Loans and Leases and the Allowance for Loan and Lease Losses

Loans and Leases

The Company’s loan and lease portfolio was comprised of the following as of March 31, 2015 and December 31, 2014:



(dollars in thousands)	March 31, 2015		December 31, 2014
Commercial
Commercial and Industrial	$	1,141,408	$	1,055,243
Commercial Mortgage	1,477,902		1,437,513
Construction	111,381		109,183
Lease Financing	224,419		226,189
Total Commercial	2,955,110		2,828,128
Consumer
Residential Mortgage	2,699,434		2,571,090
Home Equity	884,742		866,688
Automobile	339,686		323,848
Other ¹	299,656		307,835
Total Consumer	4,223,518		4,069,461
Total Loans and Leases	$	7,178,628	$	6,897,589


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

Most 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 $0.5 million and $0.7 million for the three months March 31, 2015 and 2014, respectively.

Allowance for Loan and Lease Losses (the “Allowance”)

The following presents by portfolio segment, the activity in the Allowance for the three months ended March 31, 2015 and 2014. The following also presents by portfolio segment, the balance in the Allowance disaggregated on the basis of the Company’s impairment measurement method and the related recorded investment in loans and leases as of March 31, 2015 and 2014.



(dollars in thousands)	Commercial			Consumer			Total
Three Months Ended March 31, 2015
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	64,551		$	44,137		$	108,688
Loans and Leases Charged-Off	(235		)	(3,853		)	(4,088		)
Recoveries on Loans and Leases Previously Charged-Off	736			2,125			2,861
Net Loans and Leases Recovered (Charged-Off)	501			(1,728		)	(1,227		)
Provision for Credit Losses	782			(782		)	—
Balance at End of Period	$	65,834		$	41,627		$	107,461
As of March 31, 2015
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	2,212		$	3,534		$	5,746
Collectively Evaluated for Impairment	63,622			38,093			101,715
Total	$	65,834		$	41,627		$	107,461
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	26,084		$	39,453		$	65,537
Collectively Evaluated for Impairment	2,929,026			4,184,065			7,113,091
Total	$	2,955,110		$	4,223,518		$	7,178,628

Three Months Ended March 31, 2014
Allowance for Loan and Lease Losses:
Balance at Beginning of Period	$	71,446		$	44,008		$	115,454
Loans and Leases Charged-Off	(819		)	(3,219		)	(4,038		)
Recoveries on Loans and Leases Previously Charged-Off	941			1,769			2,710
Net Loans and Leases Recovered (Charged-Off)	122			(1,450		)	(1,328		)
Provision for Credit Losses	(178		)	178			—
Balance at End of Period	$	71,390		$	42,736		$	114,126
As of March 31, 2014
Allowance for Loan and Lease Losses:
Individually Evaluated for Impairment	$	8,903		$	3,699		$	12,602
Collectively Evaluated for Impairment	62,487			39,037			101,524
Total	$	71,390		$	42,736		$	114,126
Recorded Investment in Loans and Leases:
Individually Evaluated for Impairment	$	29,815		$	37,780		$	67,595
Collectively Evaluated for Impairment	2,542,348			3,599,914			6,142,262
Total	$	2,572,163		$	3,637,694		$	6,209,857

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. Management believes that there is a low likelihood of loss related to those loans and leases that are considered pass.

Special Mention:

Loans and leases in the 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 classes of loans and leases that are included in the consumer portfolio segment. Management believes that there is a moderate likelihood of some loss related to those loans and leases that are considered special mention.

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 loans that are past due 90 days or more as to principal or interest may be considered pass if the Company is in the process of collection and 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 the Company is in the process of collection, the first mortgage is with the Company, and the current combined loan-to-value ratio is 60% or less. Residential mortgage and home equity loans may be current as to principal and interest, but may be considered classified for a period of 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. Management believes that there is a distinct possibility that the Company will sustain some loss if the deficiencies related to classified loans and leases are not corrected in a timely manner.

The Company’s credit quality indicators are periodically updated on a case-by-case basis. The following presents by class and by credit quality indicator, the recorded investment in the Company’s loans and leases as of March 31, 2015 and December 31, 2014.



	March 31, 2015
(dollars in thousands)	Commercial and Industrial		Commercial Mortgage		Construction		Lease Financing		Total Commercial
Pass	$	1,096,131	$	1,400,719	$	109,608	$	223,942	$	2,830,400
Special Mention	14,982		33,841		—		91		48,914
Classified	30,295		43,342		1,773		386		75,796
Total	$	1,141,408	$	1,477,902	$	111,381	$	224,419	$	2,955,110

(dollars in thousands)	Residential Mortgage		Home Equity		Automobile		Other ¹		Total Consumer
Pass	$	2,684,218	$	880,349	$	339,149	$	298,894	$	4,202,610
Classified	15,216		4,393		537		762		20,908
Total	$	2,699,434	$	884,742	$	339,686	$	299,656	$	4,223,518
Total Recorded Investment in Loans and Leases									$	7,178,628



	December 31, 2014
(dollars in thousands)	Commercial and Industrial		Commercial Mortgage		Construction		Lease Financing		Total Commercial
Pass	$	1,001,474	$	1,358,812	$	107,381	$	225,783	$	2,693,450
Special Mention	17,364		45,082		—		17		62,463
Classified	36,405		33,619		1,802		389		72,215
Total	$	1,055,243	$	1,437,513	$	109,183	$	226,189	$	2,828,128

(dollars in thousands)	Residential Mortgage		Home Equity		Automobile		Other¹		Total Consumer
Pass	$	2,556,140	$	862,258	$	323,232	$	307,123	$	4,048,753
Classified	14,950		4,430		616		712		20,708
Total	$	2,571,090	$	866,688	$	323,848	$	307,835	$	4,069,461
Total Recorded Investment in Loans and Leases									$	6,897,589


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

Aging Analysis

The following presents by class, an aging analysis of the Company’s loan and lease portfolio as of March 31, 2015 and December 31, 2014.



(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 March 31, 2015
Commercial
Commercial and Industrial	$	2,852	$	180	$	—	$	8,641	$	11,673	$	1,129,735	$	1,141,408	$	7,402
Commercial Mortgage	1,126		34		—		732		1,892		1,476,010		1,477,902		508
Construction	—		—		—		—		—		111,381		111,381		—
Lease Financing	—		—		—		—		—		224,419		224,419		—
Total Commercial	3,978		214		—		9,373		13,565		2,941,545		2,955,110		7,910
Consumer
Residential Mortgage	6,702		2,208		3,914		14,344		27,168		2,672,266		2,699,434		1,515
Home Equity	3,804		1,378		2,425		2,965		10,572		874,170		884,742		965
Automobile	6,126		963		537		—		7,626		332,060		339,686		—
Other ¹	2,122		1,200		1,078		—		4,400		295,256		299,656		—
Total Consumer	18,754		5,749		7,954		17,309		49,766		4,173,752		4,223,518		2,480
Total	$	22,732	$	5,963	$	7,954	$	26,682	$	63,331	$	7,115,297	$	7,178,628	$	10,390

As of December 31, 2014
Commercial
Commercial and Industrial	$	992	$	356	$	2	$	9,088	$	10,438	$	1,044,805	$	1,055,243	$	7,819
Commercial Mortgage	458		—		—		745		1,203		1,436,310		1,437,513		—
Construction	—		—		—		—		—		109,183		109,183		—
Lease Financing	—		—		—		—		—		226,189		226,189		—
Total Commercial	1,450		356		2		9,833		11,641		2,816,487		2,828,128		7,819
Consumer
Residential Mortgage	4,907		2,107		4,506		14,841		26,361		2,544,729		2,571,090		632
Home Equity	3,461		2,661		2,596		3,097		11,815		854,873		866,688		375
Automobile	7,862		1,483		616		—		9,961		313,887		323,848		—
Other ¹	2,416		1,049		941		—		4,406		303,429		307,835		—
Total Consumer	18,646		7,300		8,659		17,938		52,543		4,016,918		4,069,461		1,007
Total	$	20,096	$	7,656	$	8,661	$	27,771	$	64,184	$	6,833,405	$	6,897,589	$	8,826


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.

Impaired Loans

The following presents by class, information related to impaired loans as of March 31, 2015 and December 31, 2014.



(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance for Loan Losses
March 31, 2015
Impaired Loans with No Related Allowance Recorded:
Commercial
Commercial and Industrial	$	11,798	$	17,102
Commercial Mortgage	6,407		6,407
Construction	1,668		1,668
Total Commercial	19,873		25,177		—
Total Impaired Loans with No Related Allowance Recorded	$	19,873	$	25,177	$	—

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	6,211	$	12,811	$	2,212
Total Commercial	6,211		12,811		2,212
Consumer
Residential Mortgage	31,725		37,786		3,408
Home Equity	1,203		1,203		18
Automobile	5,546		5,546		76
Other ¹	979		979		32
Total Consumer	39,453		45,514		3,534
Total Impaired Loans with an Allowance Recorded	$	45,664	$	58,325	$	5,746

Impaired Loans:
Commercial	$	26,084	$	37,988	$	2,212
Consumer	39,453		45,514		3,534
Total Impaired Loans	$	65,537	$	83,502	$	5,746

December 31, 2014
Impaired Loans with No Related Allowance Recorded:
Commercial
Commercial and Industrial	$	9,763	$	15,013	$	—
Commercial Mortgage	6,480		6,480		—
Construction	1,689		1,689		—
Total Commercial	17,932		23,182		—
Total Impaired Loans with No Related Allowance Recorded	$	17,932	$	23,182	$	—

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	7,184	$	13,784	$	2,387
Total Commercial	7,184		13,784		2,387
Consumer
Residential Mortgage	32,331		37,989		3,445
Home Equity	1,012		1,012		16
Automobile	5,375		5,375		66
Other ¹	913		913		34
Total Consumer	39,631		45,289		3,561
Total Impaired Loans with an Allowance Recorded	$	46,815	$	59,073	$	5,948

Impaired Loans:
Commercial	$	25,116	$	36,966	$	2,387
Consumer	39,631		45,289		3,561
Total Impaired Loans	$	64,747	$	82,255	$	5,948

¹ Comprised of other revolving credit and installment financing.

The following presents by class, information related to the average recorded investment and interest income recognized on impaired loans for the three months ended March 31, 2015 and 2014.



	Three Months Ended March 31, 2015				Three Months Ended March 31, 2014
(dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Impaired Loans with No Related Allowance Recorded:
Commercial
Commercial and Industrial	$	10,781	$	98	$	12,875	$	92
Commercial Mortgage	6,444		65		11,036		55
Construction	1,679		27		1,056		16
Total Commercial	18,904		190		24,967		163
Consumer
Other ¹	—		—		6		—
Total Consumer	—		—		6		—
Total Impaired Loans with No Related Allowance Recorded	$	18,904	$	190	$	24,973	$	163

Impaired Loans with an Allowance Recorded:
Commercial
Commercial and Industrial	$	6,698	$	26	$	9,176	$	28
Total Commercial	6,698		26		9,176		28
Consumer
Residential Mortgage	32,028		267		31,841		236
Home Equity	1,108		8		876		5
Automobile	5,461		104		5,124		107
Other ¹	946		22		367		8
Total Consumer	39,543		401		38,208		356
Total Impaired Loans with an Allowance Recorded	$	46,241	$	427	$	47,384	$	384

Impaired Loans:
Commercial	$	25,602	$	216	$	34,143	$	191
Consumer	39,543		401		38,214		356
Total Impaired Loans	$	65,145	$	617	$	72,357	$	547


¹	Comprised of other revolving credit and installment financing.

For the three months ended March 31, 2015 and 2014, the amounts of interest income recognized by the Company within the periods that the loans were impaired were primarily related to loans modified in a troubled debt restructuring that remained on accrual status. For the three months ended March 31, 2015 and 2014, the amount of interest income recognized using a cash-basis method of accounting during the periods that the loans were impaired was not material.

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 $61.8 million and $60.2 million as of March 31, 2015 and December 31, 2014, respectively. There were no commitments to lend additional funds on loans modified in a TDR as of March 31, 2015 and December 31, 2014.

The Company offers various types of concessions when modifying a loan or lease. Commercial and industrial loans modified in a TDR often involve temporary interest-only payments, term extensions, and converting revolving credit lines to term loans. Additional collateral, a co-borrower, or a guarantor is often requested. Commercial mortgage and construction loans modified in a TDR often involve reducing the interest rate for the remaining term of the loan, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, or substituting or adding a co-borrower or guarantor. Construction loans modified in a TDR may also involve extending the interest-only payment period. Residential mortgage loans modified in a TDR generally include a lower interest rate and the loan being fully amortized for up to 40 years from the modification effective date. In some cases, the Company may forbear a portion of the unpaid principal balance with a balloon payment due upon maturity or pay-off of the loan. Land loans are also included in the class of residential mortgage loans. Land loans are typically structured as interest-only monthly payments with a balloon payment due at maturity. Land loans modification usually involved extending the interest-only monthly payments up to an additional five years with a balloon payment due at maturity, or re-amortizing the remaining balance over a period up to 360 months. Interest rates are not changed for land loan modifications. Home equity modifications are made infrequently and uniquely designed to meet the specific needs of each borrower. Automobile loans modified in a TDR are primarily comprised of loans where the Company has lowered monthly payments by extending the term.

Loans modified in a TDR are typically already 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 increasing the specific Allowance associated with the loan. An Allowance for impaired consumer and commercial 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 months ended March 31, 2015 and 2014.



	Loans Modified as a TDR for the Three Months Ended March 31, 2015							Loans Modified as a TDR for the Three Months Ended March 31, 2014
			Recorded			Increase in				Recorded			Increase in
Troubled Debt Restructurings	Number of		Investment			Allowance		Number of		Investment			Allowance
(dollars in thousands)	Contracts	(as of period end)¹			(as of period end)			Contracts	(as of period end)¹			(as of period end)
Commercial
Commercial and Industrial	17		$	2,687		$	1	18		$	5,883		$	120
Commercial Mortgage	1		507			—		1		365			—
Total Commercial	18		3,194			1		19		6,248			120
Consumer
Residential Mortgage	5		2,122			61		2		733			23
Home Equity	2		203			3		1		74			1
Automobile	35		780			11		37		626			9
Other ²	22		151			5		10		95			3
Total Consumer	64		3,256			80		50		1,528			36
Total	82		$	6,450		$	81	69		$	7,776		$	156


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 months ended March 31, 2015 and 2014, 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 March 31, 2015			Three Months Ended March 31, 2014
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	$	306	2	$	517
Automobile	7	152		4	53
Other ²	8	61		3	21
Total Consumer	16	519		9	591
Total	16	$	519	9	$	591


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 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 $9.8 million as of March 31, 2015.