs to change. 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 which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by the federal securities laws.

19

Table of Contents

Critical Accounting Policies

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 1 to the Consolidated Financial Statements.  Application of these principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes.  Most accounting policies are not considered by management to be critical accounting policies.  Several factors are considered in determining whether or not a policy is critical in the preparation of the Consolidated Financial Statements.  These factors include among other things, whether the policy requires management to make difficult, subjective, and complex judgments about matters that are inherently uncertain and because it is likely that materially different amounts would be reported under different conditions or using different assumptions.  The accounting policies which we believe to be most critical in preparing our Consolidated Financial Statements are those that are related to the determination of the reserve for credit losses, fair value estimates, and income taxes.

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”).  As a result of our January 1, 2020, adoption of ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments,” and its related amendments, our methodology for estimating the reserve for credit losses changed significantly from December 31, 2019.  The standard replaced the “incurred loss” approach with an “expected loss” approach known as current expected credit loss (“CECL”).  The CECL approach requires an estimate of the credit losses expected over the life of an exposure (or pool of exposures).  It removes the incurred loss approach’s threshold that delayed the recognition of a credit loss until it was “probable” a loss event was “incurred.”    The reserve for credit losses is an estimate that is subject to uncertainty due to various assumptions and significant judgements used in the estimation process.

The estimate of expected credit losses under the CECL approach 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, the continued uncertainty of the COVID-19 pandemic, and the cumulative impact of fiscal, monetary and regulatory programs in response to the pandemic.  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 cancellable by the Company.

The historical loss experience for the commercial portfolio segment is primarily determined using a Cohort method.  This method pools loans 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.

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,

20

Table of Contents

the historical loss rates were calculated utilizing the Cohort methodology, while the consumer portfolio utilized the Vintage methodology.

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 geographic, large borrower, industry; and economic trends and conditions, such as Hawaii unemployment, real estate prices and market conditions, and visitor arrivals.  We also consider changes in underwriting standards, experience and depth of lending staff, trends in delinquencies, and the level of criticized loans.

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 Hawaii Economic Research Organization (“UHERO”) macroeconomic forecast that continuously changes due to economic conditions and events. The forecast includes various economic variables for Hawaii such as gross domestic product (“GDP”), unemployment rate, visitor arrivals, residential real estate market conditions, personal income, and inflation rate. We also utilize other third party macroeconomic forecast tools to provide broader US economic variables such as interest rates.

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 Hawaii 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, 2022, a 25 basis point increase in the forecasted Hawaii unemployment rates would have increased the quantitative component of the Allowance for consumer loans by an estimated $2.6 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 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, 2022, a 50 basis point increase in the % of commercial loans risk rated as Classified would increase the quantitative component of the Allowance for commercial loans by an estimated $2.1 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.

Fair Value Measurements

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

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

Financial assets that are recorded at fair value on a recurring basis include available-for-sale investment securities, loans held for sale, mortgage servicing rights, investments related to deferred compensation arrangements, and derivative financial instruments.  As of December 31, 2022, and December 31, 2021, $2.9 billion or 12% and $4.4 billion or 19%, 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

21

Table of Contents

recorded at fair value on a recurring basis are comprised of derivative financial instruments.  As of December 31, 2022, and December 31, 2021, $168.0 million and $18.8 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, 2022, and December 31, 2021, Level 3 financial assets recorded at fair value on a recurring basis were $46.6 million and $42.6 million, respectively, or less than 1% of our total assets, and were comprised primarily of derivative financial instruments.  As of December 31, 2022, and December 31, 2021, Level 3 financial liabilities recorded at fair value on a recurring basis were $168.0 million and $17.9 million, respectively, or less than 1% of our total liabilities, and were comprised of derivative financial instruments.

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 to the 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, six 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 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, 2022, and December 31, 2021, we carried a valuation allowance of $6.2 million and $3.2 million, respectively, related to our deferred tax assets established in connection with our low-income housing investments.

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, 2022, and December 31, 2021, our liabilities for UTBs were $3.7 million and $4.0 million, respectively.

In 2022, the Company recognized federal and State of Hawaii investment tax credits from energy investments.  The Company uses the deferral method of accounting for its investment tax credit with the benefit recognized in the provision for income taxes.  These credits reduced the Company's provision for income taxes by $1.0 million, $2.1 million, and $3.1 million in 2022, 2021, and 2020, respectively.

22

Table of Contents

Overview

We are a regional financial services company serving businesses, consumers, and governments in Hawaii, 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.

Hawaii Economy

The COVID-19 pandemic has had and is continuing to have an impact on the Hawaii economy.  Hawaii benefits from a wide range of industries that help to provide stability in the case of economic shocks.  Federal government jobs, primarily military, have historically been a stabilizing part of Hawaii’s economy, supplying about 20% of GDP.  Construction activity, including the Honolulu Rail Project, and other non-visitor-related activities have continued despite the COVID-19 pandemic.  Hawaii’s large retiree population also contributes to a stable economic base.  Hawaii’s unemployment rate was 3.2% in December 2022, substantially below its peak in April and May of 2020 and below the national average as of year-end 2022.

As previously mentioned, local housing prices are one of the metrics that we continually monitor.  While sales volume fell year-over-year given the sharp rise in interest rates, home prices remained relatively stable and months of inventory remained relatively low.  The volume of single-family home sales on Oahu decreased 23.2% in 2022 compared to 2021, while the volume of condominium sales on Oahu decreased 11.8% in 2022 compared to 2021.  The median price of single-family home sales on Oahu increased by 11.6% in 2022 compared to 2021, while the condominium sales price on Oahu increased by 7.4% in 2022 compared to 2021.  As of December 31, 2022, months of inventory of single-family homes and condominiums on Oahu was 2.1 months and 2.2 months, respectively, compared to 0.8 months and 1.6 months as of December 31, 2021.

Earnings Summary

Net income for 2022 was $225.8 million, a decrease of $27.6 million or 11% compared to 2021.  Diluted earnings per common share were $5.48 in 2022, a decrease of $0.77 or 12% compared to 2021.  Our return on average assets was 0.98% in 2022, a decrease of 16 basis points from 2021, and our return on average shareholders’ equity was 16.10% in 2022, compared to 16.94% in 2021.

Our lower net income in 2022 was primarily due to the following:

These items were partially offset by the following

23

Table of Contents

We maintained a strong balance sheet throughout 2022, with what we believe are adequate reserves for credit losses, and high levels of liquidity and capital.

24

Table of Contents

Analysis of 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.

25

Table of Contents

1  The change in interest income and expense are not solely due to changes in volume or rate has been allocated on a pro-rata basis to the volume and rate columns.

2  Comprised of other consumer revolving credit, installment, and consumer lease financing.

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.

Yields on our earning assets increased by 27 basis points in 2022 compared to 2021 primarily due to the higher rate environment.

26

Table of Contents

Yields on our investment securities portfolio increased by 27 basis points.  Yields on our funds sold increased by 151 basis points primarily due to federal fund rate increases.  Yields on our commercial and industrial loans excluding Paycheck Protection Program (“PPP”) loans increased by 54 basis points primarily due to the higher interest rate environment.  Contractual yields on Paycheck Protection Program loans are fixed at 1%, however, effective yield varies based on processing fee income being accelerated due to loans being forgiven by the Small Business Administration (“SBA”) ahead of maturity.  Yields on our commercial mortgage loans increased by 61 basis points due to the higher interest rate environment and an interest recovery in the second quarter of 2022.  Yields on our construction loans increased by 106 basis points due to the higher interest rate environment and the payoff of lower yielding loans. Yields on our residential mortgage loans and home equity loans decreased by 2 basis points and 3 basis points, respectively, primarily due to pay downs of higher rate loans offset by the higher interest rate environment.  Yields on other loans decreased by 81 basis points primarily due to the full year impact of promotional lower rate installment loans originated in the prior year.

Interest rates paid on our interest-bearing liabilities increased 20 basis points in 2022 compared to 2021.  Interest rates paid on our securities sold under agreements to repurchase increased by 18 basis points from 2021 primarily due to the addition of $300.0 million in repurchase agreements with private institutions in the fourth quarter of 2022.

Average balances of our earning assets increased by $0.5 billion or 3% in 2022 compared to 2021 primarily due to an increase in the average balances of our loan and lease portfolio. The average balance of funds sold decreased by $431.9 million or 62%. The average balances of our investment securities increased by $0.1 billion. The average balance of total loan and leases increased by $872.8 million.  The average balance of our commercial and industrial portfolio increased by $64.2 million or 5%. The average balance of our commercial mortgage portfolio increased by $480.1 million or 16% as a result of continued demand from new and existing customers. The average balance of our residential mortgage portfolio increased by $251.8 million or 6% primarily due to new originations which offset continued paydowns. The average balance of our home equity portfolio increased by $435.1 million mainly due to growth driven by ongoing promotions of our SmartRefi program.  The average balance of our automobile loans portfolio increased by $69.1 million or 10% primarily due to competitive loan programs and pricing.

The average balances of our interest bearing deposit products increased by $16.8 million or 0.1%.  The average balances of our interest-bearing liabilities increased by $41.3 million or 0.3%. The average balance of our interest bearing demand deposits decreased by $132.7 million or 2.9%.  The average balance of our savings deposits increased by $345.8 million or 4.7%.  The average balance of our time deposits decreased by $196.3 million or 14.7%.

The average balances of our securities sold under agreements to repurchase decreased by $62.1 million or 11%.  This decrease was due to terminations and calls of repurchase agreements with private institutions ($25.0 million called in 2022 and $150.0 million terminated in 2021), partially offset by $300.0 million originated in late 2022.  The average balances of our other debt, which was comprised primarily of Federal Home Loan Bank (“FHLB”) advances, increased by $14.7 million or 53% primarily due to new FHLB advances totaling $400.0 million originated in late 2022, partially offset by the prepayment of FHLB advances totaling $50.0 million during 2021.

Noninterest Income

Table 3 presents the major components of noninterest income for 2022 and 2021.

n.m.- not meaningful.

27

Table of Contents

Trust and asset management income is comprised of fees earned from the management and administration of trusts and other customer assets.  These fees are largely based upon the market value of the assets that the Bank manages and the fee rate charged to customers.  Total trust assets under administration were $10.5 billion and $11.5 billion as of December 31, 2022, and December 31, 2021, respectively.  Trust and asset management income decreased by $2.3 million or 5% in 2022 compared to 2021 due to decreases in trust assets under administration and tax service fees.

Mortgage banking income is highly influenced by mortgage interest rates, the housing market, the amount of our loan sales, and our valuation of mortgage servicing rights.  Mortgage banking income decreased by $9.0 million or 60% in 2022 compared to 2021.  This decrease was primarily due to decreased sales of conforming saleable loans from current production. This decrease was partially offset by lower amortization of mortgage servicing rights.

Service charges on deposit accounts increased by $4.1 million or 16% in 2022 compared to 2021.  This increase was primarily due to an increase in overdraft fees attributed to an increase in transaction volume.

Net losses on sales of investment securities totaled $6.1 million and $1.3 million in 2022 and 2021, respectively.  The net loss in 2022 was primarily due to $6.1 million in the fees paid to the counterparties of our prior Visa Class B share sales transactions.  The net loss in 2021 was primarily due to $5.1 million of the fees paid to the counterparties of our prior Visa Class B share sales transactions.  This was offset by $3.8 million net gains on the sales of investment securities in 2021.

Bank-owned life insurance increased by $2.2 million or 28% in 2022 compared to 2021 primarily due to policy purchases in 2022.

Other noninterest income decreased by $4.0 million or 20% in 2022 compared to 2021.  This decrease was primarily due to a $6.9 million loss related to the sale of certain leveraged lease assets.

Noninterest Expense

Table 4 presents the major components of noninterest expense for 2022 and 2021.

28

Table of Contents

Total salaries and benefits increased by $7.0 million or 3% in 2022 compared to 2021 primarily due a $11.4 million increase in salaries coupled with a $2.7 million increase in shared-based compensation due to a higher number of restricted stock units being amortized.  These increases were partially offset by a $4.2 million decrease in commission expense and a $3.0 million decrease in retirement and other benefits.

Net occupancy expense increased by $13.2 million or 50% in 2022 compared to 2021 primarily due to gains on sale of real estate property on the island of Oahu and Guam in 2021 of $9.5 million, coupled with an increase in net rental expense in 2022.

Net equipment expense increased by $2.7 million or 7% in 2022 compared to 2021 primarily due to an increase in software license fees coupled with an increase in maintenance expense.  These increases were partially offset by a decrease in depreciation expense in 2022 compared to 2021.

Data processing expense decreased by $1.9 million or 10% in 2022 compared to 2021 primarily due to expenses we incurred in 2021 related to the rollout of contactless cards.

Professional fees expense increased by $1.7 million or 13% in 2022 compared to 2021 due to the augmentation of staffing to support corporate initiatives.

Income Taxes

Table 5 presents our provision for income taxes and effective tax rates for 2022 and 2021:

The provision for income taxes was $64.8 million in 2022, a decrease of $7.4 million compared to 2021.  The higher effective tax rate in 2022 compared to 2021 was primarily due to the decrease in tax benefits from tax-advantaged investments such as Investments in Low-Income Housing, Municipal Bonds, and Leasing Transactions. The effective tax rate in 2022 was also negatively impacted by a reduction in tax benefits from the exercise of stock options and the vesting of restricted stock.

29

Table of Contents

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 2022 and 2021.  Additional information about segment performance is presented in Note 13 to the Consolidated Financial Statements.

Consumer Banking

Net income increased by $8.9 million or 11% in 2022 compared to 2021 primarily due to an increase in net interest income, partially offset by an increase in noninterest expense and a decrease in noninterest income. The increase in net interest income was primarily due to higher deposit spreads and higher deposit and loan balances, partially offset by lower loan spreads. The increase in noninterest expense was primarily due to higher allocated expenses related to support units, and higher salaries and benefits expense, partially offset by the rollout of contactless cards in the first quarter of 2021. Also, noninterest expense in 2021 included a gain on the sale of a real estate property on the island of Oahu.  The decrease in noninterest income was primarily due to lower mortgage banking income as a result of decreased sales of conforming saleable loans from current production, partially offset by higher overdraft fees and other income.

Commercial Banking

Net income increased by $2.8 million or 2% in 2022 compared to 2021 primarily due to an increase in net interest income, partially offset by a decrease in noninterest income and an increase in noninterest expense.  The increase in net interest income was primarily due to higher average spreads on deposits, partially offset by lower loan spreads and deposit balances. Loan portfolio growth was primarily driven by increases in the commercial mortgage portfolio, partially offset by runoff in PPP loans. The decrease in deposit balances was primarily driven by decreases in interest bearing and savings balances, partially offset by increases in noninterest bearing and time deposits.  The decrease in noninterest income is primarily due to a loss on sale of equipment related to the early buyout of a leveraged lease, and a reduction in loan fees due to several large one time fees realized in the prior year. Those reductions were partially offset by increases in customer derivative program revenue, merchant income, and letters of credit. The increase in noninterest expense was primarily due to higher allocated expenses from support units, higher salaries and benefits expense, and merchant transaction and processing fees, partially offset by increased deferred salaries from loan originations and reduced professional fees.

Treasury and Other

Net income decreased by $39.4 million in 2022 compared to 2021 primarily due to lower negative provision for credit losses and lower net interest income, partially offset by lower noninterest expense and lower provision for income taxes.  The negative provision in 2022 was lower than the negative provision in 2021, as most of the credit concerns associated with COVID-19 that led to a significant build in reserve in 2020 were reversed in 2021, with the development of a vaccine and significant regulatory relief and fiscal stimulus.  The decrease in net interest income was primarily due to higher deposit funding costs, partially offset by an increase in interest income from higher asset yields.  The decrease in noninterest expense was due to early termination costs incurred in the second and third quarter of 2021 related to the prepayment of repurchase agreements and FHLB advances.  The provision for income taxes in this business segment represents the residual amount to arrive at the total tax expense for the Company.

30

Table of Contents

Analysis of 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.

As of December 31, 2022, our investment securities portfolio was comprised of securities with an average base duration of approximately 5.45 years.

We continually evaluate our investment securities portfolio in response to established asset/liability management objectives, changing market conditions that could affect profitability, and the level of interest rate risk to which we are exposed.  These evaluations may cause us to change the level of funds we deploy into investment securities, 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 our portfolio. As of December 31, 2022, 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, 2022, our available-for-sale investment securities portfolio was comprised of securities with an average base duration of approximately 3.89 years.

Gross unrealized gains in our investment securities portfolio were $1.9 million as of December 31, 2022, and $49.8 million as of December 31, 2021.  Gross unrealized losses in our investment securities portfolio were $1,128.3 million as of December 31, 2022, and $142.8 million as of December 31, 2021.  The overall increase in net unrealized losses was primarily due to the increase in interest rates during 2022.

31

Table of Contents

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, are widely recognized as “risk free,” 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. We do not intend to sell 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 to the Consolidated Financial Statements for more information.

The Company’s corporate bond holdings as of December 31, 2022, had a fair value of $809.1 million.  Of this total, $16.2 million or 2% was fully guaranteed by the Export-Import Bank of the United States, an agency of the U.S. government, and $8.7 million was fully guaranteed by the U.S. government acting through the U.S. Agency for International Development.  Of the remaining $784.2 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.

1   Comprised of other revolving credit, installment, and lease financing.

Total loans and leases were $13.6 billion as of December 31, 2022.  This represents a $1.4 billion or 11% increase from December 31, 2021, primarily due to strategic growth in lower risk categories including Commercial Mortgage, Residential Mortgage, and Home Equity.

The commercial loan and lease portfolio is comprised of commercial and industrial loans, PPP 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 acquisition, expansion, working capital, and other general business purposes.  PPP loans provided cash flow assistance to small businesses who were affected by economic conditions as a result of the COVID-19 pandemic.  Commercial mortgages and construction loans are offered to real estate investors, developers, and builders primarily domiciled in Hawaii.  Commercial mortgages are secured by first mortgages on commercial real estate at loan-to-value ratios generally not exceeding 75%.  The commercial properties are predominantly multifamily, industrial and retail centers that are primarily grocery or drug store-anchored, and to a lesser extent, specialized properties such as hotels.  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.

32

Table of Contents

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 that are used by commercial customers to finance capital purchases.  Although our primary market is Hawaii, 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 Hawaii or are associated with a Hawaii customer relationhip.

Commercial loans and leases were $5.5 billion as of December 31, 2022, an increase of $498.3 million or 10% from December 31, 2021.  Commercial and industrial loans remained relatively unchanged from December 31, 2021.  PPP loans decreased by $107.2 million or 85% from December 31, 2021, primarily due to forgiveness payments received from SBA.  Commercial mortgage loans increased by $573.4 million or 18% from December 31, 2021, primarily due to continued demand from new and existing customers.  Construction loans increased by $40.6 million or 18% from December 31, 2021, primarily due to an increase in construction activity in our market and focus in affordable housing projects.  Lease financing decreased by $35.6 million or 34% from December 31, 2021, primarily due to paydowns and the termination of the last three remaining leveraged leases.

The consumer loan and lease portfolio is comprised of residential mortgage loans, home equity lines and loans, indirect auto loans and leases, and other consumer loans including personal credit lines and direct installment loans.  These products are generally offered in the geographic markets we serve.  Although we offer a variety of products, our residential mortgage loan portfolio is primarily comprised of fixed-rate loans concentrated in Hawaii.  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 $8.2 billion as of December 31, 2022, an increase of $889.0 million or 12% from December 31, 2021.  Residential mortgage loans increased by $343.5 million or 8% from December 31, 2021, primarily due to a significant decrease in payoff activity, partially offset by a decrease in production. Home equity increased by $389.4 million or 21% from December 31, 2021, as a result of increased originations along with slower payoffs.  Automobile loans increased by $133.8 million or 18% from December 31, 2021 primarily driven by competitive loan programs, increased dealer inventory and strong consumer demand.  Other consumer loans increased by $22.4 million or 5% from December 31, 2021, primarily due to growth in our installment loans.

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

33

Table of Contents

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

Our commercial and consumer lending activities are concentrated primarily in Hawaii and the Pacific Islands.  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.

34

Table of Contents

Goodwill

Goodwill was $31.5 million as of December 31, 2022, and December 31, 2021.  As of December 31, 2022, based on our qualitative assessment, there were no reporting units where we believed it was more likely than not that the fair value of a reporting unit was less than its carrying amount, including goodwill.  See Note 1 to the Consolidated Financial Statements for more information on our goodwill impairment policy.

Other Assets

Other assets were $574.0 million as of December 31, 2022, an increase of $189.3 million or 49% from December 31, 2021.  This increase was mainly due to a $135.4 million increase in deferred taxes primarily due to changes in unrealized gains and losses in Other Comprehensive Income.  Low-income housing and other equity investments increased by $38.6 million due to new projects, partially offset by amortization of existing investments.  See Note 7 to the Consolidated Financial Statements for more information on the composition of our other assets.

Deposits

Table 11 presents the components of our deposits by major customer categories as of December 31, 2022, and December 31, 2021.

Total deposits were $20.6 billion as of December 31, 2022, a $255.6 million or 1% increase from December 31, 2021.  This increase was primarily due to an increase in public and other deposits, partially offset by decreases in consumer and commercial deposits.  Consumer deposits decreased by $134.5 million or 1.3% due to a $264.2 million decrease in core deposits, partially offset by a $129.7 million increase in time deposits.  Commercial deposits decreased by $72.2 million or 1% due to a $109.6 million decrease in core deposits, partially offset by a $37.4 million increase in time deposits.  Public and other deposits increased by $462.4 million or 36% due to an increase in time deposits of $538.6 million, partially offset by a $76.2 million decrease in public core deposits.

Table 12 presents the components of our savings deposits as of December 31, 2022, and December 31, 2021.

Table 13 presents the maturity distribution of the estimated uninsured time deposits as of December 31, 2022, and December 31, 2021.

35

Table of Contents

Estimated uninsured deposits totaled $10.7 billion and $10.5 billion at December 31, 2022, and December 31, 2021, respectively. Uninsured amounts are estimated based on the portion of account balances in excess of FDIC insurance limits.  Estimated uninsured time deposits increased $728.7 million from December 31, 2021, primarily due to a $538.6 million increase in public time deposits and a $129.7 increase in consumer time deposits.

Securities Sold Under Agreements to Repurchase

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

Securities sold under agreements to repurchase as of December 31, 2022, increased by $275.0 million or 61% from December 31, 2021.  As of December 31, 2022, the weighted-average maturity was 1.9 years for our repurchase agreements with government entities and 3.7 years for our repurchase agreements with private institutions.  Some of our repurchase agreements with private institutions may be terminated at earlier specified dates by the private institution or in some cases by either the private institution or the Company.  If all such agreements were to terminate at the earliest possible date, the weighted-average maturity for our repurchase agreements with private institutions would be 1.5 years.  As of December 31, 2022, and December 31, 2021, the weighted-average interest rate for repurchase agreements with government entities were 1.55%, while the weighted-average interest rate for repurchase agreements with private institutions as of December 31, 2022, and December 31, 2021, were 2.97% and 2.46%, respectively, with all rates being fixed.  Each of our repurchase agreements is accounted for as collateralized financing arrangement (i.e., secured borrowing) and not as a sale and subsequent repurchase of securities.

Other Debt

Other debt was $410.3 million as of December 31, 2022, an increase of $399.9 million or 3849% from December 31, 2021.  During the fourth quarter of 2022, we added FHLB advances totaling $400.0 million with a weighted-average interest rate of 4.16% and maturity dates in 2027.  As of December 31, 2022, our available capacity under our line of credit with the FHLB was $2.8 billion.

Pension and Postretirement Plan Obligations

Retirement benefits payable were $27.0 million as of December 31, 2022, an $11.5 million or 30% decrease from December 31, 2021.  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 decrease in retirement benefits payable was primarily due to the increase in discount rate, partially offset by a decrease in 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 to the Consolidated Financial Statements for more information on our pension and postretirement benefit plans.

36

Table of Contents

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 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.  For information regarding material contractual obligations, please see Note 14 Employee Benefits, Note 18 Affordable Housing Projects Tax Credit Partnerships, Note 19 Securities Sold Under Agreements to Repurchase, Note 20 Commitments, Contingencies, and Guarantees, and Note 23 Leases in the Notes to the 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, 2022, December 31, 2021, and December 31, 2020, 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 exposure at the obligor, industry, product, and/or geographic location levels is actively monitored to manage concentration risk.  Furthermore, credit risk management also 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 transportation equipment.  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 Hawaii.  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%.  The commercial properties are predominantly multifamily, industrial, retail centers that are primarily grocery or drug store anchored, and, to a lesser extent, more specialized properties such as hotels.  Commercial mortgage and construction loans are substantially secured by properties located in Hawaii.

37

Table of Contents

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.  As noted above, LTV ratios generally do not exceed 75%, which are based on regulatory-compliant appraisals that we obtain for the underlying properties.

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 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.  These loans are secured by a primary residence, 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, 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 85% of the value of the collateral property for primary residence and up to 80% of the value of the collateral property for second 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, liquidity and credit scores.  Maximum 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.  We originate automobile loans on an indirect basis through selected dealerships in Hawaii, Guam and Saipan, and we originate automobile leases on an indirect basis through selected dealerships in Hawaii.  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.

38

Table of Contents

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.

39

Table of Contents

Table 17 presents the activity in Non-Performing Assets (“NPAs”) for 2022:

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 mortgage non-accrual loans decreased by $5.0 million or 60% from December 31, 2022.

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 as of December 31, 2022 decreased $1.3 million from December 31, 2021, due to sale of one foreclosed real estate in Hawaii.

If interest due on the balances of all non-accrual loans as of December 31, 2022, had been accrued under the original terms, approximately $0.1 million in total interest income would have been recorded in 2022.

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

Loans and leases in this category are 90 days or more past due, as to principal or interest, and are still accruing interest because they are well-secured and in the process of collection.  Loans and leases past due 90 days or more and still accruing interest were $5.4 million as of December 31, 2022, a $2.4 million or 31% decrease from December 31, 2021.  This decrease was primarily in our residential mortgage and home equity portfolios.

Loans Modified in a Troubled Debt Restructuring

Table 18 presents information on loans whose terms have been modified in a TDR:

40

Table of Contents

Reserve for Credit Losses

The reserve for credit losses consists of the Allowance and the Unfunded Reserve.  Table 19 presents the activity in the Company’s reserve for credit losses for the years ended December 31:

41

Table of Contents

Allowance for Credit Losses

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